The Profoto Group is an international group exposed to operational risks, industry and marketrelated risks, legal and tax risks, as well as financial risks. Below is a description of the risks identified within each category, the risk value and a description of how the risk is managed within the organization.
The objective of risk management is not to eliminate risk completely, but rather to prioritize internal risk management to ensure that the focus is on the most significant risks, with the aim of helping to limit the negative financial impact that may be associated with the risk. The level of risk is assessed annually for a three-year period, based on the likelihood of the risk occurring and the financial impact of the risk according to a predetermined materiality level. The risk score is defined as low, medium, high or very high, where a risk score at the low level indicates that the probability of the risk occurring is low or would have a low, non-material financial impact. In contrast, a risk score of very high indicates that the risk is certain or highly likely to occur during the time horizon and the financial impact will be material.
Risk management is based on the internal control framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and consists of five basic components: control environment, risk assessment, control activities, information and communication, and monitoring. Risk management is a normal part of the business and helps to create added value. Risk management is reported to the Board, which bears ultimate responsibility. The Board is responsible at an overarching level for ensuring compliance with policies and guidelines related to internal control. The annual risk assessment is carried out by the management team. In the risk assessment, the management team identifies the risks based on the Group’s overall objectives and strategies. As part of the risk assessment, measures and controls related to risk management are identified, along with who is responsible for managing the risk and how it is monitored.
Profoto is also exposed to certain sustainability and climate risks. The Group’s scalable business model depends on good relationships with and control of its key suppliers. Profoto needs to continuously improve and ensure an environmentally friendly business chain. There is a risk of ethical shortcomings regarding human rights, health and safety issues and social responsibility among suppliers, which could damage Profoto’s business and reputation.
|Description of risk
|Management of risk
|Currency risk, translation exposure and transaction exposure
|Profoto’s operations are exposed to foreign exchange risk, i.e. the risk of fluctuations in the fair value of future cash flows. Currency risk arises mainly as a result of foreign currency cash flows and foreign currency borrowings.
|Profoto mainly has flows denominated in SEK, EUR, USD, CNY, JPY and GBP and borrowings in USD, JPY and CNY. Risk related to translation exposure is not hedged in accordance with the financial policy. The aim is to have net cash flows in currencies that offset each other, with the remainder exchanged into the Group currency SEK to minimize any loss due to currency fluctuations.
|Liquidity and financing risk
|Profoto is exposed to the risk that the necessary financing may not be available to Profoto, resulting in significantly increased costs. If Profoto faces this risk in the future, Profoto may be forced to raise capital through alternative resources, or be forced to reduce other important costs, such as costs related to product development, or personnel expenses.
|The Parent Company has an available undrawn credit facility of SEK 250m. In addition, the local companies have available credit facilities which can be used to cover temporary liquidity problems. In accordance with the financial policy, Profoto shall maintain a liquidity reserve of at least SEK 30m, which shall consist mainly of an unused overdraft facility. The size of the liquidity reserve is set taking into account relevant risks related to the ability of customers to pay, other financing and expected profit and liquidity growth.
|Interest rate risk
|Interest rate risk refers to the risk of fluctuation in variable interest rates associated with borrowings in the Group.
|Profoto has low debt and strong cash flow, which limits the risk.
|Credit and counterparty risk
|Credit risk refers to the risk that the counterparty in a transaction will cause a loss to the Group by failing to fulfil its contractual obligations, with reference to accounts receivable and cash and cash equivalents.
|To mitigate the risk, quarterly credit assessments of customers are performed. In addition, Profoto strives to use banks with good credit ratings.
|Capitalized development expenditure
|Changes in the value of capitalized development expenditure could have a negative impact on Profoto’s earnings and financial position if impairment testing shows that it is necessary to take an impairment charge on capitalized development expenditure.
|Profoto performs quarterly impairment tests based on 12-month forecasts to identify whether a possible write-down requirement exists. This gives the group the opportunity to act at as early a stage as possible to be able to prevent the risk of, and avoid any need for write-downs.
|INDUSTRY- AND MARKET-RELATED RISK
|Declining market for still photography
|Profoto sells premium lighting systems for professional still photography. There is a risk that the market for traditional still photography is declining at the expense of video recording, which may result in the obsolescence of the Group’s products, with a shrinking market resulting in a loss of revenue.
|Profoto’s products are already adapted to be used for video production. It is also the company’s view that although video is growing in importance, the trend is that high-quality still images will continue to be needed as a complement. Should video increase in importance to our existing customers in a way that current products do not fully address, Profoto is prepared with plans for organic growth in the video segment.
|Profoto’s future competitive opportunities depend on future product development, the successful launch of new products on the market and the preservation of intellectual property rights. Competition from companies in low-wage countries may force Profoto to reduce prices, which would result in a lower level of profitability. Large competitors in the international market may have more financial and operational resources than Profoto, which may lead them to present more advantageous products and services to customers.
|To mitigate this risk, Profoto has an action plan linked to investments in research and development, as well as a growth strategy on how to continuously strengthen the brand. In addition, the company conducts market analysis of existing and new customers and competitors. Ensure that product plans include sufficient innovation (technical, marketing and sales).
|The Covid-19 outbreak has negatively impacted the global economy and may continue to have a negative impact on the Profoto’s sales figures, financial position and future revenues due to the photo industry’s heavy reliance on travel and events.
|Profoto is closely monitoring the development of the pandemic and current restrictions in all regions.
|The Company’s international operations expose it to certain risks, such as the risk that Profoto’s sales will be adversely affected by changes in political situations, the emergence conflicts/wars and trade barriers, and changes in customs and trade regulations. If these risks were to materialize, it could have a material adverse effect on Profoto’s earnings and financial position.
|Profoto’s current exposure to risks resulting from the political environment, trade barriers/wars and customs barriers is considered limited. Profoto constantly monitors current situations and tries to find alternative solutions if problems arise. In addition to this all customers, existing and new, are reviewed against updated sanction lists. Reduce dependence on individual countries.
|The company’s business is affected by the current state of the global market and, in the event of a recession due to rising inflation and interest rates, this could have a material adverse effect on Profoto’s financial position and results.
|Profoto has a low debt ratio with strong underlying cash flows and closely monitors developments in the global market. Profoto’s assessment is therefore that it is well equipped to face a possible future recession.
|LEGAL AND TAX
|Risk related to control and interpretation of laws and regulations
|There is a risk that Profoto does not comply with EU laws and regulations, for example due to inadequate internal controls or misinterpretation of regulations, which may result in penalties or fines. There is also a risk that the necessary certifications for new products cannot be obtained without unreasonable cost or delay, which could result in adverse financial consequences. Disruptions or errors in the company’s IT systems may affect the handling of personal data. There is a risk that the measures Profoto has taken to comply with the GDPR and any other privacy policies worldwide may prove to be inadequate, leading to unauthorized disclosure or improper processing of personal data, which may result in fines, claims, and/or adversely affect customer perception.
|Profoto cooperates with various legal specialists. In addition, annual scoping of internal controls is carried out, minimizing the risk of control deficiencies, as well as an annual internal audit of GDPR compliance.
|Patents and trademarks
|There is a risk that Profoto’s protection of registered intellectual property rights, such as patents and trademarks, will prove insufficient or that current applications will not be granted. If Profoto fails to protect and enforce its intellectual property rights, or if it is accused of infringing upon the intellectual property rights of third parties, it could result in extensive litigation, disputes, claims and other legal proceedings, along with legal and financial liability that would result in financial losses, which could also adversely affect the company’s brand and reputation.
|Profoto has secured in-house intellectual property expertise and also uses legal advisors to minimize risk.
|Tax, VAT and customs issues
|This risk includes the risk of incorrect interpretation of tax rules and/or incorrect handling of customs which may result in incorrectly reported tax or customs declarations.
|Profoto has various internal controls in place to minimize the occurrence of risks in these areas. In addition, annual training sessions are held to ensure staff competence in the field, as well as collaboration with external consultants with key expertise.
|Profoto is dependent on the supply of components for its products in order to be able to deliver to customers. Risks include loss of key suppliers, delayed or non-delivery of products due to supply chain problems and/or component shortages, or failure to meet customer quality requirements.
|Profoto actively monitors the market to seize buying opportunities when they appear and the group is constantly working to ensure closer coordination with suppliers. For new products, a strategy has been applied with preference of
components with high availability.
|There is a risk that Profoto’s products will be defective or otherwise fail to meet relevant product requirements, which could have a material adverse effect on Profoto’s brand, reputation and relationships, which could materially result in an inability to maintain the premium price market position, which in turn will result in reduced profitability and revenue. Safety defects are a high risk and the company has a producer responsibility; any faulty products could cause physical damage and would expose the company to criticism and negative media statements, as well as legal action.
|Profoto is working to consolidate the global and comprehensive quality situation across the company and is working to improve and ensure action on quality issues reported from the market. The aim is to increase management attention to quality issues. Ongoing follow-up regarding the initiatives started in 2022, the recruitment of a new quality resource, the PPAP (quality assurance) process and the ECO process.
|There is a risk of not being able to grow and find new business if experience and skills are not available in the company.
|Profoto has development plans for employees with the aim of securing employee competence, development and motivation. Profoto has developed plans to attract and retain employees with critical skills.
|Loss of key personnel
|Profoto’s ability to achieve its business objectives depends on its ability to recruit, retain and train qualified employees with specific skills and experience, especially in management positions and in research and development. There is a risk that one or more key people will leave Profoto. If Profoto is unable to attract key employees, consequences may include an adverse effect on the company’s product development activities and growth, failure to drive innovation, reduced efficiency, a significant negative impact on the competitive position, missed business opportunities that may result in reduced revenue and failure to maintain the premium market position.
|Profoto has development plans for employees with the aim of securing employee competence, development and motivation. Profoto conducts annual employee surveys for all employees and based on the survey results, relevant change plans are formulated both in Profoto as a whole and at departmental level. Profoto has developed plans to attract and retain employees with critical skills, especially technical skills in Research and Development. Use external
recruitment partners when recruiting for business-critical roles.
|Lack of innovation
|Profoto faces the risk of losing its category leadership position due to its inability to produce a constant flow of innovations with real customer value to increase sales through new and existing customers in still photography. This risk may be the result of insufficient resources for research and development activities, or product portfolios that do not meet customer requirements due to Profoto’s failure to predict and analyze market trends.
|Profoto works continuously to identify new business opportunities. Profoto does not rely on a single idea but conducts several different feasibility studies and tests of early business concepts in parallel, often in close dialogue with customers, to avoid overdependence on a single venture.
|Failed growth strategy
|In the future, Profoto may seek further growth through acquisitions of other businesses, which entails the risk of additional costs or losses in investments, the risk that any legal or financial risks are not identified in the acquired company prior to the acquisition, and challenges when integrating businesses into existing operations. Profoto may have to contribute additional capital to the acquired companies, become involved in costly legal proceedings, or be unable to realize expected synergies, which may adversely affect Profoto’s operating results or financial position.
|The extent of the risk is highly dependent on the size of the acquired company. Profoto has an integration plan in place to ensure successful integration, expert support for the acquisition process, and extensive due diligence to minimize the possibility of legal and financial risks arising. It also learns from and documents previous acquisitions.
|IT systems and cybersecurity
|It is essential that Profoto and its IT suppliers are able to maintain and update existing IT systems, firewalls and anti-virus software to reduce the risk of loss of important product data or other critical sensitive data due to malicious software or viruses. This risk can result in unauthorized access, increased costs, breaches of regulatory requirements, dissatisfied customers, unavailability of the system and adversely affect the business and Profoto’s financial position.
|Profoto has standardized its IT processes, performs an annual risk scoping of actual risks, and the technical solutions are constantly updated to ensure effective IT protection.
|A scalable business model with a focus on outsourcing carries the risk that external staff will not be able to meet Profoto’s high quality standards; there is also a risk of non-delivery of products on time, as well as the risk of increased costs and disruptions in the product chain, which can lead to loss of customers.
|This risk is minimized by creating redundancy in outsourcing partners and ensuring that core competencies are available in-house.
|Dealers are the main sales and rental channel for Profoto’s products. In addition, online sales are made directly to end customers. Profoto may be adversely affected if dealers are involved in financial, legal, or operational problems, or have other limitations in their operations. The dealer network is diverse both in terms of geography and size. There is a risk that the measures Profoto implements in relation to its dealers are not appropriate for all of them, which may result in a material adverse effect on Profoto’s sales, financial position and growth.
|Profoto strives not to be dependent on a single dealer. With existing dealers, the risk is managed by maintaining good relationships and, where possible, ensuring that there are several resellers in the same country to reduce dependency. In addition, Profoto has launched its own website through which it sells directly to end customers. Existing dealers are constantly evaluated. Develop sales strategy for dealers and direct sales.