Risk management

The target of risk management is to collect information on and to review and manage opportunities, threats and risks arising in the company’s operations in order that the company can reach its targets and carry out its operations without disruptions.

A risk can be defined as a matter or event that may, when realised, prevent or hinder the company to meet its strategic and operational targets, or result in missing business opportunities. Risks are classified as business risks (strategic risks), operational risks, risks of losses or damages and financial risks. Also other aspects than financial impacts are considered when assessing risks.

Musti Group’s Risk Management Policy describes the targets, principles, organisation, responsibilities and practices of Musti Group’s risk management. Risk management is a part of the internal control. The execution of the Risk Management Policy is monitored by the company’s top executive management and the Board of Directors.

Responsibilities

Under the Limited Liability Companies Act, the Board of Directors shall see to the administration of the Company and the appropriate organisation of its operations. In addition, the Board of Directors shall monitor and review the efficiency of the company’s internal control and risk management system. The Board of Directors shall confirm the company’s internal control and risk management policies and amendments to them, as well as address significant risks and uncertainties related to the company’s operations.

The Company’s CEO with the assistance of the Group’s Management is responsible for the preparation of the Risk Management Policy and the systematic and appropriate implementation of the risk management. The CEO shall ensure appropriate coverage of the Company’s risk management and assess the implementation of the risk management. The CEO reports on the risk management to the Company’s Board of Directors. The members of the Management Team are responsible for the planning, implementation and follow-up of the risk management measures in their own area.

Risks and uncertainties

As published in the Financial statements release October 2019 – September 2020

Musti Group’s risk profile follows the general risk level of the retail and grocery trade. The industry is not particularly cyclical and not subject to rapid changes. The company regularly monitors changes in the risks and their impact on the business. The company implements risk management continuously and systematically according to a scheduled process. The risk management process ensures that risks related to the Group are identified, estimated and controlled in a proactive way and the management of risks is monitored. The company’s risk management includes, among others: identification and review of risks, risk assessment, determining and implementing control measures for the identified risks, and monitoring and reporting of risks.

The following describes the risks and uncertainties that are considered significant for Musti Group.

Risks relating to the macroeconomic environment

Musti Group’s net sales and operating profit are impacted by general economic conditions, which are influenced by many factors beyond Musti Group’s control. As Musti Group’s net sales and operating profits are generated in Finland, Sweden and Norway, the company is vulnerable to negative economic developments, including recession and depression, in these core markets. Although the pet care market has proven to be resilient to economic downturns in the past, and so far during the COVID-19 pandemic, there can be no assurance that this would be the case in the future. Adverse changes in the Nordic markets could result from e.g. deterioration in business or consumer confidence leading to low customer spending, fluctuations in currency rates, changing customer preferences or employment levels, lower availability of credit, rising interest rates or inflation or changes in taxation or in the local political landscape.

The COVID -19 has exposed Musti Group’s risk management to a new challenge. Musti Group is actively working on minimising disruptions on a longer term and implementing precautionary measures to be able to manage diverse future scenarios. To date, the pandemic has not had any significant negative impacts on Musti Group, as the company has successfully managed the risks related to e.g. disruptions in the logistics chain, suppliers and employees. However, the pandemic can result in long-term effects with risks related to higher unemployment and recession in the society.

Risks relating to changes in the competitive environment

Pet products and services retail industry is increasingly competitive due to the presence of online merchandisers and specialty retailers’ in the pet food and products market. Also, the expansion of pet-related product offerings by certain grocery stores and other general retail merchandisers has increased competition. Musti Group competes with a number of other participants in the Nordic pet care market, which includes pet food, pet products and pet services. Musti Group’s competitors are large grocery retailers, smaller pet specialist stores, online competitors (including general online stockists and internet pure-plays), home and garden stores, pet service providers, as well as veterinary clinics.

Risks relating to quality of products and services

Musti Group’s brand is an important asset to the company. Maintaining the reputation of, and value associated with, Musti Group’s brand, is central to the success of its business, and Musti Group could be adversely affected if customers lose confidence in the safety and quality of the food, accessories and services sold or provided by the company. The real or perceived sale of contaminated pet food or defective accessory products by Musti Group could result in product recalls, product liability claims against Musti Group or its suppliers, investigations by authorities and loss of customer confidence. In addition, Musti Group may also be subjected to complaints from its customers, employees, competitors or other third parties in social media channels, alleging injury, health, environmental, safety or operational concerns, negligence or failure to comply with applicable laws and regulations. Any such complaints and claims, even if successfully resolved without direct adverse financial effect, could have a material adverse effect on Musti Group’s brand and reputation.

Risks relating to changes in customer preferences

Musti Group has identified a mega-trend refered to as Pet Parenting where customers increasingly treat their pets as family members. The increasing development of the Pet Parenting trend and growth in spend per pet has opened markets for Musti Group’s high-quality food products with high nutritional value, broader range of products and services with a rising emphasis on wellness. Musti Group’s success depends in part on its ability to identify and respond to evolving customer preference trends in all of its product areas, and on ability to translate customer preferences into appropriate, sellable merchandise offerings with appropriate levels of inventory.

Risks relating to sourcing of products

As Musti Group does not operate through own factories, it relies on domestic and foreign external suppliers to source its own products. For third-party products, Musti Group is dependent on its relationships with suppliers of third-party brand products to maintain a broad product offering and sufficient inventories. Musti Group focuses on the authenticity of its sources of supply and the quality of its products and seeks to maintain high standards of sustainable sourcing of products in its supply chain. Any loss of significant suppliers or the inability to source products from such suppliers that meet Musti Group’s standards and requirements or a supply reduction or cost increases demanded by suppliers could have a material adverse effect on the customer relationships and competitive position.

Risks relating warehouse operations

A disruption or malfunction in Musti Group’s warehouses or sourcing, difficulties in successful managing of Musti Group’s inventory, or difficulties in predicting the product demand may raise the costs related to warehouses and require the selling of products with discounts reducing the profitability. Such discuptions or malfunctions may have an adverse effect on the inventory of Musti Group’s and franchisees’ stores, and Musti Group’s business could be substantially interrupted. Interruptions may in turn limit Musti Group’s ability to perform its obligations towards its customers, which may result in claims for financial compensation based on non-delivery of orders and damage Musti Group’s reputation as a reliable trading partner.

Risks relating IT systems

The timely development, implementation and uninterrupted performance of Musti Group’s hardware, network, websites, ordering platforms and other IT systems, including those which may be provided by third parties or which may be hosted online or in the “cloud”, are critical factors for the smooth functioning of Musti Group’s operations and are, thus, critical to Musti Group’s success. Musti Group uses various software to assist in efficiently managing supply flows, orders, customer handling, warehousing, distribution, replenishment, operational data, customer- and employee-related data as well as other management and financial information. Even though Musti Group has recently completed its IT system renewal and is not expecting any larger upgrades in the near future, any future upgrades of existing IT systems or the implementation of new IT systems, may cause organizational disruptions within Musti Group.

Musti Group depends on the continuous availability and reliability of its IT platforms, which, in turn, depend on the functioning of its IT hardware. This includes operational risks, such as the occurrence of equipment and software failures, power interruptions and unlawful conduct by third parties or human error. Musti Group’s IT systems are also exposed to cyber security risks relating to, for example, viruses, malware, hacking phishing attacks, penetrating or bypassing security measures in order to gain unauthorized access to Musti Group’s networks and systems.

Musti Group strives to comply with all applicable laws and regulations relating to privacy and data protection. However, it is possible that such requirements may be interpreted and applied by the company in a manner that is unforeseeable or may conflict with the current interpretations or practices of the EU or the Finnish authorities. In addition, non-compliance or data breaches through cyber-attacks or otherwise may result in fines, damages, orders to stop processing personal data as well as damage to the Company’s reputation, and otherwise have a negative impact on the company’s business.

Risks relating management and employess

Musti Group’s success is largely dependent upon the continued service, skills and experience of its existing management team and Board members, having valuable knowledge of the pet products and services industry. Furthermore, Musti Group relies on its trained and passionate sales personnel in the stores striving to provide tailored, knowledgeable service and guidance to Musti Group’s customers. Losses of key management or a significant number of employees could adversely affect the daily operations of Musti Group as well as its ability to develop its business successfully.

Musti Group’s ability to support its overall strategy may be limited by Musti Group’s ability to recruit, train, motivate and retain qualified staff. As Musti Group relies on skilled personnel, its success depends partly on its ability to continue to attract, motivate and retain qualified personnel who understand and appreciate Musti Group’s corporate culture, customers and merchandise, and are able to adequately and effectively represent this culture.

Risks relating to regulation and compliance

Inadequate compliance with the regulations regarding Musti Group’s operations and products or with the corporate social responsibility requirements could result in sanctions or harm Musti Group’s public image among its key customer groups.

Musti Group processes customer and employee data and collecting its customer data has a significant role in Musti Group’s business and strategy. Therefore, Musti Group’s operations are subject to laws relating to data protection and privacy, including the EU General Data Protection Regulation ((EU) 2016/679, the “GDPR”), which replaced the EU Data Protection Directive (95/46/EC) in May 2018, as well as other national data protection laws.

Risks relating to taxation

Changing tax legislation, unexpected changes in interpretations of current tax regulations, and administrative processes related to taxation may cause significant costs to Musti. Musti is currently subject to a tax audit of Musti Group Oyj, Musti Group Finland Oy and Musti Group Nordic Oy regarding financial years 2018-2020.

Musti Group’s central warehouse located in Eskiltuna, Sweden, supplies a significat number of products to all of Musti Group’s operating countries. This centralized operation generates a significant number of intra-group and cross-border transactions. Therefore, interpretations concerning transfer pricing may have a significant impact on the group level business results.

Risks relating to currency fluctuations

Musti Group’s results can be affected by fluctuations in currency exchange rates as Musti Group is exposed to foreign exchange rate risks in the form of translation risks and transaction risks arising from fluctuations in currency exchange rates. Musti Group’s purchases are primarily conducted in euros, with currency exposure to Swedish krona, Norwegian krone, Brittish pound sterling and US dollar. Transactions risks relating to Brittish pound sterling and US dollar are partly hedged. Financial items are subject to translation risks of internal loans and receivables in Swedish krona and Norwegian krone.

Risks relating to interest rate fluctuations

Musti Group’s current loans are subject to variable interest rates and, therefore, exposed to movements in interest rates. An increase in the interest rate level may have a material adverse effect on the cost of financing and Musti Group’s financial costs. In addition, the interest rate level is dependent on the covenenants of the financing agreement.

Risks relating to liquidity

Musti Group’s business requires, and will require the availability of a sufficient funding. Sufficient funding is a condition for the development and expansion of the business through opening of new stores and possible acquisitions. To mitigate potential liquidity risks Musti Group has an unutilized EUR 4.0 million credit limit and an undrawn EUR 10.0 million revolving credit facility.

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