06 Compliance

As part of our strategy, HZPC Holding has an Enterprise Risk Management (ERM) framework in place in order to structurally identify, assess, treat, manage, monitor and report risks throughout the organization. Since we find it important to continuously improve, a risk & control roadmap for the coming years is in place in order to further embed risk & control in our governance, strategy, systems, processes and daily operations.

Since we are growing across various regions, segments and business models, our risk profile changes and we need to pay more attention to managing those risks, starting with setting up clear (internal) processes and procedures. Such a greater focus on internal processes and compliance may perhaps give the impression that entrepreneurship is relegated to second place, but that is not the case. Just like growing from a small car to a lorry; we need to consider that if we want to move faster, we need to ensure that we have effective brakes and an insightful dashboard enabling us to speed up in a responsible manner. We aim to achieve this through our risk management approach and activities.As doing business inherently involves taking risks, our success depends on our ability to identify both risks and opportunities generated by our business and the markets we are in. By taking balanced risks, we strive to continuously build on being a financially sound and sustainable company. Risk management is therefore an important element of our corporate governance and strategy development. With our risk management approach and activities, we try to offer greater certainty with respect to realising trade goals and fulfilling our obligations to our customers, shareholders, employees, and society as a whole.

The overview below depicts HZPC Holdings main risks categorized into four areas (strategic (market) risk, operational risk, financial (reporting) risk and compliance risk) that could prevent us from realizing our financial and non-financial strategic objectives. The following pages provide a more detailed description of our main risks, including the actions taken to mitigate these risks and/or chase any related opportunities. This list should not be considered exhaustive. There are no risks and uncertainties that have had a significant impact on HZPC in the past financial year.

Changes to the competitive landscape relating to new and/or non-traditional competition, mergers & acquisitions and the expansion of offerings, and an increased focus in the market on sustainability topics (e.g., food waste, sustainable agriculture, climate change, packaging and data integrity) that, without a distinct response by HZPC, could result in a loss of competitive advantage, decrease in sales, erosion of margins and an inability to deliver on our strategic objectives. 

How we manage this risk?
HZPC has a diverse team of Finance, R&D, Marketing and Sales staff to structurally monitor the competition on R&D investments (incl. variety properties), M&A, strategy & business model changes, and market dynamics. This team provides periodically reports on these topics to the Executive Committee, in order to enable strategic decision-making. 

Not making the right R&D investment and choices now will have a huge impact on the long term and may adversely impact our strategic objectives. When we do not make the right varieties at the right time or are not able to foresee or adequately respond to external disruption in seed development and disruptive business models we might not be able to grow at our desired pace.

How we manage this risk?
We are in the process of defining an innovation and R&D strategy for the long-term strategic horizon in which we set out the need for talent, knowledge and capabilities regarding (strategic) R&D investment and our approach for attracting, recruiting and retaining such talent, knowledge and capabilities. We are continuously scouting for other comprehensive and future-proof breeding methods and tools, study the potential global impact of gene editing our varieties and develop market driven breeding. We report on a regular on basis the progress of this activity. 

Although it is hard to predict black swans such as political turmoil, terrorist attacks, recessions and pandemics that can affect the market, their impact can be high. We have seen that a black swan such as the pandemic, Ukraine war and inflation affects the overall performance of the market and thereby also affects our business. On the other hand, the impact of local market disruptions is quite well mitigated as we sell multiple varieties to multiple countries. The developments in the Netherlands, among others, around the nitrogen issue has a limited effect on our growers and on HZPC.

How we manage this risk?
We have defined a sound risk management process and way of working to manage this risk and deciding upon mitigating actions / controls, we try to mitigate this risk as much as possible by spreading our risk through having different business in different areas of the world. Also we develop several varieties and work with several partners and organizations.  Additionally, we are continuously working on creating awareness to ensure HZPC is aware of such types of risks and manage them in the best way possible. 

From an operational and reputation perspective, not being able to deliver high-quality products due to issues regarding seed components / ingredients / production / logistics / packaging will impact both our financial as well as reputational position on the long term. Customers expect high quality seeds and we keep ourselves to the promise to delivery high quality products, always.

How we manage this risk?
We manage this risk by having a high-quality testing process and ensure quality failures are recognized early on. We iteratively improve this testing and quality process over time to keep the highest level of quality available for our customers. Additionally, we have quality control protocols to ensure we meet the expected quality requirements of a country.

Having a healthy variety portfolio is needed for the independence of HZPC. When we do not have the right variety mix, we are dependent on a few varieties which bring greater risk. The right variety mix provides the ability to best serve our clients and mitigate the risk of losses due to diseases. 

How we manage this risk?
Throughout the years we have been investing in defining / researching seeds with sustainable growth potential, examining the market and having the right network to identify and create the right varieties. We will continue to focus on having the right variety portfolio to mitigate this risk through our investments in Research & Development in terms of time, money and man hours. 

As we are focusing on our customer segment  and growers plan seeds years ahead, we need to consider the risk of making the right Long term forecast.  If not done correct it can  heavily impact our financial position. 

How we manage this risk?
We optimize constantly our processes and check if they are sufficient and that our staff is well-trained and capable to ensure that favorable production-to-sales ratios are being arranged. We develop a tool to support us with this planning. We have the knowledge and capabilities to make the right decisions and are structured in such a way that the four-eye principles is always maintained throughout this process. We are constantly improving and optimizing our portfolio management, long term forecasting, stock estimation and inventory management processes in order to be able to make the right arrangements. 

From an organizational perspective, being unable to grow in a sustainable manner will impact our ambition to be the market leader. In order to grow, we need to be able to attract, retain and develop the right talent to grow HZPC in a sustainable manner. Therefore, we need to keep investing in talent, both in terms of attracting new talent and retaining our current employees by providing them opportunities to grow. Additionally, we need to have the right systems and processes in place in order to enable employees to develop the organization over time. 

How we manage this risk?
This year we managed to be reasonably successful in attracting talent despite the squeeze on labour market conditions. We realise that our mission and vision appeal to talented people and have therefore been focusing on our recruitment efforts and mapped out the capabilities we need in order to grow. To enable people in the day-to-day activities and personal development, we are in the process of improving our IT systems and processes.

Our operating profit is subject to treasury risk. Financial issues at clients and or specific countries can potentially lead to financial losses for HZPC.  We noted no major funding issue’s and/or payment risks throughout the year. We have a relatively limited exposure to foreign currencies and did not experience major incidents here. 

How we manage this risk?
From a financial perspective, we have been improving our sales and overdue amount process in order to mitigate treasury risks. We structurally check our clients to ensure that we can do business with them in a responsible manner and pay special attention to credits and commissions. We are building on a more accurate cashflow planning and forward in sight in the developing of our currency position.

As we continue to grow, there is pressure to become more mature in terms of internal control. As a lack of internal control can lead to non-reliable financial reporting, operational ineffectiveness, fraud, and/or non-compliance with laws and regulations we have paid attention to further embedding Internal Control and Risk Management throughout the organization and will continue to do this in the coming years. 

How we manage this risk?
Throughout the year we have taken steps in further embedding risk management and internal control. We actively take actions on becoming a more mature (risk) organization, by clarifying roles and responsibilities within the organization, standardizing and optimizing our processes and documenting our processes and procedures so we facilitate one structured and controlled way of working throughout the company. Accordingly, we are optimizing our policy management process and update / draft policies, standards and guidelines where needed. This is in the future supported by a more robust systems.

Our business operations are dependent on the uninterrupted operation of IT systems. Disruptions or data breaches may result in a compromised IT system, system failure, or a breach of sensitive company information. The ongoing digitization and company growth have increased the dependence on our IT systems. 

How we manage this risk?
We have processes, policies and procedures in place to mitigate the IT & Security risk. These procedures include a variety of prevention and detection measures, including, but not limited to, training, control optimization and monitoring. To further improve our systems, we are optimizing our IT Control Framework. Moreover, our new ERP and Finance system is also being designed in such a way that general IT controls are embedded and security risks are mitigated. In the mean time we do regular PEN Test.

In order to make high-quality decisions and comply with regulatory / statutory requirements, we are able to generate the necessary reports and analysis (financial and non-financial). Although we have experienced that our system not always facilitates us in providing the right (level) of reporting, we have managed to provide the necessary reports and disclosures. We recognize that we are in the process of implementing a new ERP system in which we pay attention to the user friendliness and ability to extract the right data for reporting and disclosure purposes.  

How we manage this risk?
Throughout the year, we have been paying attention to the user friendliness and ability to extract the right data for reporting and disclosure purposes in the design of the new ERP system. Accordingly, we ensure (functional) Risk & Control requirements are embedded in the ERP system to optimize data quality & availability. To further optimize our reporting and disclosure processes, we have designed a roadmap in which we have lined out that we will revise/ draft new reporting and disclosure related policies and procedures based on business value and needs. 

HZPC Holding and its subsidiaries may be held responsible for any liabilities arising out of non-compliance with laws and regulations. Due to our growth and presence in multiple (high-risk) countries, alongside with changing laws & regulations we recognize that not being able to become more mature in the field of Legal Entity Management and contract management, can lead to compliance breaches. We referred further to the notes in the consolidated financial statements to net sales.

How we manage this risk?
Over the years, we have managed this risk well and will continue to do this in the coming years. We have worked on improving our compliance-related processes and procedures. We have compliance policies and procedures in place and are working on further improving compliance processes and controls. For Ultra High Risk Countries we stopped the direct sales to these countries.

Considering our competitive market, we might face the risk that we are not able to protect our IP rights due to the fact that competitors are misusing our rights or are obtaining Essentially Derived Varieties (EDV). To ensure that we keep our IP protected, we are working on protecting our variety rights in the different countries we operate in.

How we manage this risk?
We are managing this risk by constantly monitoring the market. In Europe we are a shareholder of Breeders Trust who is executing this role in Europe   In other areas in the world we even sometimes buy samples in the market to check if our varieties are illegal produced. 

This year too, despite the war and other uncertain circumstances, we have invested in our business and continue to do so. The second part of the investment in the R&D facility last year, has been commissioned this year. The follow-up is scheduled for next financial year. The new office in France was completed this year. The invested capital (total fixed assets) at the end of the 2021/2022 financial year is EUR 30.4 million, which is EUR 2 million lower than last year. For next year, we expect a higher amount of investments. An important part of this is the Aurora project. Here we are trying to improve processes and replace the old ERP system. This is in addition to the regular replacement investments in operations and R&D.

Cash
The cash position has improved compared to last year. The current ratio increased slightly to 1.32. The quick ratio (current ratio excluding stock) also increased slightly to 1.27. This is caused by slightly lower investments, but mainly by a strongly increased result.

Net turnover of EUR 350 million was recorded last year. Like last year, more than 85% of the turnover consists of seed potato trading. Turnover was higher because HZPC realised higher prices. Licence income remained almost the same. In addition, more turnover was made in consumption potatoes. The organisation's gross margin, sum of operating income minus the sum of costs of raw and auxiliary materials and third-party services, freight and loading costs and packaging, increased to EUR 64.0 million. This was achieved besides HZPC realising higher prices by paying close attention to costs. The net profit before deducting the costs of the Connecting Growers programme therefore increased to EUR 7 million. Net profit rose sharply compared to last year.

There was no major change in the financing structure this year. The improved cash position allows us to reduce our facility in the future. Solvency fell from 41.6% in 2020/2021 to 40.4% in 2021/2022.

Last financial year, sales and margin recovered after the corona crisis. The war in Ukraine accelerated the end of the season and had an impact on our customers and hence on our turnover and margin. One of the largest customers in the Middle East was back to pre-corona crisis levels after ordering less in 2020. Costs were lower as we deferred or delayed several commercial activities. As for the accounts receivable position, the situation is back to pre-pandemic levels.

The corona crisis seems pushed into the background, but may return again in the autumn. This time it will surprise us less and we will be better prepared for it. It is possible we will be better prepared for it this time. The economic consequences of the war and the related energy crisis and rising inflation are also not yet fully understood.

Management is continuously assessing available information and risks, to take appropriate measures. The available funding was and is sufficient to absorb future regular fluctuations and disruptions. Management continuously monitors the development of turnover and costs to keep a good view on the development of liquidity. In addition, analyses are performed to take additional measures in time. Based on the analyses performed by management and the company's current results and financing position, the financial statements have been prepared on the assumption of going concern. Based on updated forecast in September 2022, we expect to be in compliance with the bank's covenants, at least until October 2023.

Personnel matters
HZPC staff play an important role in achieving our results. Through an adequate personnel policy and a remuneration policy in line with the market, we are able to retain staff. All available instruments are used in this respect.

Twenty years ago, almost all certificates were in the hands of active growers. This has now fallen to around half. This primarily occurs because many growers are no longer actively involved in growing, but hold onto their certificates and rarely offer them for sale. These certificates are then bought by very few active growers.

The senior managers, in consultation with the SB, the Board and Association HZPC, and with permission from the certificate holders, have decided to find a way to ensure that more certificates end up in the hands of active growers. To this end, the SB and the Board have approved the creation of the Connecting Growers programme, proposed by the Executive Team. As a result, EUR 1.5 million worth of depositary receipts of shares were bought this year. These share certificates were given for free to growers who had a seed potato contract in the EU with an HZPC group entity.

Read more on: www.hzpc.com/cg.

Twice every financial year, in November and May, the Association organises a stock exchange trading day. During these days, as well as the certificate scheme for staff, HZPC will also buy certificates for the Connecting Growers programme.

Association HZPC was the stockholder and Captin was the market supervisor for the stock exchange trading days in November 2020 and May 2021. During the ALV in November 2021, it had been decided to transform the exchange. In this, the stock exchange holder is no longer the HZPC Association but Captin. Captin is an AFM-regulated stock exchange party that handles trading through its platform. Captin also handles the administration of the certificates and also the membership of the Association HZPC. This ensures compliance with EU regulations. This has made the exchange more transparent and the rights of the certificate holder are in line with regulations as on the regular exchange. 

The certificate holders were informed about the business by means of media messages, the annual report and via the website for HZPC Holding (www.hzpc.com). In addition, Dutch certificate holders receive the company’s client magazine ‘Ruggespraak’.