Annual Report 2017

Opportunities and risks profile

As a technology company, technotrans operates in a dynamic market environment in which new opportunities and risks are continually emerging. technotrans conducts opportunity and risk management to assist the company management in achieving the corporate targets. technotrans’ long-term success depends on identifying and seizing opportunities at an early stage. Meanwhile the company is exposed to risks that could hinder the attainment of its short and medium-term targets. technotrans takes risks to mean internal and external events, resulting from uncertainty about future developments, which could adversely affect the attainment of corporate targets. technotrans understands opportunities to mean possible successes over and above the defined targets, which thus promote the development of the business. Risks and opportunities are inseparably linked. The structures and processes of the risk management system as explained in the Risks Report are therefore automatically also an aspect of opportunities management. However opportunities are identified not merely by the management or the risk managers, but also by the individual employee.

To establish the overall risk, technotrans bundles individual risks that belong together substantively. Based on the recommendations of DRS 20, technotrans categorises its risks according to five risk groups that could permanently have adverse effects on the net worth, financial position or financial performance of the technotrans Group. It should be noted in this regard that the Board of Management assesses the probability of occurrence of all the risks stated below as low. Unless otherwise indicated, the risks apply to all segments.

General and Industry-Specific Risks

The success of the technotrans Group depends to quite some degree on the macroeconomic developments of its sales markets, specifically the printing industry, the plastics processing industry, the machine tool and laser industry, along with the sales markets of its customers. In assessing macroeconomic development, among other tools technotrans uses forecasts by widely recognised institutions and economic research institutes. The growing diversification of the technotrans Group reduces its dependence on the business cycles of a single industry, while creating the chance to share in the opportunities offered by various growth markets.

A fundamental cyclical and industry-specific risk naturally remains because the actual economic development of the global economy and the German economy, but particularly of the export-oriented capital goods industry, could differ considerably from the forecasts made.

Political decisions, international conflicts and exchange rate volatility may erode sales of our products and undermine our forecasts. Thanks to its flexible production structures, technotrans is able to adjust capacities swiftly and thus respond to changes in demand.

As a systems supplier, technotrans realises a comparatively high proportion of its revenue from the leading printing press manufacturers worldwide. As a result of the industry’s process of consolidation in recent years and the generally flat market volume for print products, technotrans is subject to growing interdependence with machinery manufacturers (OEMs). Economic difficulties for one of these customers or its exit from the market would potentially have a considerable impact on the financial position and financial performance of the company in the short term. However, the Board of Management does not expect any lasting effects because consolidation would probably not exercise any influence on overall sales of printing presses. In addition, technotrans is successfully expanding its range of products and services in the niche markets of digital and flexographic printing.

Industry-specific opportunities and risks could also arise for the technotrans Group from technological and competitive changes. technotrans addresses these risks through ongoing initiatives to safeguard and extend its leading technological and innovative position as well as by focusing on new customers and new markets.

In summary, the Board of Management assesses all net risks and therefore the overall risk in this risk category of general and industry-specific risks as low at the time of compiling this report.

Corporate Strategy Risks

There are a number of risks involved in taking over companies that could impact our financial performance, financial position and net worth. If the expected economic or industry-specific developments or the targets for newly acquired businesses or expectations of newly developed products should prove to be inaccurate, the revenue and therefore also the earnings target could be missed. Attainment of the margin targets depends to a very high degree on the planned revenue performance and on keeping costs strictly under control. Unplanned expenses e.g. for restructuring measures unexpectedly needed, or unforeseeable additional quality problems, could also cause major shortfalls.

The strategic direction of the group in the past few years has centred on investment in growth markets, the expansion of existing markets and the acquisition of further companies. The purpose of this investment is to increase the presence in existing markets and to access new market areas that offer attractive growth potential. In order to gain access to further sales markets, technotrans focuses on its core skills and specifically addresses niche markets where it can succeed as a systems partner to major industrial clients. The relevant markets are moreover continuously monitored and opportunities for strategic acquisitions that complement organic growth are identified. By making targeted acquisitions, technotrans endeavours to strengthen its position as technology leader, unlock market potential, improve the services it provides for customers and expand the product portfolio.

How quickly the acquisitions can be integrated into the group in order to realise the expected group-wide synergies will also be crucially important. Building on experience of the most recent successful acquisitions, the Board of Management addresses this risk by deploying additional personnel and conducting regular checks on the measures implemented. With the acquisition of GWK Gesellschaft Wärme Kältetechnik mbH in 2016, technotrans took an important strategic step towards further reducing its dependence on the printing industry, as its main market segment to date, and significantly stepping up its activities in the growing market of the plastics processing industry.

As a result of its corporate strategy of driving growth through the gradual expansion of its investment portfolio, the group has accounted for goodwill amounting to € 23.1 million (previous year: € 23.1 million). Pursuant to IAS 36 this must be tested for impairment at least once a year. If impairment is established, the goodwill in question is to be written down. In the year under review, as in the previous year, no write-downs were recognised.

To maintain competitiveness, meet market requirements and attract new customer groups, technotrans is also investing in the development and optimisation of its technologies, products and processes. Its activities focus on all sales markets. New products are created in constant consultation with the customer from the product and applications development stage onward (product/market strategy).

In new markets involving new customers, there is fundamentally always the possibility that efforts to launch new products will not succeed. On the other hand the individual risk is lower because of the growing number of customers. Nevertheless, it is impossible to exclude miscalculations with regard to the strategic direction of the group and its market potential, along with a lack of customer acceptance of newly developed products; these could have negative effects on the competitive position and the sales of the group. We tackle this risk by conducting a careful analysis of the underlying conditions before developing new products, and by carrying out a meticulous selection process of prototypes; we rate this risk as low.

In drawing up our plans for the 2018 financial year we have based our estimates on realistic planning assumptions and can if necessary take swift corrective action to exclude these risks as far as possible, or minimise their impact.

In summary, the Board of Management assesses the overall risk in this risk category of corporate strategy risks as low at the time of compiling this report.

Financial Risks

Financial risks include above all the liquidity risk, the interest and exchange risk, as well as the credit risk.

The individual subsidiaries fundamentally finance themselves from their operating profit. Depending on the liquidity situation, technotrans AG also helps with the financing and provides funding if required. To remain in a position to act at all times, the group parent maintains adequate liquidity reserves. A diversified financing structure, spread across several principal banks, prevents dependence on individual lenders with the result that as matters stand default risks from banks are limited.

Nor would a change in the interest rate have any major impact on the financial performance, because ongoing financing involves a mix of fixed-rate and variable-rate financing and in selected instances interest rate risks are hedged. At the reporting date of December 31, 2017 the unsecured share of financing within the bank liabilities amounted to € 4.1 million. A significant deterioration in the financial performance, financial position and net worth from the plan figures for the 2018 financial year could render it necessary to draw on the promised but unused credit line. Based on our plans for 2018, the Board of Management rates this risk as low.

In view of the company’s structure and the growth in its international activities, exchange rate fluctuations influence the business activities of the technotrans Group. Because production and sales activities for the overwhelming portion of business operations are billed in euros, the exchange rate risks from transactions are limited. However exchange rate movements may to varying degrees be a help or a hindrance to the competitiveness of our customers. There are also exchange rate risks in financial reporting terms from the translation of revenue, income and expenses as well as intragroup receivables and liabilities for the international subsidiaries into euros as the group currency. Exchange rate movements may therefore correspondingly increase or reduce the consolidated result. In the 2017 financial year, the group reported a negative currency result of € 1.0 million.

In view of the diversified portfolio and our experience of recent years, we rate the overall credit risk on the debtor side, especially of a major debt default, to be low. Effective systems of monitoring creditworthiness and possibly demanding collateral ensure that business with new customers proceeds in an orderly manner. Trade credit insurance cover tailored to technotrans furthermore reduces the credit risk.

The overall analysis of the Board of Management is that it rates the financial risks for the group as low.

Economic Performance Risks

As well as corporate strategy risks, technotrans is exposed to market risks, in particular in the form of procurement risks and production risks.
technotrans is dependent on suppliers and service providers being able to supply goods and services of the required scope and quality at all times. Risk management is therefore a fixed component of supplier management. technotrans cooperates closely with selected system suppliers.

The Purchasing Department addresses risks associated with price and volume fluctuations, interruptions, delayed deliveries or inferior quality by means of group-wide supplier management, with the goal of reducing lop-sided dependencies. Economies of scale in the group’s procurement of the principal categories of materials are exploited by creating a group procurement structure. Wherever necessary, commodity hedges limit the price and volume risk. On the materials and procurement side we expect to see a rising trend in raw material prices for some components in 2018. Depending on the prevailing market situation, it is not always possible for group companies to pass on the resulting cost burdens to customers promptly and comprehensively.

Production stoppages as well as disruptions to transport and logistics fundamentally constitute a relevant risk that technotrans addresses by implementing flexible processes and high technical standards. gwk’s higher vertical integration furthermore increases flexibility within the group by providing a safeguard against external supply bottlenecks if necessary. In view of growing diversification within the group, the risks from effects on the group are therefore of minor importance.
There is furthermore the risk that customer expectations with regard to punctuality of delivery or quality will not be met (sales risk). A large number of processes and mechanisms, from supplier management and customer project handling to quality management, are intended to anticipate and eliminate such risks.

A secure and effective IT infrastructure is the basis of the modern working environment. The growing integration of a large number of IT systems and the need for permanent availability place high demands on the information technology used. technotrans could suffer losses if the availability of data and systems or the confidentiality of information in need of protection were harmed and/or restricted.

technotrans addresses possible risks from the failure of computer systems and networks, unauthorised accessing of data and data misuse through a central shared service centre function (in technical and organisational terms) as well as through regular investment measures in hardware and software. To limit future IT risks, technotrans uses preventive measures for system security (use of virus scanners, firewall systems and access controls) as well as an ongoing SAP ERP implementation strategy within the group. The Board of Management currently estimates the IT risks as low. Measures to prevent, identify and deal with cyber attacks are becoming increasingly relevant.

The group’s success is critically influenced by having qualified and motivated employees and managers. technotrans therefore invests both in retaining its employees and in improving job appeal, to rise to the challenge of impending digitalisation and demographic change. There exist possible risks mainly in the areas of personnel recruitment and personnel development. Changes to structures or processes harbour the risk of losing employees and their expertise if they are unable to identify with the measures taken and are therefore prompted to move (fluctuation). We tackle this risk through focused training and advancement measures, by spreading individual expertise among teams and by offering commensurate pay. Employees appreciate the positive corporate culture, with the result that all measures combined make technotrans an attractive employer.

Overall, the Board of Management rates the economic performance risks as low.

Legal Risks

technotrans AG and its group companies are exposed to a wide range of legal risks.

The business operations of the individual companies harbour risks especially from guarantee and product liability claims from customer complaints. These risks are by and large covered by insurance policies as an element of the risk management system. In addition, provisions amounting to € 1.9 million (previous year: € 1.4 million) were accounted for in 2017 by way of adequate risk provisioning.

In response to significant individual risks of group companies from litigation and therefore associated litigation risks, a provision is formed if the obligation is probable and a reasonable estimate of the amount in question is possible. No further risks arose compared with the previous year. The group is not currently involved in legal proceedings with any substantial influence on its overall economic position. A lawsuit from the previous year was successfully terminated in November 2017 by way of a court settlement. technotrans did not account for any provisions for litigation risks at December 31, 2017 (previous year: € 1.0 million).

There are also risks from changing international regulations and laws, and from the associated changes in standards – for example regarding the use commodities or constituents – especially in Germany and the EU. The erecting of trade barriers and growing competition restrictions can have a negative effect. While effective contract and quality management plus a compliance system can minimise these risks, they cannot exclude it altogether. technotrans has adequate insurance cover in place to guard against the risk, and in individual instances also accounts for provisions.

Overall, the Board of Management rates the legal risks as low.