06 Compliance

As part of our strategy, Royal HZPC Group B.V. has an Enterprise Risk Management (ERM) framework. This allows us to identify, assess, handle, manage, monitor and report risks within the organisation in a structured way. We believe it is important to continuously improve, so we have prepared a risk-and-control roadmap for the coming years to ensure that risk and control are embedded in our governance, strategy, systems, processes and daily operations.

We are growing within different regions, segments and business models and this changes our risk profile. We need to pay greater attention to managing these risks, starting with creating clear (internal) processes and procedures. This will enable us to do business responsibly. Our success depends on our ability to recognise risks and opportunities and take the appropriate action. We take balanced risks and continuously work towards sustaining our status as a financially sound and sustainable company. Risk management is thus an important part of our policy and strategic development. In this way, we manage to achieve our strategic goals and fulfil our commitments to customers, shareholders, our staff and society as a whole.

In the table below, we describe the four main risks which are, in turn, divided into sub-topics. Any one of them could throw a spanner in the works in terms of achieving our financial and non-financial strategic goals. For each sub-topic, we describe the type of risk or opportunity and what we are doing to mitigate the risks and exploit opportunities. This list is not exhaustive.

Anything can change in the competitive landscape. Changes might include new or non-traditional competition, mergers and acquisitions, range expansions and/or an increasing focus on sustainability issues.

Change presents opportunities and risks. If we do nothing, we may also lose our advantage over competitors. Sales may decline and margins may evaporate. We may not succeed in achieving our strategic goals.

How do we manage this risk?
Royal HZPC Group B.V. has a multidisciplinary team from Finance, R&D, Marketing and Sales that structurally monitors the competition when it comes to R&D investments (incl. varieties), M&A, strategy and entrepreneurship, model changes and market dynamics. The team reports periodically to the Executive Committee. These reports serve as inputs for strategic decisions.

If we do not make the right investments in R&D or the right choices for our research, it will have a negative impact on our strategic goals in the long run. Our growth may stagnate because we are not developing the right varieties at the right time. In addition, we need to monitor the development of potato seeds so that we foresee disruptive business models in time or react to them appropriately.

How do we manage this risk?
We are developing a long-term innovation and R&D strategy. This sets out what we need in terms of talent, knowledge and skills and how we attract, retain and develop the appropriate people. We make targeted investments in R&D and constantly seek to improve and accelerate the research process. We report regularly on progress. We are also investing in hybrid breeding to enable faster breeding and to be able to develop and start selling potato seeds in 5-10 years.

While it is difficult to predict political unrest, terrorist attacks, recessions and pandemics, their impact on the market can be enormous. We have seen that the pandemic, war in Ukraine and inflation are affecting the overall business cycle and hence our numbers.

How we manage this risk?
We can cope well with local market interruptions because we sell multiple varieties to multiple countries. We spread the risk, thanks to HZPC branches and collaborations with others in different areas of the world. We develop new robust varieties and collaborate with a variety of partners and organisations. Our employees are aware of the risks and know how to deal with them. In the last financial year, we have been confronted with a new situation in Russia. A law has been passed in the State Duma which allows authorities to take a majority stake in our local entities. Many questions still surround the implementation and enforceability of this law but nevertheless, we might have to adjust our participation value. We are not expected to have a definite answer on this before the finalisation of this annual report. We have therefore not included a provision at this time. The volume of investments in our Russian associates, comprising participation value and financing provided, amounts to over EUR 4 million.

Customers expect high-quality material and count on us to deliver top-quality products. If we cannot fufil these expectations, for example due to problems in ingredients or delivery, it will have a negative impact on our financial position and reputation.

How do we manage this risk?
Thanks to our high-quality testing process, we are guaranteed to spot quality defects early. Our testing and quality process is continuously improved. Our quality control protocols ensure that we meet the qualtiy requirements of a particular country.

A healthy variety portfolio is necessary for Royal HZPC Group's independence. An extensive and diverse portfolio of varieties allows us to serve our customers as effectively as possible. We thus also reduce the risk of loss due to diseases and viruses.

How do we manage this risk?
We continuously invest time and money in developing new varieties with sustainable growth potential to expand our variety portfolio and make it future-proof.

We have to deal with market demand on the one hand and the acreage planning of our growers on the other. This means making long-term forecasts when it comes to production and sales. If this forecast is wrong, it will impact Royal HZPC Group's financial position.

How do we manage this risk?
We continuously optimise our processes and train our staff so that production and sales are as closely aligned as possible. We are developing a tool to support us with this planning process. We have the knowledge and capacity to make the right decisions and always work according to the four-eyes principle. We continuously optimise our portfolio management, long-term forecasting, inventory estimation and inventory management to make the right decisions.

To become and remain market leader, it is important that we can sustainably attract, retain and develop the right staff. That is why we continue to invest in new talent and offer existing staff growth opportunities.

How do we manage this risk?
Despite the tight labour market, we are still in a good position to attract staff. We focus on recruitment activities and identify the skills and knowledge we need. We improve IT systems and processes to support our staff in their daily work and personal development.

Our operating profit is subject to treasury risk. Financial problems encountered by customers and/or in specific countries may lead to financial losses for Royal HZPC Group. In the past year, we did not face any major financing problems or payment risks. We are suffering due to hyperinflation in Argentina, rising interest rates and a fluctuating Rouble.

How we manage this risk?
From a financial perspective, we have improved our process for sales and late payments. We continue to monitor our customers on a structural basis to ensure that we can do business with them responsibly. We focus on managing the credit freedom we give customers. We are working on more accurate cash flow planning and a better overview of the development of our currency position.

Last year, we revalued our receivables from Argentina as a result of the devaluation of the Argentine Peso due to hyperinflation. This resulted in a provision of 0,9 million euros. Conditions remain difficult and we do not see this improving in the short term.

The same goes for Russia. The Russian rouble fluctuates dramatically due to the corresponding circumstances and this is reflected in the participation value of our Russian subsidiaries. This risk is virtually impossible to hedge.

In 2018, we took out an interest rate cap that is now ‘in the money’ and provides partial protection on interest rate exposure. Last year, we took out a second interest rate cap to cover a greater portion of interest rate exposure.

As we keep growing, there is also a need for greater maturity when it comes to internal control. A lack of internal control may lead to irresponsible financial reporting, operational ineffectiveness, fraud and non-compliance with laws and regulations.

How do we manage this risk?
We pay close attention to the further implementation of internal control and risk management within the organisation. We take action to become a more mature (risk) organisation. We clarify roles and responsibilities in the organisation and improve, standardise and document processes. So that we all work in the same structured and controlled way within the organisation. Where necessary, we optimise our policies, standards and guidelines. This is supported by our new ERP system.

We need well-functioning IT systems to do our work. Interruptions, system failures and data breaches can impact business operations in general and lead to sensitive business information leaking into the public domain. Ongoing digitalisation and business growth have made us more dependent on our IT systems.

How do we manage this risk?
We have processes, policies and procedures for mitigating IT and security risks. These procedures encompass a range of prevention and detection measures, including training, control optimisation and monitoring. To further develop our systems, we are improving our IT Control Framework. In addition, our new ERP and financial system will be designed to provide overall IT control and mitigate security risks. Meanwhile, we carry out regular penetration testing.

Cybercrime incident
Despite our constant attention to our IT systems, we were recently targeted by a form of cybercrime, which resulted in a large amount of money being transferred to a bank account held by the criminals. It is now known that the amount is in a blocked bank account and thus out of the hands of criminals. An external forensic investigation - in addition to internal investigations - is currently taking place. The results of these investigations will be taken into account in our continuous focus on information security on the one hand and the further tightening of procedures to minimise our risks on the other. The further awareness of our employees in this area is essential.

To make informed decisions and comply with legal and statutory requirements, we need robust reports and analysis. Our current system does not provide the right level of reporting. Nevertheless, we manage to generate the necessary reports and records.

How do we manage this risk?
We are working on the implementation of a new ERP system, which will give us the option to filter data in a user-friendly way for reporting purposes. We implement (functional) risk and control requirements in the ERP system, improving data quality and availability. We are also developing new reporting policies and procedures.

Royal HZPC Group and its associates may be held liable if we fail to comply with laws and regulations. Our growth, our presence in high-risk countries, and laws and regulations that are constantly changing means it is important to ensure that our legal and contract management processes are in good order.

How do we manage this risk?
We have worked on improving compliance with processes and procedures. We adapt policies and procedures where necessary and work to further improve these processes, procedures and controls. We have stopped selling directly to ultra-high-risk countries.

We risk being unable to protect our intellectual property rights because competitors abuse our rights or produce derivative varieties.

How do we manage this risk?
We work to protect our varieties in the various countries in which we operate and constantly monitor the market. In Europe, we are shareholders of Breeders Trust, which protects intellectual property rights. In other world regions, we sometimes even buy samples in the market to check that our varieties are not produced illegally.

This year, the Global Finance Management Team conducted a fraud assessment of the organisation. This involved going through and assessing the various processes within the organisation.

Several processes were assessed for potentially fraudulent acts. These were assessed for likelihood and impact. It was then determined which functions and/or departments are involved in this process. The existing measures that would prevent this fraud were then assessed.

Existing measures were then assessed for their effectiveness in preventing or detecting this fraud. From this process, the remaining risk was determined and whether additional measures should be taken.  The main fraud risks from this assessment process relate to: bribery and corruption, use of ware potatoes as seed potatoes, licences and the reporting of foreign entities due to shortcomings in segregation of duties. The results of this fraud assessment process have been reviewed by the Executive Committee of Royal HZPC Group and will be submitted to the Supervisory Board for review.

Next year, the organisation aims to have some of these measures assessed for effectiveness by an external auditor. In addition, these measures will be included in the renewed processes being rolled out in the Aurora project.

We have invested in our company this year, despite the war in Ukraine and other uncertainties, and we will continue to do so. The final component of the investment in the R&D facility will be officially commissioned in November. Our invested capital (total fixed assets) at the end of the 2022/2023 financial year is EUR 36,4 million, which is EUR 6,1 million higher than last year. We expect a similar amount of investments next year. The Aurora project is an important aspect of this. In Aurora, we are trying to improve processes and replace the old ERP system. This investment is in addition to regular replacement investments in operations and R&D.

The cash position deteriorated compared to last year. The current ratio fell slightly to 1,2 from 1,3 last year. The quick ratio (current ratio excluding inventory) also fell slightly to 1,2 from 1,3 last year. This is partly caused by slightly higher other payables and accruals.

Net turnover of EUR 421 million was recorded in the past year. Like last year, more than 85% of the turnover consists of seed potato trading. Sales were higher as Royal HZPC Group B.V. achieved higher volumes and prices. Licence income increased from EUR 23,9 million to EUR 24,5 million. In addition, turnover in ware potatoes was down from EUR 24,3 million to EUR 16 million as more potatoes were sold as seed potatoes than last year. The organisation's gross margin, i.e. the sum of operating income minus the sum of costs of raw and auxiliary materials and third-party services, freight and loading charges and packaging, increased to EUR 71 million. This is due to higher prices. By also paying close attention to costs, a net profit before deducting the costs of the Connecting Growers programme of EUR 7,1 million was achieved.

For the coming season, there are no commitments yet on the result due to major uncertainties. The causes of these uncertainties are caused by uncertain yield expectations and thereby the availability for the various markets. In addition, the geopolitical situation causes great uncertainty.

The financing structure has not been affected by any major changes this year. Solvency fell from 40,4% in 2021/2022 to 39,6% in 2022/2023. Last financial year, sales and margins continued to recover after the Covid crisis. The war in Ukraine last year hastened the end of the season. This year, it had an impact on our buyers and their choice of whether to grow seed potatoes or another crop. Costs came out higher due to higher volumes and cost increases due to inflation. Regarding the accounts receivable position, we have seen a delay in payments and have included a higher provision for a debtor from China and Sudan. Thus, the economic impact of the war and related energy crisis and rising inflation expected last year is reflected in our costs.

Royal HZPC Group B.V. stands for Diversity, Equity and Inclusion (DEI).

We are committed to a diverse workforce and an inclusive environment where everyone feels valued and respected. In addition, we stand for a corporate culture where everyone feels encouraged to (continuously) develop and grow. Or, in other words: Guiding continuous growth.

We actively seek to attract, employ and retain people from diverse backgrounds. As a result, our workforce is increasingly reflecting the rich diversity of the societies in which we operate. Our commitment to diversity extends to all levels of the organisation, from entry-level positions to management positions. The diversity dimensions on which Royal HZPC Group B.V. intends to report are:

1. Gender diversity (female/male representation)
2. Age diversity (representation of different age groups)
3. International diversity (number of nationalities of our colleagues)
4. Knowledge diversity (distribution of our workforce by clustered areas of expertise

We are accountable to the principles of fairness, impartiality and justice. Our aim is to provide a working environment where everyone has equal access to professional and personal growth. To the extent that there are barriers to these principles, we want to remove them.

Our Code of Conduct describes how to deal with (perceived) unequal treatment.

For us, inclusion means promoting a sense of ‘belonging’and creating a culture where everyone feels respected and valued. Our mission, vision, corporate values and goals should be unifying. Within this context, we encourage open dialogue, active listening and mutual respect for everyone's unique contribution to the whole. We recognise that inclusive teams are more innovative, productive and better able to achieve our shared goals.

Our commitment to DEI is in line with international (including European) laws and regulations promoting equality and non-discrimination in the workplace. We focus on adhering to the principles set out in this regard in the various international guidelines within the countries where we are based. We understand that building a diverse, equitable and inclusive organisation is a journey that requires continuous effort and improvement. We will discuss the objectives internally so that they are known to everyone. Based on insights gained, we will make arrangements with Staff Representatives to refine our practices and policies.

Twenty years ago, almost all certificates were in the hands of active growers. This has now fallen to around half. This is because many growers, who are no longer actively involved in growing, hold on to their certificates and in the past have rarely offered them for sale. At the same time, active growers purchased few certificates. Thanks to the Connecting Growers programme, share certificates are increasingly coming into the hands of active growers. For this purpose, Royal HZPC Group B.V. bought EUR 1,1 million worth of certificates in 2022-2023. These were donated free of charge to growers with a seed potato contract with Royal HZPC Group B.V. in the EU. Virtually all our active European growers now hold certificates. Read more at: www.hzpc.nl/cg.

 Share certificates used to be traded on an internal market. Since the trading period in May 2022, Royal HZPC Group B.V. has operated a new trading system for trading in certificates. Twice a year, in May and November, certificate holders can trade HZPC certificates for 10 working days on the Captin trading platform; Captin is an AFM-regulated brokerage firm. Royal HZPC Group

B.V. has thus become a semi-listed company that is obliged to abide by the Dutch Financial Market Authority (AFM) rules. The market has also become more transparent and the rights of the certificate holders align with the regulations that govern the regular market. The range within which trading takes place is 20 per cent (rather than 10 per cent), so the market balances faster. During these trading periods, Royal HZPC Group B.V. purchases certificates for the Connecting Growers programme in addition to the certificate scheme for staff.

The certificate holders receive information about Royal HZPC Group B.V via press releases, the Annual Report and the HZPC website. In addition, Dutch certificate holders receive the company’s client magazine ‘Ruggespraak’.