Fundamental information about dormakaba

dormakaba Group (dormakaba) is one of the leading companies in the global security and access solutions market. With its comprehensive portfolio and strong brands, dormakaba offers its customers products, solutions, and services for access to buildings and rooms from a single source. The portfolio includes locking systems – from cylinders, keys, and locks right through to fully networked electronic access solutions as well as cloud-based solutions – but also physical access systems and automatic door systems, as well as a comprehensive range of door hinges and fittings, door closers, and doorstoppers. These are augmented by products for time and enterprise data recording, high-security locks, horizontal and vertical sliding walls, and movable partitions. The business is also a market leader for key blanks, key cutting machines, and automotive solutions, such as transponder keys and programmers.

dormakaba is active in over 130 countries and has a presence in all relevant markets through production sites and/or distribution and service offices as well as through collaboration with local partners.

dormakaba has a long tradition of innovation and engineering skills. On the way to its strategic objective of innovation leadership within the industry, dormakaba links customer requirements to technological trends and continuously develops state-of-the-art solutions that create added value for customers and end users.

The company’s business is divided into five segments which are aligned to the implemented management structure. The four Access Solutions segments are based on geographical markets and offering. Segment Key & Wall Solutions is also based on offering but operating globally. A detailed description of the segments can be found in the notes to the consolidated financial statements for financial year 2019/20.

As a stock-listed company, dormakaba pursues the overall objective of increasing its enterprise value on a lasting basis, i.e. across industry cycles and economic ups and downs. In addition to creating shareholder value, the company’s strategy takes into account the interests of other stakeholder groups, too. Above all, this includes satisfied customers and partners, based on a successful positioning of the company’s products, solutions, and services in its target markets. dormakaba has distribution channels and production facilities in all of the industries’ key markets and will accelerate global expansion through a strong presence in Europe, the Americas, and Asia-Pacific.

dormakaba has a strong Pool Shareholder Group that will ensure its long-term-oriented strategy. In order to grow profitably, dormakaba focuses on a clearly defined strategy with the following pillars:

• Providing a superior offering of products, along with services to meet the needs of customers and their installations along the entire life cycle;
• Expanded presence in existing markets, vertical extension of these markets, and expansion into new markets;
• Achieving enterprise excellence by improving processes and driving efficiency and competitiveness along the entire value chain;
• Leadership in innovation for superior customer value;
• Active management of the portfolio of business activities and disciplined pursuit of options for corporate transactions (acquisitions, divestments, joint ventures); and
• Efficient deployment of employees: having “the right people in the right roles”.

These strategic pillars are based on the two foundations of sustainability and enhancing the global brand power.

dormakaba is led strategically by the Board of Directors (BoD) of dormakaba Holding AG. The duties and responsibilities of the BoD are defined by the Swiss Code of Obligations and the company’s Articles of Incorporation and Organizational Regulations. The BoD has delegated management of ongoing business to the Executive Committee (EC) under the leadership of the Chief Executive Officer (CEO). Therefore, the CEO is responsible for overall management of dormakaba. The powers and functions of the EC are set out in the Organizational Regulations. Further details on the internal management system can be found in the Corporate Governance Report 2019/20.

The principles for compensating the BoD and EC are set out in the Articles of Incorporation. The following regulations are particularly important:

• Basic principles of compensation for the BoD (Article 23);
• Basic principles of compensation for the EC (Article 24);
• Binding vote by the General Meeting (Article 22);
• Maximum additional amount of compensation for new EC members (Article 25);
• Loans (Article 28).

The Compensation Report, which provides further details on the compensation system and on compensation paid out in the financial year 2019/20, can be found here.

dormakaba has defined sustainability as a foundation of its business strategy. The company is committed to foster a sustainable development along the entire value chain in line with its economic, environmental, and social responsibilities toward current and future generations.

Detailed information on sustainability strategy, measures and progress can be found in the dormakaba Sustainability Report 2019/20, published in accordance with the Global Reporting Initiative Standards. dormakaba also publicly reports on sustainability-related matters on an annual basis in the dormakaba Modern Slavery Statement, the Communication on Progress to the UN Global Compact, and in its submission to the Carbon Disclosure Project.

The innovative strength of dormakaba and the development of new products, solutions, and services are key to the company's sustainable profitable growth. The aim is to invest 4–5% of consolidated sales in R&D every financial year. Research and development activities are coordinated across all segments. In financial year 2019/20, digitization continued to be an important driver in research and development work. The digitization of processes, products, solutions, and services creates opportunities for new business models and value streams.

In recent years, the product portfolio of dormakaba has increasingly embraced electronics and connectivity. For example, the company has achieved strong growth supported by its Mobile Access Solutions, which allow e.g. hotel guests to open their doors with their smartphones. This technology is now expanded into Exos 9300, a flexible and scalable access management solution, and into Matrix Professional Access solution, which meets individual requirements with regard to access control, time recording, and time management. In financial year 2019/20, the company comprehensively launched the Mobile Access technology for components such as online readers, terminals, fittings and also cylinders which can now all be delivered prepared for mobile access support.

Exivo, another web-based access solution, enables small and mid-sized enterprises to individually plan, configure, customize, and install access systems with both electronic and wireless components, and dynamically assign access rights. With this networked solution, dormakaba is operating as a service provider with a new business model, known as “Access as a Service”.

dormakaba also wants to continue to expand its market leadership in mechanical solutions with innovations. For example, it produces high-performance, high-quality products to meet the growing demand for cost-effective solutions in Asia. In Europe and in America another goal is to extend services as a strong part of its offering.

The products launched in the financial year 2019/20 included:

• Argus: further development of this new generation of sensor barrier which is based on the company’s XEA design language and offers various features for more convenience while at the same time providing the same high level of safety and security. New features include elements to support access control in times of a pandemic.
• Self-locking panic locks: launch of the new generation of self-locking panic locks with new advanced features like an advanced locking action, the possibility to be operated by three protocols, and a LED indicator which eases handling by the installer and service technician.
• Switch Tech (Switch Core): a battery-powered, Bluetooth-enabled Small Format Interchangeable Core (SFIC) core that can replace a traditional mechanical core in an existing lock, allowing customers to bring electronic access control to openings that would not traditionally have been practical for economic reasons. Switch Tech allows to go from mechanical to digital in minutes and at a fraction of the costs of traditional hardwired access control.
• Swing Door Operators - ED "Force Balancing Technology": major enhancement to our winning swing door operators ED series which significantly extends service lifetime.
• FH9 Digital Door Lock: a handle fingerprint lock in high-security design for advanced home security for the Asian markets, with various features such as vibration feedback, silent unlock, encryption management, and multiple alarms.
• Universal Motion: the self-closing patch fitting for toughened glass assemblies in Universal design. The door closes softly by itself, all components are integrated in the patch fitting, no power supply needed. Smart, almost invisible, comfortable and easy to install.
• Variflex Moduline: a redesign of the existing versatile Variflex system range, resulting in simplified production and sales processes. The products sport an optimized design to achieve high acoustic performance and offer advantages in terms of weight as well as in smaller dimension for space saving in stacking and operation.
• My Keys Safe: an innovative B2C (Business-to-Customer) digital service to allow end users to store digitalized data of their residential and automotive keys into a secure cloud wallet. Both key digitalizing and copying operations with Silca electronic machines at a locksmith’s shop are controlled by the user.

dormakaba will continue to invest substantially in the development of new and existing products, of services and platforms as part of its solutions, as well as in modernizing its production facilities and developing its information technology systems. dormakaba will also allocate additional funds to digital transformation in the coming years and is convinced that these investments are vital to further shape the competitive position of the company and to develop new products and solutions to address market opportunities.

The overall economic environment for the financial year 2019/20 was characterized by an almost unprecedented level of uncertainty. While the first half of financial year 2019/20 showed growth, which was slightly below previous year but still solid, the Covid-19 pandemic dealt a substantial blow to the global economy. Global GDP is expected to contract by 5.2% in 2020 according to the World Bank (June 2020), the deepest recession over the past eighty years. This represents a 7.7% downgrade from the 2.5% global GDP growth anticipated by the World Bank in pre-Covid-19 forecasts (January 2020). Restrictions such as government-mandated blanket lockdowns and closed borders, while necessary to slow down the Covid-19 spread, disrupted international trade. Overall, global trade is expected to suffer an 11.9% decline, with specific sectors such as travel and tourism facing considerably more damage (IMF World Economic Outlook, June 2020).

Certain geographies were more affected than others, as size and duration of outbreaks as well as stringency of government responses differed widely. The impact of Covid-19 was deeply felt in regions across North and Latin America as well as in Asia, especially in China, region ASEAN and India, while in Europe it was most pronounced in France, Italy, Spain and Austria.

Furthermore, pre-crisis geopolitical and economical challenges were reinforced by the world’s increased vulnerability ensuing from the pandemic. Trade tensions between the United States, China, and the European Union, but also in other parts of the world, made doing business more challenging as well.

dormakaba as a globally operating company is active in very heterogenous regional markets and was therefore substantially negatively impacted by the Covid-19 pandemic. In addition to a description of impact on the entire Group, the company discloses information about the economic development in each of its segments.

The dormakaba Covid-19 crisis management has continuously aimed at ensuring the health and safety of its employees, while at the same time limiting the impact on its business operations, preventing disruptions in its supply chain and securing financial stability. The company reacted quickly and decisively to this financial year’s numerous external market environment challenges. While the Covid-19 pandemic is a setback for some of dormakaba’s verticals like hospitality, it does not question the five megatrends that will shape our industry in the longer-term:

• Prosperity will increase globally, especially in growth markets with growing middle classes, and this will fuel the desire for additional protection (Growth driver: Increasing prosperity);
• At the same time, the average life expectancy is rising steadily, which means that institutions and private homes increasingly need barrier-free solutions that allow senior citizens to move easily from room to room (Growth driver: Demographic change);
• Then, urbanization is creating more conurbations and more cities with over a million inhabitants, requiring ever more complex infrastructure solutions (Growth driver: Urbanization);
• There is an increasing need that buildings and land must be secured, while flow of people must be managed in ways that ensure optimum efficiency and convenience (Growth driver: Need for security);
• Finally, technology influences practically every aspect of the access and security market, from digitization to distribution channels to the networking of products in the “Internet of Things” (Growth driver: Technology).

All these factors are contributing to a growing demand for smart and secure access solutions. With its comprehensive service offering and global presence, dormakaba is playing a significant role in these markets.

In addition to these five megatrends, dormakaba is well-positioned to address demand emerging from the Covid-19 pandemic. The company expects access and credentialing policies across all vertical end markets to be strengthened, with emphasis on adaptability, versatility, and health. As such, dormakaba believes it is well equipped with key products and interoperable solutions to realize the growth potential, for example in the area of seamless and touchless access solutions.

Detailed information on the business performance and the average number of full-time equivalent employees in the financial year 2019/20 can be found in the financial performance section of this Group Management Report and in the consolidated financial statements for financial year 2019/20.

dormakaba continuously tracks non-financial performance indicators. These indicators have a strategic focus respective objective, however dormakaba is not being operated by them. The main non-financial performance indicators are the following:

Customers and products

One of the things the dormakaba brand stands for is high-quality products. Product quality and customer satisfaction are therefore crucial and must remain a focus at all stages along the entire value chain. Customer satisfaction is measured regularly through customer dialog as well as through local surveys. Customers usually consider the expanded offering from a single source as a benefit.

Human resources

Employees are crucial to the success of dormakaba. Therefore, the company strives to shape a work environment which enables professional growth and engagement. As part of this, dormakaba implemented a Group-wide employee engagement program called “dormakaba dialogue” in the financial year 2017/18. In February 2020, all dormakaba employees around the globe were invited to participate in the second round of the corresponding survey. The high response rate of 80% shows that a vast majority of dormakaba employees used the opportunity to provide feedback – a substantial increase compared to the participation rate of the survey conducted two years ago (72%). Overall, the global results show a positive development across all survey items compared to the first results from 2018.

dormakaba offers various trainings and development programs to continuously develop and engage its employees, for instance courses on sales skills, project management, intercultural awareness, or leadership. More information on human resources can be found in the dormakaba Sustainability Report 2019/20.

Compliance and human rights

When conducting its business, it is a matter of course for dormakaba to comply not only with applicable law and legal regulations at the local, national, and international level but also with internal company directives at all its locations. This applies to internal processes as well as to relations with external partners, including customers, authorities and suppliers. To live up to its responsibilities in these areas, dormakaba has developed measures and processes to ensure its responsibilities are met and to prevent abuse. These measures and processes are continuously improved and developed further. The company sets binding rules in its Group-wide Code of Conduct which is available to employees on the Group Intranet in various languages and to external stakeholders on the dormakaba website. Furthermore, the segments ensure that all dormakaba employees participate in the mandatory Code of Conduct trainings. The Code and additional directives form an important foundation for the sustained economic success of dormakaba all over the world.

dormakaba acknowledges its responsibility to respect human rights as outlined in the Code of Conduct and the Supplier Code of Conduct (see paragraph on supply chain below).

In August 2019, dormakaba published its Statement of Commitment on Human Rights in line with international standards including the UN Guiding Principles on Business and Human Rights. The commitment clarifies:

1. The relevant international human rights frameworks that the company subscribes to,
2. Salient human rights issues of dormakaba, and
3. The company’s Human Rights Due Diligence (HRDD) framework describing the appropriate policies and processes to implement its human rights commitment.

Based on the human rights-related risks and impacts identified, dormakaba will continue to develop prevention and mitigation measures integrated into company operations, training programs, policies, and management systems. This will be achieved through the implementation of a human rights roadmap which was established in the financial year 2018/19 and approved by the EC in the context of the HRDD process development. Further information on human rights can be found in the Sustainability Report 2019/20.

Environment

dormakaba uses resources in the manufacture of its products and generates waste and emissions. Environmental issues are therefore a key aspect of sustainability and are relevant along the entire value chain. A detailed overview of the company’s sustainability work and the most important benchmarks, including greenhouse gas emissions, energy consumption, water consumption and waste management can be found in the Sustainability Report 2019/20.

Supply chain

dormakaba pursues a comprehensive and consistent procurement policy. Based on a detailed analysis of all expenditures, goods, and services are grouped into material categories according to their characteristics. By means of this analysis, all products and quantities as well as the complete supplier portfolio are identified and then classified into either global, regional, or local material groups.

The process to approve a supplier is in accordance with DIN and ISO requirements, as are the supplier evaluation and assessment processes. Audits are performed on demand, for example, for new suppliers or covering quality and sustainability issues. In addition, the dormakaba Supplier Code of Conduct outlines minimal requirements with regards to human rights, fair working conditions, environmental responsibility, and business ethics, among others. Further information can be found in the chapter supplier social and environmental assessment of the Sustainability Report 2019/20.

Opportunities

Opportunities arising from market position and synergy effects

dormakaba is one of the global leaders in the fragmented market for security and access solutions, and offers its customers high-quality products, solutions, and services for access to buildings and rooms from a single source. dormakaba is expanding its competitive position based on its expanded complementary product portfolios, combined geographical presence, and optimized value chains.

Opportunities arising from the “dormakaba” brand

The brands Dorma and Kaba are being continued under “dormakaba” following the merger. Both brands and their sub-brands are well known in the relevant customer groups as representing high-quality, innovative products. By combining the two brands to one master brand for Access Solutions, opportunities are being created by complementary strengths, firstly through the cross-selling potential, and secondly through the ability to offer customers a comprehensive product portfolio from a single source.

Opportunities arising from industry consolidation

Opportunities also arise from the ongoing and anticipated consolidation of the industry dormakaba operates in. Despite the consolidation that has already occurred, the market for security and access solutions remains highly fragmented. The three biggest companies in the industry together account for only about 30% of market share. dormakaba wants to build up its market position substantially and thus continues to play an active role in industry consolidation. The focus for any acquisition activity is to strengthen the Group’s global presence and to secure targeted improvements in technologies and/or the product portfolio, innovations, and services, while at the same time maintaining a solid financial profile.

Opportunities through innovation

The market for security and access solutions is in transformation. Megatrends such as the rising need for security, urbanization, demographic change, technology, and increasing prosperity in emerging economies, are driving the demand, but also require new technological approaches. dormakaba intends to invest 4–5% of sales annually in innovation and product development to exploit the growth opportunities brought by these megatrends, and to achieve its desired innovation leadership (see also the statements on Research and Development above).

Risk policy, risk management, and risks at dormakaba

Risk policy

dormakaba manages a globally active business. All its business activities are conducted with the aim of securing economic success. However, these activities can also bring about risks. The overriding goal of the risk policy of dormakaba is to secure the future development of the Group, to achieve sustainable profitable growth, and thus to increase enterprise value. In the course of its business activities, dormakaba is exposed to the general risks inherent in any entrepreneurial operation, and these may impede or prevent the achievement of its goals. Consequently, it is sometimes necessary to take certain calculable and controllable risks to exploit the opportunities this risk-taking creates. Opportunities are therefore taken in the course of the Group’s business activities; the associated risks are identified early, actively monitored and reassessed on a continuous basis.

dormakaba always takes strategic and operational decisions on the basis of a systematic analysis and evaluation of the opportunities and risks relating to its assets, financial position, and earnings. It never enters into incalculable, unreasonably high or existential risks.

Opportunities, as understood in the Group’s opportunity and risk policy, are chances to use events, developments or active operations to achieve or exceed planned quantitative and qualitative objectives. Risks, as understood in the risk policy of dormakaba, are all those internal and external events and developments that could have a negative effect on the Group’s planned economic success. In addition to direct, quantitatively measurable risks, qualitative risks, such as reputational risks, are also taken into account.

Risk management

The overriding aim of dormakaba is to sustainably increase its enterprise value (see also Chapter Goals and Strategies above). Active risk management helps the company’s management to achieve this goal.

Opportunities and risks should be identified at an early stage and actively controlled. To do this, dormakaba has implemented a comprehensive risk management system.

a) Internal Control System based on Group accounting

In line with the Swiss Code of Obligations, dormakaba has implemented an Internal Control System (ICS) based on the consolidated (Group) accounting (in the following section “accounting”). The ICS ensures that business activities are correctly recorded, analyzed, evaluated, and transmitted to the external accounts.

The essential characteristics of the ICS with respect to accounting are:

• A clear organizational, business, controlling, and monitoring structure;
• Computer systems used for accounting are protected against unauthorized access;
• Internal regulations about the specific requirements are developed, implemented, and communicated;
• The departments and persons involved in accounting meet the requirements in terms of quantity and quality;
• The ICS, as it relates to accounting, and the internal reporting systems ensure and continuously check the correctness and completeness of data in the accounting system; the Internal Audit department regularly conducts spot checks of the implemented processes and controls;
• The two-pairs-of-eyes principle has to be applied to all processes relevant to accounting, and the separation of functions has to be respected, both to the extent organizationally possible, which is subject to special audits;
• The BoD regularly deals with the main topics relevant to accounting, risk management, Internal Audit, the external audit mandate, and external audit priorities.

In addition, statutory and specific internal corporate guidelines and directives are used to ensure that accounting is consistent and proper. The application of clear and consistent accounting rules and a uniform consolidation software tool ensures consistent accounting throughout the Group in line with legal and statutory requirements.

Further information can be found in the Corporate Governance Report 2019/20.

b) Risk management system

Risk management is integrated into the regular business and decision-making processes, codified in internal rules and regulations, and made binding to all Group companies. It includes an impact-focused assessment of risks, implementation of appropriate risk control measures, regular review of identified risks and measures, and transparent reporting of the risk situation. Responsibility for the definition and monitoring of risk management (“risk governance”) lies with the BoD, while the Audit Committee monitors implementation. Responsibility for implementing and applying the risk management system rests with the EC and with line managers throughout the internal hierarchy.

The company’s risk management system distinguishes between operational and strategic risks:

• Operational risks are future events that could hurt the efficiency or effectiveness of business processes, or that could compromise compliance with regulations or reporting requirements in day-to-day business. Responsibility for identifying and controlling these risks lies with segment heads.
• Strategic risks are future events that may compromise the long-term development of dormakaba and prevent it from reaching its strategic objectives. Reports about strategic risks from the segments and Group functions are consolidated at Group level into risk maps that show likelihood of occurrence and potential amount of damage, with both dimensions divided into four evaluation categories. Strategic risks are discussed within the medium-term planning process and consolidated by the EC into a “Group Risk Assessment” that is presented for approval to the BoD through its Audit Committee. The EC reviews the risk situation every half year. Additionally, the risk situation is scheduled for discussion and review during the segments’ Monthly Performance Review meetings every quarter.

The Group Internal Audit function is responsible for internal audits at dormakaba. Internal Audit reports directly to the Audit Committee, though in functional terms it reports to the CFO. All audits performed in financial year 2019/20 were in line with the (yearly) audit plan and approved by the Audit Committee.

Risks faced by dormakaba

a) Risks arising from business transactions

The planned growth strategy is also implemented by means of acquisitions. This creates risks in the evaluation, transaction and integration of the corresponding entities and assets. To minimize these risks, dormakaba manages the acquisition projects rigorously, using well-trained specialist employees and professional support from outside the Group.

b) Opportunities and risks arising from the business model

In recent years, dormakaba has continued to extend its product portfolio on electronic and cloud-based solutions. Its products are very frequently used in security-relevant applications such as access control systems; increasingly often these are connected. dormakaba is therefore more exposed to the risk that hackers will gain unauthorized access to sites and premises protected by products and thus cause damage to the Group’s reputation and possibly expose dormakaba to liability claims. dormakaba counters the increasing significance of such hacking scenarios during the product development process by using the latest methods to identify points that could be attacked, and then closing these known vulnerabilities in the hardware and software with upgrades before new products are launched on the market. Equally important, existing products (mechanical, electronic, and cloud-based) are subject to continuous testing to keep them robust against new threats. dormakaba has taken out product liability insurance to be protected against these hacking threats to an extent that is economically reasonable.

Digital transformation is progressing rapidly, and it is essential to the success of dormakaba that it keeps pace with this development. This applies to the Group’s products and their connectivity, but also to operational processes. Sudden, disruptive developments are not rare these days, and there is a risk that existing competitors or new entrants to the markets of dormakaba could use such disruptive leaps to create significant advantages for themselves. The company’s innovation management team systematically monitors and analyzes the relevant technologies. As part of medium-term planning, targeted analysis of information relating to the state of the market and the competition is conducted to ensure that local peculiarities are also taken into consideration.

For dormakaba, as a manufacturer and supplier of high-quality access products and solutions in the premium market segment, the growing pressure on prices in relevant markets and specific product areas also represents a risk. It counters this risk through the targeted development of new products that offer customers a broader range of services, and thus help to secure the Group’s market position. This strategy is complemented by elaborate strategic pricing efforts.

A significant risk in product manufacturing is the possibility of a lengthy interruption to operations at one or several of the Group’s worldwide production sites, for example because of fire. Supplier failure and poor-quality raw materials and components also constitute a risk. Alongside the essential insurance protection, a central goal of the loss prevention programs in place at all manufacturing sites is to minimize the risk of fire. Through these programs, the measures in place to prevent fire are regularly updated, formulated and implemented. This is a recurring process that includes regular site visits and systematic risk grading analyses, conducted by the company’s global insurance provider who also organizes feedback loops and supports in improvement projects.

Manufacturing processes create the risk of air and water pollution. To minimize this risk, dormakaba invests continuously in environmental protection measures. dormakaba has ISO 14001 certification for 28% of its manufacturing sites worldwide.

As a globally active company, dormakaba is exposed to risks created by the political situation in individual countries and regions, and also to risks resulting from trade conflicts between countries or country groups. Both risk drivers can rarely be influenced. dormakaba carefully monitors such situations and tries to implement prompt and appropriate risk control measures. Its top priority is always to protect its own employees.

In early 2020, these political tensions and the overall economic development started to be impacted by the Covid-19 pandemic. The pandemic and the regulatory consequences implemented by most governments worldwide resulted in a unprecedented slump in business activity in many countries dormakaba is doing business in. This effect is visible in the company’s financial year 2019/20 revenues and profitability, and it can be expected to impact revenues and profitability in financial year 2020/21 and possibly further into the future. dormakaba has reacted by implementing state-of-the-art crisis management processes both to ensure the health and safety of employees and to minimize the impact on business operations and supply chains, and thus on customers, while at the same time placing a strong focus on its cash situation and financial stability. Additionally, scenario planning methods are used to identify organizational and geographic units that provide opportunities for cost reduction measures. The scenarios are also used to find opportunities to introduce new products or fine-tune the business approach to specific markets. In this context, dormakaba is keeping a close watch on its supply chains to make sure that imminent disruptions caused by non-performing vendors or regulatory hindrances are noticed at an early stage and an adequate reaction can be initialized. Monitoring and re-evaluation of the current situation is institutionalized and repeated at a quick pace in order to keep up with geopolitical and economic developments. The target is to be and remain capable of reacting quickly and adequately to changes that might occur.

c) Personnel risks

Committed employees and managers are crucial to the sustainable business success of dormakaba and to the implementation of its strategy. The most common personnel risks evaluated by the Group are those relating to succession planning, fluctuation, and competences. There is a risk that vacant positions cannot be filled properly, and that competent employees could be lost. In the wake of various personnel initiatives, and with the aim of fostering long-term employee retention, these risks are addressed throughout the Group with the help of employee surveys, talent and succession management, and through individual, targeted employee development. The Group has also developed various change management measures aimed at further fostering the development of the new corporate culture.

d) IT risks

The main business processes and customer solutions of dormakaba are supported by IT systems. The failure of these systems and the permanent loss of data through operating or program error, or as a result of increasingly prevalent external influences (e.g. cybercrime) represent a risk. To limit the risk of critical systems and infrastructure failing, the company’s IT strategy is to use state-of-the-art standards such as email address validation, client security, identity and access control management, network security management, network and infrastructure management (e.g. 24x7 monitoring, high-level firewall protection tools, redundant network connections), and IT continuity operating plans as provision of redundant data and systems. dormakaba is using advanced threat protection solutions and operates a security operations center to further mitigate cyber security risks. A global information security management system (ISMS) according to ISO 27001 is in place. Cyber security risk awareness trainings (e-Learnings, behavior trainings concerning phishing malware) are globally mandatory for each employee with access to corporate IT systems. Additionally, dormakaba has taken out insurance to be protected against cyber threats to an extent that is economically reasonable.

Successful and timely execution of the global IT strategy (standardization of applications and infrastructure) is vital for the company’s future success. Failure could result in delay of integration projects and underperformance of important business or Group-wide processes, including financial damage. dormakaba manages such risks by an IT governance model, which involves all relevant stakeholders including operational business.

e) Legal and tax risks

As a globally active group of companies, dormakaba is exposed to the risk of legal disputes. These legal disputes can concern e.g. product liability claims as well as potential competition and antitrust law and trademark or patent rights infringements. Risks are managed with the aid of Group-wide standards, trainings, and controls. The internal Legal department and/or external lawyers are brought in for legal matters associated with specific risks.

International business activities can also give rise to tax risks. As tax law is in the responsibility of each jurisdiction, external tax assessments might not be aligned and might lead to double taxation. To identify and manage such tax risks, dormakaba sets directives and manuals based on a defined tax policy. The responsibility for the tax policy rests with the BoD. For intra-Group transactions dormakaba follows the dealing at arm’s length principle of the OECD (Organization for Economic Cooperation and Development). This leads to tax payments where the economic value is created. dormakaba publishes the amount of taxes paid in a yearly CbCR (Country-by-Country Report). Transactions may further be subject to export control regulations. Compliance is managed through Group-wide standards, including directives and employee trainings. The internal Tax department works closely together with the local internal finance and legal organization and consults external advisors in case of need.

f) Compliance risks

It is Group Compliance’s mission to support the dormakaba organization and every dormakaba employee to take appropriate decisions consistent with applicable laws and corporate regulations and to act with integrity.

This mission is based on the following strategic goals:

• Enable employees to work in accordance with legal requirements as well as dormakaba´s company values, its Code of Conduct and other internal rules and regulations.
• Support the BoD and EC to ensure that all provisions of the law and dormakaba’s rules and regulations are complied with. The objective is to achieve compliance by all Group entities.
• Reduce undue risks for dormakaba, its employees and management.
• Implement and operate a Compliance Management System (CMS) which meets the most stringent certification-demands according to best practice standards.

That is why prevention is the priority: the implemented system is intended to avoid infringements, and employees are properly trained and advised.

On 1 July 2016, a new Code of Conduct was introduced. The subsequent mandatory Code of Conduct trainings have been successfully completed for all dormakaba employees. Procedures are in place to ensure that new employees sign the dormakaba Code of Conduct and are trained. In addition, dormakaba placed emphasis on antitrust trainings for a defined target group of employees who are particularly exposed (Senior Management, Sales, etc.). A full set of internal rules and regulations on Group Directive level covering the main activities of dormakaba is available and regularly updated. The implemented compliance mechanisms are adjusted to changing circumstances where necessary.

Compliance risks arise as a result of a business model involving worldwide production and sales units, a growth strategy in emerging countries and increasingly internationalized procurement. Risks also result from the wide variety of distribution channels, from participation in tendering processes, from the use of products in public spaces and private buildings, and from active work within trade associations. Significant compliance risks include bribery and corruption, infringements of antitrust and competition law, fraud, preferential treatment of business partners from personal motives, violation of intellectual property protection rights, and shortages or improper installation of products. These risks can result in financial, liability and reputational damage.

g) Other risks

The company’s business model could also give rise to other risks not mentioned so far. These could be, for instance, liability risks resulting from local laws that are not known at Group level. dormakaba counters these risks by keeping the quality of its products and services consistently high, by engaging legal experts when the risk of a legal dispute is identified, and by taking out appropriate insurance cover.

h) Financial risks

dormakaba is exposed to various financial risks on account of its international activities. As well as the risk of default on claims, e.g. trade receivables, liquidity and credit risks, these include market price risks in particular (interest rate, currency, and other price risks).

Further details on dormakaba’s financial risk exposure and its risk avoidance and mitigation measures can be found in the consolidated financial statements for financial year 2019/20.

Since 1 April 2014, the “European Market Infrastructure Regulation” (EMIR), the EU initiative to regulate OTC trade in derivatives, has imposed an audit duty. During the annual audit under § 20 para. 1 of the German Securities Trading Act for the audit period from 1 July 2018 to 30 June 2019, it was confirmed that dormakaba has an overall and in all respects appropriate and effective system for ensuring compliance with the statutory requirements. Since 1 January 2016, Switzerland regulates the OTC trade in derivatives with the Finanzmarktinfrastrukturgesetz (FinfraG). All Swiss-based Group companies classify as “NFC“ (small non-financial counterparties) and have signed agreements with their banks regarding the delegation of reporting duties.

The funding for dormakaba Group companies is managed centrally. A five-year syndicated credit facility, agreed for dormakaba during financial year 2015/16 with a consortium of banks, amounts to CHF 500 million with options to extend by another two years and to increase the facility by CHF 200 million. There are also agreements with various regional banks for bilateral credit facilities. dormakaba thus has sufficient liquidity reserves to ensure that even unexpected events do not have a significant effect on its liquidity position.

In conclusion, the company’s opportunity and risk situation can be rated as moderate.

Existing risks are identified, continuously monitored through the risk management system, and hedged where necessary using appropriate countermeasures. With the organizational and process structure in place, and with the existing innovation structure and approach, the prospects of further profitable growth for dormakaba remain promising.

Apart from the ramifications of a possible worsening of the Covid-19 situation, there is no expectation of a significant change in the risk situation, compared with the previous financial year. There is no sign of any risks that would endanger the continued existence of dormakaba. Currently no risk has been identified that could significantly affect the assets, financial position, or earnings of dormakaba, neither there is evidence of any liquidity risk. A material deterioration in the future assets, financial position and earnings is not expected given the current risk situation.

The Covid-19 pandemic led to a global economic shock of significant and unprecedented magnitude. Forecasts from the World Bank anticipate a 5.2% contraction in global GDP for 2020, the deepest recession over the past eighty years. As global trade is expected to experience a sharp decline of 11.9%, certain sectors such as travel and hospitality face considerable and potentially long-lasting damage (IMF World Economic Outlook, June 2020). Therefore, future developments will be closely linked to the evolution of the ongoing Covid-19 pandemic. Medical breakthroughs, increased preparedness to new cases, and limited new outbreaks are factors that could positively affect the Covid-19 situation.

As stated by the IMF, other risks were exacerbated by the pandemic (IMF World Economic Outlook, June 2020). First, the trade tensions between the United States, China, and the European Union, but also in other parts of the world, make doing business more challenging and less profitable. Secondly, the resilience of the financial sector is expected to be challenged. Amongst others, sovereign and private debt levels are considered “uncomfortably high” in some countries (OECD Economic Outlook, 2020). Thirdly, rising national political instability and social unrests could contribute to negatively impact the economic situation. In short, the global macroeconomic environment shows acute levels of uncertainty with a very low visibility.

Since the merger to form dormakaba in September 2015, the company’s risk profile has improved significantly; dormakaba has gained scale, while remaining financially flexible and noticeably diversifying its product portfolio and global presence. This enables the company to continue to execute its strategy consistently even during the current crisis and thus creating a solid basis for its competitiveness and sustainable profitable growth in the post-crisis period. This includes consistently continuing to invest around 4–5% of annual sales into R&D. After the crisis, dormakaba will most likely also consider investing in the ongoing consolidation of the industry, which is likely to accelerate and depends on the progression of the Covid-19 pandemic.

Financial performance in the months of June and July 2020 indicate an improvement of the economic environment for dormakaba’s businesses compared with the very weak months of April and May 2020. While some important countries for dormakaba continue to suffer from negative Covid-19 impacts, other important countries show resilience and an improved business performance.

However, due to the ongoing Covid-19 pandemic, global business visibility is still very limited. Geopolitical risks like the ongoing trade conflicts create additional uncertainty.

Under the assumption that Covid-19 or geopolitical tensions will not create additional significant deterioration of the business environment, dormakaba expects for the first quarter of financial year 2020/21 to outperform financial results of the fourth quarter of 2019/20, both in terms of organic growth and EBITDA margin. Based upon the same framework, expectation for the first half of financial year 2020/21 is to outperform second half of financial year 2019/20.

Due to the lack of visibility to the further course of business dormakaba does not provide any additional financial and business guidance for the financial year 2020/21 and beyond.

Detailed information on dormakaba Holding AG’s capital structure can be found in the Corporate Governance Report 2019/20.