Risk management has been organized as a part of the management system at HKScan and it is based on the consistent identification, assessment and reporting of risks throughout the Group. In 2010, the company implemented a systematic ERM process which aims to promote risk awareness in HKScan and effective risk management throughout the Group, and to ensure that management and the Board of Directors are in possession of sufficient information on risks to support their decision-making. The new risk management policy will be applied in all of the companies in the HKScan Group which carry out business operations.
The Board of Directors and CEO have responsibility for the
strategy and principles of risk management within the Group and for
managing risks that threaten achievement of the Group’s strategic
intents. Operative risks are the responsibility of segment
management and the managers of the relevant business processes. The
Group CFO is responsible for the management of financial risks and
risks to persons and property.
Risk management is part of the management system and as far as possible and appropriate, it is implemented as a part of day-today business activities together with the support processes. This shows in the consideration of investment and other draft resolutions, process and job descriptions, the charters of the various bodies, performance reviews with employees, etc.
At HKScan, risks have been divided into four main categories:
strategic risks, operative risks, economic risks and risks of
damage. Strategic risks are assessed as a part of the annual
strategy process and in connection with major business decisions.
Economic risks and risks of damage are minimized to the extent
possible by using policies and guidelines drafted for this purpose.
Operative risks are assessed not only in connection with the annual
action plans but also as a part of day-to-day business
operations.
Fluctuation in the availability and prices of raw materials
The prices and availability of the raw materials, such as pork, poultry, and beef, which are needed for the production of HKScan products, vary. The global overproduction of raw materials decreases the prices of raw materials and increases their availability, while underproduction leads to poorer availability and rising prices of raw materials. Owing to oversupply and the high prices in Finland, and to a certain extent in Sweden as well, the export of excess production to countries where raw material is less expensive presents a challenge. The cycle of economy and the EU’s Common Agricultural Policy affect the balance of supply and demand in the long term. Factors rapidly affecting supply, like animal disease
epidemics, may occasionally distort the balance of supply and demand. The prices of processed meats sold by the company to retail are agreed for several months ahead in Finland, Sweden and the Baltics, and under these circumstances, the rise in the prices of raw materials cannot be passed on to product prices. Passing higher raw material prices to product prices may also be difficult in a situation where no fixed prices have been agreed in advance.
Increasingly fierce competition in the meat industry and the constant state of flux in the structure of the perishable goods market
Competition in HKScan’s business sectors has grown tougher recently with retail chains to an increasing degree entering the food market to compete with their own products and brands. Besides domestic competitors, competition is also made fiercer by international companies and companies operating in lower-cost countries. The company is responding to increased competition through, for example, the efficiency of its core processes, highquality products, delivery reliability, and internationalization.
Adaptation of operations to possible changes in legislation and dependence on the authorities
HKScan’s operations are regulated by the legislation of the company’s respective countries of operation. Regional and supranational regulation, such as EU legislation, also affects the company’s operations.
The company’s management considers that at present, the company is in compliance with legislation and other regulation.
Legislation and other regulation and the interpretations thereof may change, however, and the company cannot guarantee that it would be compliant with such changed requirements without taking material action. In the event that the company expands its operations to new markets, the company will also have to observe local regulation in these new regions, which may differ considerably from regulation in effect in its current markets. In its operations, the company is also dependent on the authorities in its countries of operation. Authorities procedures may also vary considerably in the company’s various sectors of operation.
Acquisitions and integration of businesses acquired
As a part of the development of its business, HKScan may acquire either in its current markets or in other geographical areas companies which enhance its competitive position. Risks relating to acquisitions include the unknown liabilities of the companies possibly acquired by the company, the possible inability to integrate and manage the business operations and personnel acquired, and the risk of the benefits or synergies of mass production not being realized.
In addition, exclusion from industry consolidation might have an adverse effect on HKScan’s strategic competitive position. Expansion to new geographical areas might also cause problems relating to exchange rate fluctuations, overlaps of different taxation systems, unexpected changes in statutory requirements, changes in and compliance with foreign legislation and regulations, and political risks and longer distances.
Animal diseases
An outbreak of animal diseases, such as avian influenza, Newcastle disease, foot and mouth disease, or BSE may affect the company’s business and demand for the company’s products. Animal diseases may affect consumer behaviour for a long time, although company management believes that consumption is usually normalized within a reasonable period of time from the respective animal disease discovery. The animal disease risk is levelled off by consumption transferring to the company’s other meat product groups. In an integrated production line, such as some of the company’s Baltic operations, discovery of an animal disease may temporarily sever, in a worst case scenario, the supply of raw materials, if substitute raw material sources such as importation from abroad do not exist.
Dependence on production plants and the uninterrupted operation of chains of distribution
HKScan is dependent on the uninterrupted operation of its production plants and distribution centres. If a key production plant of the company is destroyed or closed regardless of reason, its equipment is damaged in a significant manner or other disruptions occur in production, this is likely to cause delays in HKScan’s ability to produce and distribute its products as scheduled. Depending on product, it may be possible for HKScan to transfer production
to other locations, thus avoiding any significant interruptions to its operations, but changes in production of this kind may be more difficult to implement in respect of some product groups and may lead to significant delays in the deliveries of products and to lost sales, and give rise to additional expenditure.
The delivery of orders on very short lead times is characteristic of the company’s industry. Short lead times increase the significance of an effective and dependable order/delivery chain and underscore the need to be able to anticipate consumer behaviour.
Likewise, the significance of the reliability of logistics systems and other technological systems has increased. If distribution centres are damaged, destroyed or brought out of commission for whatever reason, or if the products held in the distribution centres suffer significant damage, HKScan will have to come up with an alternative method of delivering products to customers until such time that the damaged distribution centre can again be made available for operations.
Possible product quality issues
Food safety risks have to do with the purity of raw materials (residues, foreign substances), the healthfulness of products, packaging materials intended to come into contact with food, and microbiological purity. Particular attention is paid to the prevention and control of bacteria which cause food poisoning. In addition to rigorous in-house controls, the facilities of all industry operators are subject to strict scrutiny by the authorities. HKScan’s high standard of requirements and rigorous internal control notwithstanding,
HKScan cannot have absolute assurance of the risk-free management of the entire foodstuff chain. The realization of a risk relating to product safety or product liability may have a material adverse effect on the demand for the company’s products among customers and consumers.
Reliance on skilled management and employees
HKScan’s success is materially dependent on the
professional expertise of the company’s management and other
personnel as well as on the company’s ability to foster the
commitment of current management and other personnel and recruit
new, skilled employees in the future too.
Harmonization of Group management systems and operational
models
Various development projects relating to the
harmonization of business models are underway at HKScan, the aim
being to
achieve consolidation benefits. As a part of these
development projects, the company’s management systems are being
updated, which may entail uncertainties if local benefits conflict
with Group benefits.
Unforeseeable factors
Natural disasters, fi res, bioterrorism, pandemics, exceptional weather conditions or other factors beyond the company’s control may have an adverse effect on the health and growth of production animals or hamper the company’s operations due to power outages, damage to production and property, disruptions in the distribution chains, or other reasons.
Financial risks
Financial risks mean unfavourable movements taking place in the financial markets that may erode accrual of the company’s result or reduce cash fl ows. The company’s financial risk management aims to use financial means to hedge the company’s intended earnings performance and equity and to safeguard the Group’s liquidity in all circumstances. As a rule, HKScan’s funding is obtained through the parent company while funding to subsidiaries is arranged by the Treasury through intra-Group loans in the local currency of each subsidiary. Funding of the Group is centralized to a finance unit operating under the Chief Financial Officer.
Owing to income and expenses denominated in foreign currencies and equity investments and earnings denominated in foreign currencies, the company is exposed to foreign exchange risk arising from movements in exchange rates. The most significant exchange risks in the company’s business arise from the US dollar, Japanese yen and Swedish crown. The largest equities of the companies in the HKScan Group are in Swedish crowns, Polish zloty and Estonian crowns. The Group’s financial risks are presented in more detail in Note 26 of the financial statements.
Internal audit
At HKScan, the internal audit is a management tool for the accomplishment of supervision organized around an internal controller function in the business areas. The Company’s auditors, who constantly perform audits of various operational aspects, also participate in internal auditing.
The aims of internal auditing are integrally linked with the Company’s management system built on a principle of ongoing improvement. The implementation of corrective and preventative measures is a key part of the function of the entire process.