Managing risks – a part of conducting business
Swedish Match strives to ensure that the risks taken are deliberate. It is important for us to understand the risks to which our business is exposed and make informed decisions. Risks need to be managed efficiently in order for the Group to be competitive, to operate safely, and to maintain financial stability and growth.
| Being competitive | Operating safely | Being financially stable |
|---|---|---|
| Performance oriented culture High quality products Leveraging strong brands Thorough consumer insights At the forefront of product innovation and development Efficient, state of the art in manufacturing Knowledgeable and agile sales forces | Ethical business conduct Strict supplier requirements Thorough workplace safety and loss prevention programs Appropriate insurance program Meeting regulations by being well prepared and in active dialogue with governments and regulatory agencies Robust processes to comply with laws and regulations | Strict financial policies in place and monitoring by the Board of Directors Limited currency transaction risk as production and sales to large extent are in the same countries and currency blocks Clearly prioritized use of cash, ensuring that the fulfillment of commitments is not jeopardized |
Risk management within Swedish Match
Swedish Match applies a systematic risk management model, which includes risk reviews as well as loss prevention, continuity planning, crisis management and insurance programs.
The Swedish Match Board of Directors determines the Group’s strategic plans and associated risks based on recommendations from the Group Management Team (GMT). The Board of Directors oversees the Group’s risk management processes and is informed, on a recurring basis, about the existing and emerging risks as well as on related mitigation activities. Each division, as well as Corporate functions, is responsible for managing the risks associated with their plans, and if required, coordinating risk management activities with other units. Appropriate competencies in the organization and a governance structure with clear responsibilities set the prerequisites for risk management at the local level. The Code of Conduct further ensures an organizational culture that helps to prevent taking those risks deemed to be unacceptable.
To efficiently manage risks, existing and potential risks need to be known. Swedish Match strives to establish a broad understanding among its employees of the concepts and importance of risk management. Employees in all parts of the organization are encouraged to identify and report events and circumstances which could be indications of risks. Existing and potential risks are regularly discussed within the divisional management teams and the GMT. A framework of policies is in use to ensure that the responsibilities are communicated and understood and that the management teams have the right tools to drive risk management.
Annual ERM process
To identify and assess the major risks to which the Group is exposed, an annual Enterprise Risk Management (ERM) process is conducted at division level and consolidated at Group level. The resulting risks, including probability, impact, risk appetite, interrelations with other risks, mitigation activities and monitoring, are presented to the GMT. The GMT presents the risks identified at division level, alongside a consolidated view for the entire Group, to the Board of Directors. This process helps to ensure that appropriate actions are taken to reduce, prevent or mitigate undesired risks. As a part of the strategic planning process, strategies are developed to manage new or changed risks based on ERM results. Risk responses include risk avoidance, risk reduction, risk sharing or risk acceptance.
Integration of sustainability risks into ERM process
Swedish Match addresses sustainability risks with the same priority as financial and operational risks. Sustainability risks are identified and assessed in the ERM process at division level, as described above. The central coordination responsibilities for sustainability risk assessment are designated to the same function as for the ERM process. This facilitates the sustainability risks to follow the same management approach as for the other key risks for the organization.
Major sustainability risks include climate risk, child labor and inability to adhere to plans and targets set out for the focus areas of Swedish Match. Risks related to sustainability are detailed in the sustainability section.
Risk areas
Important risks to address arise in the areas of competition, production, regulation, IT security, and finance among other areas.
Competition
Risk
Swedish Match operates in highly competitive markets, which require an agile organization in a continually changing environment. In the event that Swedish Match cannot provide a better offering to the consumer than competitors, there is an increased risk to both customer purchases and the ability to realize price changes.
Mitigation
Swedish Match continuously monitors the competitive environment and assesses changing consumer needs. To meet these consumer needs, the Company conducts consumer and market research and closely follows market trends. This insight forms the basis for product positioning, product portfolio decisions and product development and ensures consumers are offered high quality products that meet their needs.
Production
Risk
Production facilities are exposed to risk of various harmful incidents such as fires and machinery breakdown, as well as potential natural disasters or global health crises such as a pandemic and other catastrophic events, along with effects related to climate changes. Such incidents may affect both production facilities and employees. Production interruptions could cause quality or delivery problems.
Mitigation
In order to avoid delivery problems or other production interruptions, Swedish Match has implemented a loss prevention and continuity planning program. Periodic inspections are conducted by an independent third party at production facilities that have been identified as critical. These inspections assess to what level the production facilities meet the risk management standards of Swedish Match and determine whether there are investments or actions required to reduce risk. The purpose of the continuity planning is to minimize any negative impact of an incident. By having multiple facilities producing core products, Swedish Match strives to reduce the potential impact of harmful incidents to any single facility.
Suppliers
Risk
A loss of a key supplier or a supplier’s non-compliance with regulations or unethical behavior could be harmful to the Group. Potential consequences are delivery or quality problems or difficulties in the interaction with other stakeholders including sales to consumers.
Mitigation
Selected suppliers of production inputs are reviewed by the procurement departments on a recurring basis. The suppliers’ own financial stability and risk management systems are an important consideration for Swedish Match. As a complement to the internal reviews, at times an independent third party conducts risk inspections at suppliers identified as critical.
Swedish Match strives to work with suppliers who have a healthy, long term financial position and who support our values. Our Supplier Code of Conduct specifies what we expect and require from our suppliers in terms of employment and labor practices, workplace practices, ethical business practices and environmental management practices. The Supplier Code of Conduct forms the basis for our relationship with suppliers and is an integral part of our significant business agreements. Risk assessment forms the basis for our efforts to identify and mitigate specific risk in dialogue with prioritized suppliers. We have procedures in place, and under continuous development, to further emphasize sustainable supply chain management.
Regulation
Risk
Swedish Match is exposed to a high degree of regulation from various authorities. Regulations could have a restricting impact on how the Group can operate its business and interact with its stakeholders or direct financial impact in the form or increased taxes or imposed fees. Regulations, many related to the Group’s involvement in the tobacco industry, concern among other issues, tobacco excise taxes, marketing, packaging, warning labels, ingredients, reporting to authorities, product approvals, and introduction of new products. Many authorities have and continue to implement various forms of restrictions on sales and usage of tobacco and other nicotine containing products.
Mitigation
Swedish Match closely monitors the development of tobacco regulation and regularly shares information and opinions with governments and other regulatory agencies on issues that affect the Group’s operations.
Most importantly Swedish Match needs to continue to provide consumers with less harmful alternatives to cigarettes and strive toward the vision of A world without cigarettes, with evidence-based regulations for our products. A critical activity is to educate and inform decision makers about Swedish Match’s portfolio of smokefree products and their relative health characteristics compared to cigarettes. The differences in relative risk among different tobacco and other nicotine-containing consumer products and the potential to migrate consumers to less harmful products are often referred to as harm reduction.
Currency and interest rate risks
Risk
The dynamic financial market conditions are continuously changing with fluctuating currency exchange rates, interest rates and availability of funds.
Currency rate risks
A weakening of certain major currencies, such as the USD versus the SEK, could cause lower financial results presented in SEK from the translation of foreign operations. The transaction exposure is relatively low as most production is located in the country where sales are conducted.
Interest rate risk
Higher interest rates could have a negative impact on net finance expense.
Mitigation
Swedish Match has a large part of its business being conducted outside Sweden with a significant part in the US. The currency exchange rate development is not in the control of Swedish Match. As there is a speculative element in hedging currency translation exposure, Swedish Match does not normally hedge this translation element. However, Swedish Match is mindful of the cash impact from currency rate changes and strives to regularly distribute dividends from its foreign subsidiaries to the Swedish Parent Company.
Swedish Match is a highly cash generative company with a well-established financial policy. Swedish Match is optimizing its cost of capital by ensuring an appropriate leverage. In order to manage interest rate risk and refinancing risk, the Group strives to have an even spread of maturities and to tie nearly all of its borrowings to fixed interest rates. In addition, Swedish Match shall as a general rule secure financing for the coming twelve months before any share repurchases are executed. More information on financial risks can also be found in the Note 27 Financial instruments and financial risks to the Group Consolidated financial statements in the annual report for 2021.
Information security risk
Risk
IT systems help manage and make business processes more efficient and reliable, but it could also lead to higher risk for the organization.
Key business processes such as production management, invoicing, customer support and financial reporting rely on IT systems. Increasingly sophisticated and frequent cybercrimes could result in significant outages or application failures to our infrastructure, and cause reputational damage, considerable business disruption or adverse impact on business-critical data.
The information assets within Swedish Match are of fundamental importance for our business. Proper handling of the assets is important for the trust of employees, customers, and partners. Swedish Match needs to ensure confidentiality, integrity, and availability of information most important to Swedish Match.
Mitigation
Swedish Match has developed an Information Security Risk Process to manage and mitigate these risks for the Group. The Group’s Information Security Council governs the process which is implemented locally in the divisions, with the support of appointed Business Information Security Coordinators.
The Information Security Risk Process enables Swedish Match to identify the most critical information objects and IT services and to prioritize protection and effort in line with their criticality. Information objects, where the potential impact on the business exceeds the acceptable threshold, are classified as High Value Information Objects (HVOs). Evaluation of the criticality of these HVOs is part of the annual ERM process.
Through our Code of Conduct and mandatory annual training, we help to ensure that threats or suspicious activities are reported to IT Service Desk in order that appropriate actions be taken. There is also an internal incident management process where cases are documented and classified, and actions are taken based on severity and type.
In addition to mandatory trainings for all employees, Swedish Match also performs internal phishing tests and other activities to increase awareness of information security within the organization.
