Our Board of Directors has the oversight responsibility 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, it performs an annual review of the key risk profiles and risk response. The Executive Management ensures risk identification, reporting and discussions with the Audit Committee.
Our risk assessment for 2017 has been reviewed and discussed with the Audit Committee and subsequent the Board of Directors. The main risks identified for 2017 are identical with previous years and consists of regulation, excise taxes, total market developments and manufacturing disruption. The identified financial risks, including foreign exchange, interest rate, credit and liquidity risks can be found in note 4.2 on pages 80-85 under following link st-group.com/annualreport2017.
Due to the health risks associated with smoking, governments and health officials have taken regulatory measures. The regulations related to the tobacco industry continue to increase. The most recent regulatory initiatives in selected markets include neutral packaging without branding, ban on certain flavorings, significant reporting obligations in respect of ingredients and ban on display of tobacco products at the point of sale.
Tobacco regulation may impact our industry's ability to compete and differentiate its products, entail substantial costs for our Group, adversely affect our results of operations and increase complexity in our operations.
In collaboration with various national trade organisations, we engage with regulators and stakeholders, to help facilitate reasonable and balanced regulations that meet their objectives. We have dedicated resources to identify and monitor ongoing regulatory initiatives and spend significant resources on the preparation for and implementation of increasing regulations.
Even though cigar volumes have demonstrated higher resilience than cigarettes in the market where we operate, the total tobacco market volumes have declined for decades. In our machine-made cigars and pipe tobacco categories, the total market continues to decline and may continue to do so in the future.
Though, we have diversified our market to more than 100 countries, a significant decrease in demand for tobacco products in one or more core markets would impact our Group net sales and earnings negatively.
We monitor the market trends on a monthly basis, collect market research data and conduct regular forecast projections in order to ascertain market developments. This enables us to promptly address adverse market conditions. Furthermore, we are continuously exploring new markets with a view to spreading the geographical risk.
Excise taxes are a major component of the retail price of tobacco products. Governments may decide to increase the excise tax on our products to increase tax revenue or as means to limit tobacco consumption.
Increases in the tobacco excise tax rates – in particular an alignment of excise tax rates across tobacco product categories – would impact the consumer price of our products and thus potentially the demand.
If such an increase is implemented at a time or in a frequency we did not expect, our ability to adjust to this increase would be limited.
We actively monitor potential changes to the excise taxes imposed on our products and together with trade industry partners, we engage in dialogue with regulators to limit the risk of disruption in the market.
We aim to pass on excise tax increases to consumers wherever possible in light of the market conditions.
Interruptions in our Group's supply of products to the market could have a material adverse effect on our business. Our manufacturing footprint has changes as a result of the decline in volumes in machine-made cigars and pipe tobacco categories. The dependency on specific manufacturing sites has therefore increased.
Political and economic unrest, extreme variations in weather patterns in tobacco growing areas and labor instability may arise in countries and regions in which we manufacture our products.
Our operation setup is global with production facilities on four continents. We monitor geopolitical and economy policy developments where it is relevant and avoid overdependence on specific manufacturing sites.
We carry inventory to safeguard against bad crops. We carefully consider our location of raw materials and continuously update our manufacturing sites with defense mechanisms such as alarms and sprinkler systems. Finally, we continuously assess the adequacy of our insurance coverage.
Learn about some of the most commonly used tobaccos and where they come from
Get the insights from seed to cigar, pipe tobacco and fine cut
Discover how the crop journeyed from the americas across the world over thousands of years