Uncertainties in the global marketplace are part of our everyday business activities. We monitor and manage our exposure to various risks in a structured and proactive way as we seek to identify, prioritise, and manage key risks at all levels of the business. The aim of our enterprise risk management process is to support better decision making through good understanding of risks and their likely impact, and proper mitigation of risks.

Governance

The Board of Directors is responsible for the governance of risks in the Group. Appointed by the Board of Directors, the Audit Committee assists on its behalf in monitoring the effectiveness of our Group’s risk management and internal control systems. In addition, the Audit Committee performs an annual review of key risk profiles and risk response. The Executive Management ensures risk identification, reporting, mitigation and discussions with the Audit Committee. Our risk assessment for 2018 has been reviewed and discussed with the Audit Committee and subsequently the Board of Directors. The main risks identified for 2018 consist of regulation changes, increasing excise taxes, total market developments and cyber risk. The identified financial risks, including foreign exchange, interest rate, credit and liquidity risks can be found in note 4.2 on page 60 in our Annual Report 2018.

 

Regulations

Regulations related to the tobacco industry continue to increase. Government and health officials aim with regulatory initiatives to affect customer behavior, discourage use of tobacco products and obstruct new product development. Most common regulatory initiatives include significant reporting obligations, various bans on tobacco product displays, plain packaging and ban on certain flavorings.

 

Mitigating actions

We engage with regulators and stakeholders to ensure proper insights and knowledge about our industry and facilitate reasonable, transparent and balanced regulations. Through collaboration with national trade organisations we support governments in meeting their objectives with new regulations. We have dedicated resources monitoring regulatory initiatives and use significant resources preparing for and implementing new and updated regulations.

Excise taxes

A major component of the retail price of tobacco products is excise tax. This component can be changed by national governments and is actively used to increase tax revenue and/or in an attempt to limit tobacco consumption. An alignment of excise tax rates across tobacco product categories would increase the excise on our products, impact the consumer price of our products and negatively impact our sales. Increases and alignments of excise taxes implemented unexpectedly or not in the expected frequency would limit our ability to adjust accordingly for production and sales.

Mitigating actions

We continuously monitor potential changes to excise taxes on our product categories. We adjust prices to the extent possible to pass on the effect of the increase to consumers if the market conditions allow. We govern seats in relevant industry associations and in collaboration with trade industry partners we actively engage in dialogue with regulators to limit the risk of market disruption based on excise alignment and change.

Total market development

The total tobacco market volume is declining. Although cigar volumes have shown higher resilience than cigarettes in our markets, the markets for machine-made cigars, pipe tobacco and fine-cut tobacco are declining. With presence in over 100 markets around the world, we have diversified our portfolio. Still, a significant and unexpected decrease in demand for tobacco products in one or more of our core markets would negatively impact our Group’s net sales and earnings.

Mitigating actions

We continue to explore new markets to diversify even further and spreading the geographical risk. We continuously monitor the market trends, collect market research data and perform forecasts to project market developments and trends. The trend analysis helps us address adverse market conditions more promptly.

Cyber risk

We operate in an environment of cyber security threats that are growing in number and sophistication. Successful attacks might result in business disruption, production stops, loss of image and direct financial loss. Disruptions to our online retail business platforms resulting in these becoming unavailable to customers would impact our sales and profitability. Further, our business platforms might be unavailable, keeping us from fulfilling engagements and responsibilities towards customers and employees.

Mitigating actions

We are focusing on implementation of security policies and business continuity management. We monitor and test our cyber resilience and IT enhancements – and continue updating our operating systems. We are increasing the awareness of cyber security amongst top management and employees