Russia-Ukraine conflict influence on HansaMatrix business
Considering recently started Russia and Ukraine conflict (the Conflict) and its influence on economic and business environment situation in Baltics and globally, with this announcement HansaMatrix (the Company) informs about the current business situation of the Company, risks and potential business impact on HansaMatrix of the Conflict and on the actions that the Company is undertaking to mitigate the Conflict potential influence.
The current business situation of the Company:
All HansaMatrix business units of operate at the available capacity.
HansaMatrix has worked closely with customers to better identify and understand the potential impact the Conflict may have on the manufacturing order book. The Company has no customers in Russia, Ukraine or Belarus, moreover HansaMatrix’s customers do not have significant revenue exposure to the markets directly involved in the Conflict.
HansaMatrix has a diversified supplier base and has no suppliers in Russia, Ukraine or Belarus. The Company has been in contact and discussed the Conflict and risks related to it with the key suppliers and logistics partners.
Key risks:
Energy price and inflation increase risk
Russia, Ukraine and Belarus are countries rich in commodities, including oil, natural gas, metals and crops, disruption of supply of which due to international sanctions and as a result of the Conflict is expected to lead to higher energy, raw material and food prices, contributing to inflation in European Union in 2022 and 2023. Expenses of the Company related to energy and utilities are comparably small in the total cost structure, amounting to around 2.5% of revenues in 2021. Nevertheless, the Company is closely monitoring energy price and general inflation trends, evaluating financial results and budget fulfilment on a monthly basis to ensure that in case necessary the manufacturing services pricing adjustments are negotiated with the clients and carried out on a timely basis to maintain the profitability level.
Supply chain and liquidity risks
Neon gas, which is needed to feed lasers in production of semiconductors and metal palladium, used in later manufacturing stages of chips, are two key raw materials that are at a risk of being constrained. Industry analysts estimate about 25-50% of the world’s semiconductor-grade neon is sourced from Russia and Ukraine, while approximately 30% of the world’s palladium originates from Russia.
The increased demand and supply-chain disruptions after COVID-19 pandemic have resulted in global semiconductor deficit continuing for 1.5 years now, which has at initial stages helped to manage the additional supply chain challenges caused by Russia’s invasion in Ukraine, as many of chip manufactures have significantly improved their supply chain risk management and stockpiled materials needed for manufacturing for 3-12 months ahead (https://cnb.cx/3K1IqGV).
In longer-term and assuming that Russia-Ukraine conflict will not be properly settled in the nearest months, the aforementioned commodity shortages could lead to higher semiconductor prices and further increase chip deficit.
In addition, the supply chain could be expected to be further disrupted by inability of transport companies to supply semiconductors from Asia to Europe through Russia using railroad. Alternative transport links are ships and airplanes, which could increase delivery time (ships) and cost of transport (airplanes).
The electronic component supply chain disruptions due to Russia-Ukraine conflict could be expected to impact HansaMatrix manufacturing order execution, potentially shifting fulfilment times, and could increase component sourcing costs, as well as increase inventory levels.
To mitigate the component shortage HansaMatrix diversifies the supplier base, applies the alternative component management approach, works with component brokers and carries out in advance component sourcing for binding customer orders. Liquidity risk mitigation measures include weekly cash flow management and monthly liquidity planning for the next 12 months, allowing for timely decisions to improve liquidity.
Salary inflation risk
Inflationary pressures could be expected to drive higher salary inflation in 2022 and 2023. Expenses of the Company related to employee salaries are significant in the total cost structure, amounting to around 39.1% of revenues in 2021. The Company is closely monitoring salary inflation trends, evaluating financial results and budget fulfilment on a monthly basis to ensure that the manufacturing services pricing adjustments are negotiated with the clients and carried out on a timely basis to maintain the profitability level as necessary.
Risk of diminishing purchasing power
Higher inflation limiting real growth of economy could lead to diminishing demand and decreased investment in long-term. The manufacturing order volume can be influenced by potential decisions by businesses to postpone investments and by consumers to decrease expenditures. Since the Conflict started the Company has not received any negative indications in relation to decreasing customer orders for the nearest future. To mitigate this risk the Company sales team is continuously and actively looking for new customers, with strategic focus on Nordic countries.
Investment attraction risk
Increased business environment uncertainty might potentially influence investor sentiment in Europe and result in postponed investment decisions. HansaMatrix associated company Lightspace technologies is currently focusing its investment attraction activities in North America.
Potential business impact:
HansaMatrix remains confident in the Company long-term prospects and growth strategy. The Company considers Russia-Ukraine conflict immediate impact to be comparably limited in short-term, however the uncertainty of the business environment has significantly increased and the Conflict impact scale on the Company could change, especially in relation to further challenges related to supply chain and increase in costs that can potentially negatively impact business volumes in the coming quarters of 2022.
HansaMatrix has reviewed the key assumptions of the fair value measurement, carried out for the Group’s annual consolidated andCompany financial statements and has concluded that as of the date of this announcement the fair values of assets and liabilities of the Group have not been significantly impacted by circumstances related to the Conflict. Nevertheless, the value of European Investment Bank (EIB) warrant liability could change starting with Q1 2022, as the Company applies average weighted HansaMatrix share price for the last respective quarter as one of the inputs to determine fair value of this liability. In addition, due to significantly increased industrial building construction costs, the decrease in HansaMatrix and the Group investment fair value in SIA Zinatnes parks as of December 31, 2021 is expected to be announced with the release of the audited financial results of the Company and the Group for year 2021.
In an unfavourable case of the Conflict continuing for long period of time and at a significantly large scale, the impact on the Company could be more significant via the risks described previously.