Internal control and risk management systems

The Board of Directors of Sioen Industries is responsible for the assessment of the risks inherent to the company and for evaluating the effectiveness of control.

The internal control of the Group is based on five principles (COSO methodology):

  1. Control environment
  2. Risk analysis
  3. Control activities
  4. Information and communication
  5. Supervision and monitoring

1. Control environment

The control environment is the basis of the internal control and risk management system. The control environment is defined by a mix of formal and informal rules and corporate culture on which the operation of the business relies.

Integrity and ethics

Within the Group the goal is to create an open corporate culture where communication with and respect for customers, employees and suppliers is key, without any distinction. All employees are expected to deal with the company assets with the necessary common sense and manage them as a good family man.

These informal rules / corporate culture, where appropriate, are sustained by more formal rules such as the Protocol to prevent abuse of inside information and the Corporate Governance Charter.

Competences

The Sioen family surrounds itself since 1986 with external independent Directors. Their expertise and experience contribute to effective and proper management of the company. The aim is to attract Directors with different skills and experiences in order to create a momentum that enables the group to develop further.

A stimulating working environment, an “open door” policy and the ability to develop itself are the principles of the human resources policy. This enables the group to attract, to motivate and to retain qualified staff.

Governing Bodies

According to existing guidelines, the Group has the following administrative and operating committees:

  • Board of Directors
  • Audit Committee
  • Remuneration and Nomination Committee
  • Executive Management Committee

The operation of these governing bodies and their responsibilities are included in our annual report in the chapter Corporate governance.

Company structure and delegation of powers

The Sioen Industries Group is divided into divisions each with an operational activity. Supporting administrative services are centralized within a “Shared Services Center”. This structure allows the Group to centralize delegated authorizations as much as possible.

2. Risk analysis

The Board of Directors decides on the strategy of the Group, key policies and risk appetite. The role of the Board of Directors consists of pursuing the long-term success of the company and ensuring that risks are assessed and managed.

The executive management is responsible for developing systems to identify, assess, manage and monitor the risks.

Targets within the risk management process

The process of risk management contributes to the achievement of operational and strategic objectives. It forms the basis of reliable internal and external information and should also guarantee the compliance with laws, regulations and internal instructions of the company.

External factors

External factors may result from technological changes, regulatory changes, competition, product trends and many more...

Internal factors

Internal factors are closely linked to the internal organization of the company and can have different causes (IT problems, human resources,...).

Risk analysis (internal and external)

Sioen Industries has analyzed the risks associated with its activities. Based on that analysis, the following risks were identified:

Risks relating to the activities of the Group

Sioen Industries is, especially in terms of income, affected by the economic performance of its divisions. Currently the activities of Sioen Industries are concentrated in 3 divisions:

• The coating division
• The apparel division
• The chemicals division

The coating division is active in various industry sectors as a supplier of semi-fin ished products. Past experience shows the development of this activity is closely related with the industrial economic trend. As such sales cyclicity coincides with the general economic cycles. In this division approximately 75% of the raw materials used are petrochemicals. ( PVC, Polyprop, PET, solvent,..)

Pricing cycles of these raw materials are, to a certain extent, subject to the price of crude oil and the laws of supply and demand on a world wide scale. Pricing cyclicity does not show close correlation with the price index of crude, as a consequence there is currently no possibility to hedge on these raw materials. Raw materials account for approximately 50% of the sales price resulting in a gross margin of also approximately 50%.

Given the volatility of the price of crude oil, prices of those raw materials will vary also to a certain extent. A price increase of 10% of all of these raw materials at the same time, and without mitigating this effect, will cause an effect of 3.75% on the gross margin. Sioen Industries will always try to pass these effects gradually through to the end users with a delay between 6 to 9 months.

In the Apparel division pricing mechanics are quite different. Summarized we can distinguish between items held in cata- logue and customer specific garments. Customer specific garments are consid- ered as projects. Each and every project is specifically costed and sales prices are quoted based on the competitive environment. Garments held in inventory are continuously costed and re-costed whereas sales prices are subject to the competitive environment.

The chemicals division has to a large extent the same cyclicity and sensitivity as the coating division.

The Group is continuously looking for new applications, new products and new markets to stay ahead of competitors and to increase production and sales activities. If we fail to be innovative, to introduce new ideas, products, services and processes, this can have a negative impact on the operational and financial results of the Group.

Risks relating to customer commitment

The Group has no customers who represent more than 10.0% of the total balance of trade receivables (see note 3.5.8. Trade receivables) and as a consequence there is no major risk related to customer commitment.

Risks associated with seasonal activities

The consolidated income statement of the Group reflects the seasonal nature of the activities, more than half of the annual results are generated in the first half of the year. Future results will depend on developments in the market for technical textiles. Adverse changes in the economic environment, customer investment cycles, major developments in production and market acceptance of new applications in this market can influence this market and as a consequence the results of the Group.

Risks related to new emerging markets

The most important part of the turnover of the Group, some 85%, is realized in Europe. The activities in these markets have a low risk in terms of crime, government decisions, foreign exchange rates, political and economic uncertainty, issues that could adversely impact the results of the Group. Also, financial risks such as liquidity problems, inflation, devaluation, price, payment risks related to new emerging markets, are limited.

Risks related to recruiting and retaining staff in key positions

To develop new applications, to support and sell new products, the Group must recruit and retain the best staff with a good knowledge and the best skills. The strategy of the Group may be affected if the Group fails to recruit and retain employees related to important positions.

Credit risk management

In view of the relative concentration of credit risk (see note 3.5.8. Trade receivables), the company covers credit risk on trade receivables via an Excess of Loss credit insurance with an own risk exposure of EUR 400 thousand. In addition, credit control strategies and procedures have been elaborated in order to monitor individual customers’ credit risks.

Capital structure management

The equity structure of the Sioen Group is managed with the main objectives of:

  • protecting the equity structure to ensure continuous business operations, resulting in the creation of shareholder value and benefits for other stakeholders,
  • the payment of an appropriate dividend to shareholders.
  • the Group’s capital is formed in accordance with the risk, which changes with economic developments and the risk profile of the underlying assets. The Sioen Group can change the dividend to shareholders, issue new shares or sell assets in order to maintain or change the capital structure.

Interest rate risk management

The Group’s interest risk is relatively limited, in view of the loan agreements and related interest rate swaps. To hedge its interest rate risks and to take advantage of the current market interest rates, the group entered into new interest rate derivatives together with the new loan agreements: see also paragraph 3.5.15. Financial instruments for more information.

Foreign currency risk management

The purpose of the Group policy is to hedge against exchange risks arising mainly from financial and ope- rational activities.

The risks are limited by offsetting transactions in the same currency (“natural hedging”) or by hedging exchange rates through forward contracts or options.

Liquidity risk management

To ensure liquidity and financial flexibility, the Sioen Group has credit lines available to meet current and future financial needs.

Budget risk management

Executive management makes its risk assessment based on different realistic estimated parameters such as market expectations, the growth of the sector, industry studies, economic realities, budgets and long-range plans, profitability studies, etc. The key elements within the Group that are subject to this include: impairments, provisions and deferred taxes.

Risk management on delegation of authorities

Not respecting the existing signing authorizations may result in commitments relating to operations not authorized by the company.

Fraud risk management

Collective or individual fraud of employees can lead to financial loss and damage the image of the Group.

Risk associated with financial statements (information policy, consolidation)

The production of complete, reliable and effective information is essential for management and governance.

IT risk management

This risk concerns the general computing environment, data security system and the use of and access to the software systems.

3. Control activities

In order to properly manage the principal risks identified, the Sioen Industries Group took the following control measures:

Formal rules and systems

  • An authorization cascade system in the computer system

Grant of approval limits

  • Definition of signing authorities (authorization contract, payment authority, authority to re-presentation...)
  • Access and monitoring systems in the buildings

Physical controls

  • Cycle counts of inventories
  • Physical inventory of machinery and equipment

Reporting, analysis and monitoring

The Sioen Industries Group has established an internal reporting system by means of which both financial data and operational data (Key Performance Indicators) are reported on a regular basis (daily, weekly, monthly and quarterly). All deviations against budgets and against the previous reference period are carefully analyzed and explained. Besides the regular reports and analysis, there is a control matrix. In this matrix all processes of each Group company are analyzed and weak spots in the process are monitored in detail.

Data protection

Sioen attaches great importance to the security of all data stored in various computer systems and has developed specific measures. To ensure continuity and availability of critical data, they are stored in two data centers. The data centers are obviously not generally accessible and are specifically adapted to accommodate IT equipment.

4. Information and communication

To provide reliable financial information Sioen Industries makes use of a global standardized chart of accounts and has a global application of IFRS accounting standards.

The controlling team is responsible for checking the consistency of the reported figures by the various subsidiaries. Regarding information systems, there is a daily backup and a cascade system to limit access to crucial information.

5. Supervision and monitoring

Currently the nature , limited complexity, size and deeply centralized organization of the company limit the need for an independent internal audit function, contrary to principle 5.2/17 and 5.2/29 of the Corporate Governance Code. Supervision and monitoring is mainly performed by the Board of Directors. As no formal internal audit department is in place the Board executes this supervision and monitoring through the work of the Audit Committee and the Management Committee. Risks are monitored by a group of “business controllers” who report, monitor and analyze both financial and non-financial KPI’s on a monthly basis. They visit on a regular basis the subsidiaries and report to the group CEO and CFO about their findings. In order to facilitate these reports and controls the group is rolling out a uniform SAP platform combined with a BI reporting tool. Moreover the Board of Directors also uses the external audit reporting to the Audit Committee on their review of internal controls and risk management systems. Given the recent accelerated growth of the Group and its global presence the Management Committee is contemplating on introducing an independent internal audit function.