Short-term risks

Risks and business uncertainties

Business Review 1 January–30 September 2023, 3 November 2023

The most significant risks related to Componenta’s business operations are risks associated with the operating environment (competitive situation, prices, commodities and the environment), risks related to business operations (customers, suppliers, productivity, production processes, labour market disruptions, contracts, product liability, personnel and information security) and financing risks (availability, liquidity, currency, interest rate and credit).

The availability of certain raw materials such as recycled steel, pig iron, structural steel, aluminium and energy at competitive prices, as well as the uninterrupted supply of energy, is essential for the Group’s business operations. Market prices of electricity remained relatively high during the review period, but decreased significantly towards the end of the period. Because of the intensified geopolitical situation, the availability of raw materials and other materials continues to involve uncertainties in Componenta’s operational activities. In addition, global challenges with the availability of certain components for customers may lead to production disruptions in our end customers’ plants and thereby affect Componenta’s sales volumes in the short term.

To ensure the availability of raw materials and other materials, Componenta maintains active interaction with its suppliers, continuously updates its needs forecast and optimises its inventory levels to meet longer-term demand, closely monitors the situation of its suppliers and market changes, and responds to these changes as necessary.

According to Componenta’s estimate, the Group has no significant and immediate risk concentrations related to Russia or Ukraine among its customers or suppliers of goods. Componenta has no operations of its own in Russia or Ukraine. The Russia’s war of aggression has had an impact on the general price development and availability of raw materials such as structural steel and pig iron, and on the development of energy prices. The war has had an indirect impact on the supply chains of Componenta’s manufacturers of steel materials and wholesalers through the price development and availability of iron ore and coal, for example.

A prolonged war and an unfavourable development of the geopolitical situation may continue to have a negative impact on the financial market, sales volumes, the availability and price development of raw materials and energy, and the availability of foreign labour, which increases forecasting uncertainty.

The cost risk associated with raw materials is mainly managed through index-based price agreements, based on which the sales prices of products are updated in response to changes in the prices of raw materials for the next quarter. An increase in raw material prices may tie more cash than expected to working capital. In terms of commercial risks, future volumes may be weakened by customers switching to cheaper alternatives due to price competition.

Componenta’s business operations depend on the reliability of production plants, supply and delivery channels and the related processes and systems. The quality, accuracy and availability of information are extremely important, as information technology plays a significant role in the operations of Componenta and its suppliers and customers. If materialised, IT and cybersecurity risks may expose Componenta to disruptions and interruptions in operations and the loss or distortion of data, which may lead to interruptions in product availability. Componenta pays close attention to cybersecurity risks and follows up its customers’ situations and notifications.

Componenta continuously monitors the liquidity risk. The Group also finances its operations through factoring arrangements for receivables. The financial services company responsible for Componenta’s factoring services has had repeated delays in its payments during the past year. As a consequence, Componenta has on 31 August 2023 terminated its factoring and credit limit agreements with the financial services company in question and made new agreements for factoring and credit limit services with Avida Finans AB. Avida Finans AB’s credit rating is AAA and the main owner is an American private equity company KKR. The services will be transferred to Avida in the majority of group companies this year. Componenta’s current revolving credit facilities will need to be renewed in September 2025. Any termination or non-renewal of factoring arrangements or revolving credit facilities can create uncertainties for Componenta’s liquidity. The Group’s liquidity was at a good level at the end of the review period. At the end of the review period, Componenta had unused binding revolving credit facilities of EUR 4.0 million and from GCF, an investor based in the United States, a share subscription facility which is valid until June 2024, with the unused portion of USD 7.5 million from the total USD 8.0 million. In addition, the second and final instalment of EUR 2 million of the EUR 4 million working capital loan was drawn down in March 2023.