Risk Management System.
We define risks as possible future developments or events that may result in an adverse variance from our forecasts. Alongside risks, we also look in equal measure at possible opportunities. In general, opportunities can be defined as potential future developments or events that may have a positive impact on the Group's future performance and forecast if used in the right manner.
We interpret risk management as the ongoing challenge of identifying, analyzing, and evaluating the entire range of potential and actual developments so that we can control our response wherever possible. Risk management is an integral part of the management system adopted by Wincor Nixdorf. The aim is to identify at an early stage any risks that might jeopardize the Company's targeted growth and/or its existence as a going concern and thus mitigate their impact. These activities are by no means restricted to risks; they are also applied in equal measure to opportunities. To this end, we have clearly defined the management and corporate structure of Wincor Nixdorf and separated certain functions in order to preserve the integrity of individual Group functions.
We follow the globally acknowledged COSO conceptual framework (The Committee of Sponsoring Organizations of the Treadway Commission) as regards the process of determining our opportunities and risks on a regular basis. Applying a classification system that includes four categories (Strategic, Operational, Financial, and Legal), all potential deviations from targets are assigned on the basis of gross exposure notifications. In this case, the opportunity (risk), measured on the basis of possible cash inflow (cash outflow) within the coming fiscal year, is defined as the product of the estimated positive (negative) effect on EBITA upon occurrence of the event and the estimated probability of occurrence.
Our risk management system is structured in such a way that opportunities and risks are monitored and evaluated – based on approved annual budgets – at a decentralized level. This means that risk management takes place both in our legally independent units and at Group level, with operating units enjoying a high degree of autonomy so that they can react flexibly to opportunities as they arise. To be more precise, the ongoing tasks of identification, evaluation, implementation of measures, and controlling occur directly within the respective operational units. Target EBITA serves as the basis for determining opportunities and risks.
Reporting processes that relate to specific parameter thresholds and the actual extent of risk are used to coordinate the activities of the relevant Group functions. Risk Review Boards, which also include members of the Board of Directors, have been set up to discuss key projects, agree on appropriate measures, and assess and manage projects with due regard for the risk strategy. Our centralized Risk Management department is responsible for controlling this risk management process and defining our risk standards and risk control tools. By embedding risk management within overall Group Controlling, we can ensure that it is treated as an integral component of business management rather than as a one-time assessment of fundamental risks, e.g., relating to the approval of specific projects. In this context, we compile an annual report on opportunities and risks, in addition to considering opportunities and risks relating to the Group and individual business units as part of monthly, quarterly, and annual assessment meetings. Furthermore, we have established a risk reporting process whereby the central risk management team is notified directly of any significant opportunities/risks that have newly emerged or of any dramatic changes to the opportunity/risk situation.
The main elements of the risk management system at Wincor Nixdorf have also been documented in our management handbook and in Group directives.
As an international enterprise with a diversified product portfolio, Wincor Nixdorf is exposed continuously to a number of developments and events that may have a material influence on its financial targets.
Wincor Nixdorf applies the following categorization for the purpose of determining opportunities and risks:
Conceptual Framework based on COSO.Enlarge image
Strategic influencing factors encompass macroeconomic influences such as economic trends in the respective sales markets, but also the impact of natural disasters or terrorist attacks.
This category also includes influences centered around the factors of competition, innovation, and market growth relating to the market that is of relevance in particular to Wincor Nixdorf. Specifically, it should be noted that the business combination of Diebold Inc. and Wincor Nixdorf AG may result in deviations from original targets.
Additionally, both positive and negative effects may occur as a result of management activities that are not aligned with corporate planning. Application of the internal control system and execution or implementation of special projects are two aspects to be cited in this context. In fiscal 2014/2015, for instance, the Company launched an extensive seven-point restructuring program referred to as Delta, which is scheduled to cover a period of several years. The aim of this program is to evolve the Group into a software and services enterprise, in addition to realigning costs and capacity levels in the area of hardware. Additionally, the general availability of resources such as highly qualified managers and skilled workers as well as access to essential IT structures are of particular relevance to the Group in strategic terms.
The category comprising operational opportunities and risks assesses aspects that relate directly to the Group's operating activities. For example, in the area of research and development this might include incorporating customer needs at an early stage of the process for the purpose of offering a portfolio of products and services tailored to market requirements or the timely provision of a product featuring the expected functionality and quality.
Opportunities/risks relating to our supply chain may occur as a result of disruptions or impairments in procurement and production, but also with regard to channels of distribution for hardware and software. At the same time, changing commodity and energy prices may have an impact on earnings generated by Wincor Nixdorf. In the area of hardware production we consider optimal capacity utilization of our plants as well as expenses associated with the relocation of manufacturing to be critical factors influencing our bottom-line results. Risks relating to transportation and channels of distribution may occur in the form of delayed deliveries and damages in transit, with associated financial repercussions.
This category also includes the assessment of sales-specific opportunities/risks, such as changing profit margins due to the prevailing level of concentration in the competitive environment. Other operational opportunities/risks might arise from delayed schedules when it comes to implementing specific projects or from non-budgeted expenses for the operation and maintenance of customer systems.
For Wincor Nixdorf, as an established supplier of IT solutions for banks and retail companies, exposure to risks associated with data handling in the areas of Outsourcing and Store Lifecycle Management is an issue of increasing significance. Insufficient availability of IT systems, with concomitant claims for compensation by our business partners on the one hand, but also better-than-expected performance on the other hand, may have financial consequences.
Wincor Nixdorf's business is also influenced by financial risks. They mainly include currency, liquidity, and credit risks, as well as risks associated with interest rate changes. For the purpose of limiting these risks, the Group treasury function is, to a large extent, managed centrally by Wincor Nixdorf.
The risk of a change in interest rates arises from taking up credit tied to the market rate. Interest expenses are mainly linked to the short-term variable market interest rate (EURIBOR) plus a margin. This margin can be subject to change depending on certain financial ratios. Being tied to a market interest rate, therefore, means that we are exposed to an interest rate risk as soon as that rate increases. In order to counteract this risk, we have concluded interest rate swap contracts.
The global nature of the Group generates payments in both directions in a range of currencies. Incoming and outgoing payments in individual currencies are netted off against each other. Thus, by selecting suitable suppliers and making appropriate location-related decisions, we actively seek to create a natural hedging effect to the greatest extent possible. The netted-off amounts represent our remaining exchange rate risk, which is then hedged up to 100% (depending on volume and currency) on a rolling 12-month basis by means of suitable financial instruments.
We reduce credit default risks by consistently obtaining credit reports, setting credit limits, and running a proactive debtor management function, including a payment reminder system and active debt collection. Wincor Nixdorf uses letters of credit to secure receivables from countries classified as presenting a credit risk.
Refinancing of Wincor Nixdorf Group entities is primarily conducted at a central level; this poses the risk of insufficient cash reserves for the on-time settlement of financial obligations. Wincor Nixdorf addresses this risk by monitoring its cash flow as well as by maintaining reserves in the form of unused credit lines.
In order to ensure sufficient room for maneuver with regard to financing, Wincor Nixdorf AG entered into a revolving credit line agreement with Diebold Self-Service Solutions S.A.R.L. in August 2016, covering a volume of €300 million over a term of five years. Additionally, we anticipate that the current loan from the European Investment Bank covering an amount of €65 million will be extinguished in early 2017 prior to maturity. As the long-term loan commitment was made by Diebold Inc., Wincor Nixdorf is exposed to liquidity risk in respect of Diebold Inc. From a third-party perspective, therefore, Wincor Nixdorf AG is subject to the same credit rating as Diebold Inc.
Wincor Nixdorf is exposed to a range of opportunities and risks in the legal environment. These might occur in connection with disputes possibly arising in the future in respect of legal issues or property rights. Legal disputes may arise in the ordinary course of business, for instance, with regard to disputes relating to products supplied and services rendered, product liability, product defects, quality issues, or the infringement of property rights.
Despite far-reaching communication and training measures as well as an established system of compliance management, it is conceivable that we may be affected by compliance-related infringements (e.g., antitrust and corruption transgressions). This can have a range of legal consequences, e.g., financial penalties and fines. Alongside these threats, we see ourselves exposed to regulatory risks arising from our international business activities. At the same time, a functioning compliance system may also create opportunities when it comes to securing contracts for customer projects.