General business risks associated with the industry relate to developments in media advertising and consumer spending. Media advertising is sensitive to economic fluctuations. Therefore, the general economic conditions of the countries in which the Group operates and the economic trends of the industry influence Sanoma’s business activities and operational performance.
Around 37% of Sanoma’s net sales is derived from media advertising and some 34% from single copy or subscription sales. Rapid changes in media advertising and consumer confidence will affect the Group’s results. Newspaper and TV advertising react fastest to changes in media advertising expenditure.
In Sanoma’s risk model, the Company-specific risks are divided into four main categories: strategic, operational, financial and hazard risks. The most significant risks in each category, that is, those that could have a negative impact on Sanoma’s business activities, operations’ performance, or financial status if realised, are illustrated below.
Strategic risks include risks related to changes in customer preferences or the competitive situation as well as risks regarding suppliers or operating countries, intellectual property rights, laws and regulations. Risks associated with mergers and acquisitions, Sanoma’s strategic agility, development of technology and innovation capabilities are also included in strategic risks.
At the Group level, the most significant risks relate to changes in customer preferences, the threat of new entrants and the success of mergers and acquisitions. The management and protection of intellectual property rights are also associated with many of these risks.
Changes in customer preferences and the threat of new entrants
Many of the identified risks relate to changes in customer preferences. This applies both to the changes in consumer behaviour as well as to the changes in the behaviour and influence of business-to-business customers.
Ongoing digitisation and mobilisation is the driving force behind many of these changes. The increased usage of smartphones and the arrival of tablets has changed the way people consume media. Sanoma is well prepared for this change and has action plans in all its strategic business units on how to respond to this challenge.
New entrants might be in a better position to utilise changes in customer preferences and digitisation, and therefore gain market share from Sanoma’s established businesses. To further enhance Sanoma’s capability to respond to the changes the Group has introduced, among other measures, an internal Growth Fund. In addition, to speed up innovation and collaboration across strategic business units a digital operations matrix headed by the Chief Strategy and Digital Officer (‘CSDO’) is now operational. The CSDO is also a member of the Executive Management Group.
Technological advances generate new opportunities in new digital business activities for multimedia companies such as Sanoma. Developing new, digital services is one of the top priorities for Sanoma going forward.
Mergers & Acquisitions
Sanoma has grown vigorously through acquisitions. Due to these acquisitions, the Group may become exposed to risks associated with new markets and different business environments. The acquisitions also include risks related to the actual transaction process, integration of the new business, retention of key personnel and achieving the targets set for operations.
Regarding risks associated with acquisition decisions, the Sanoma Corporate Governance Principles specify the approval procedures for investments (including acquisitions). The Group’s M&A Investment Policy defines the decision-making and follow-up within the Group for mergers and acquisitions, how the M&A projects are organised and how the decision-making is to be formatted. In addition, various bodies discuss investments when addressing strategies as well as action and operational plans that are outside the formal process set out in the M&A Policy. Final investment decisions are made on the basis of specific proposals, in accordance with the form set out in the M&A policy and authorisations governing approval of investments. A specific proposal for a major acquisition is submitted for the purpose of decision-making, providing information on issues such as the strategic reasons for the transactions with related risks, key terms of the underlying documentation and synergy calculations. In the Group’s M&A policy, there is also a procedure for follow-up of acquisitions.
Laws and regulations
Changes in laws and regulations may affect Sanoma’s ability to effectively conduct business.
Changing regulations regarding the use of consumer data for commercial purposes and the deterioration of publisher’s and broadcaster’s copyright protection can have impact on Sanoma’s commercial propositions and content investments. Furthermore changes in tax legislation, such as higher value added tax rates for printed products, might have significant financial consequences.
Monitoring and anticipating developments regarding changing legislations are a priority for management in countries where Sanoma conducts business.
Intellectual Property Rights (‘IPR’s)
Key IPRs with regard to Sanoma’s products and services are the copyrights including publishing rights, trademarks, business names, domains, know-how, and e-business-related patents and utility models owned and licensed by the Group.
The acquisition, management and exploitation of IPRs involve risks associated with the scope of rights, continuity of rights and insufficient protection of rights or infringements. Unauthorised use of IPRs increases with the digitisation of media. Copyright enforcement lags behind rapid technology development making it possible for new players to enter into the online advertising market without their own investments into content.
In the wake of the European Commission having published a Digital Agenda for a single ‘one European digital market’, new regulation increases not only competition but complexity and cost pressure.
Sanoma manages rights in accordance with the Group-wide IPR policy and procedures. Because of the dispersed IPR portfolio, no material risks arise in relation to any individual IPR cases.
Operational risks relate to the quality of products and services, customer satisfaction, readiness to change, information and communication technologies, integration of new operations, human resources and leadership as well as to knowledge management.
Operational risks related to product and service quality and customer satisfaction vary by strategic business unit (‘SBU’). At the Group level, the most significant risks are associated with leadership and human resources, knowledge management and information and communication technology systems.
Leadership and human resources
The Group’s successful performance depends on how competent its management and other personnel are, and on the ongoing development of their competencies and skills in developing appealing products and services in accordance with customer needs. The Group’s success also requires that the leadership culture supports innovation, change management and encourages managed risk taking. As a part of its new strategic priorities and organisational changes, Sanoma has commenced a cultural transformation process.
Recruiting and retaining key individuals is becoming more difficult as a result of various factors, including changes in the age structure of the population and intensifying competition for personnel. Sanoma is responding to these challenges by continuously improving, among other things, in-house training programmes and increasing opportunities for job rotation. Special focus in leadership training, more systematic succession and career planning as well as the development of supporting HR systems are used in the mitigation of these risks. In addition, remuneration principles and practices are continuously developed and readjusted in order to enhance the retention and recruitment of talented personnel and help in change management.
The management and transfer of knowledge across the Group are crucial for the success of Sanoma. It is important that information, best practices and successful business concepts are obtained and shared within and between strategic business units. Sanoma constantly works on making the information flow within the Group as smooth as possible. Introduction of Group-wide collaboration tools as well as cross-SBU teams are examples of actions used in the mitigation of risks related to the knowledge management.
Information and Communication Technologies (‘ICT’) systems
Reliable ICT systems are an integral aspect of the Group’s business. These systems include online services, newspaper and magazine subscriptions, advertising and delivery systems, as well as various systems for production control and the management of customer relations. To be futureproof it is highly important the Group succeeds in integrating its ICT platforms more closely and to reach a higher level of standardisation.
Regarding ICT security risks that may arise in connection with the confidentiality, integrity or availability of information as well as reliability and compliance of data processing. These can be divided into physical risks (fire, sabotage and equipment breakdown) and logical risks (related to data security, employees and software failure). Sanoma has established continuity plans for systems critical to the Group. Sanoma’s ICT Governance model includes clear responsibilities regarding ICT security.
Financial risks include interest rate risk, currency risks, liquidity risk and credit risk. Other risks include risks related to equity, impairment and availability of capital. At the Group level, the most significant risks relate to liquidity and changes in exchange rates and interest rates.
Sanoma’s medium-term objective is to achieve a capital structure that represents an investment-grade credit profile. This can be achieved by ensuring strong cash flow from operations, maintaining adequate committed credit lines with various financial institutions and managing financial risks efficiently. By centralising the financing, financial risk management and liquidity management to a centralised unit (Group Treasury) more cost-efficient and competitive financing terms and pricing can be achieved. Group Treasury operates as a counterparty to business units. The Group mainly operates in the euro area, which essentially reduces the influence of currency risks. However, the Company has substantial transaction risks mainly related to TV programming rights purchases in US dollars. Sanoma mitigates financial risks with various financial instruments and derivatives whose use, effects and fair values are clearly verifiable.
A more detailed description of the Group’s financial risk management can be found in Note 26.
As a result of acquisitions, the consolidated balance sheet on 31 December 2012 included about EUR 3.0 billion in goodwill, publishing rights and other intangible assets, most of which is related to magazine and TV operations in the Netherlands. In accordance with the International Financial Reporting Standards (IFRS), instead of goodwill being amortised regularly, it is tested for impairment on an annual basis, or whenever there is any indication of impairment. The impairment losses on goodwill and other immaterial rights for 2012 totalled EUR 46.5 million (2011: EUR 83.1 million), and there were no indicators of other impairment impacts on the Group’s financials.
Hazard risks include business interruption and risks associated with health and safety issues or environmental issues. Material hazard risks are mitigated through process management and operational policies as well as through contingency planning and insurance. Due to the nature of Sanoma’s business, hazard risks are not likely to have a material effect on Sanoma’s performance.