Risk management and risks

The aim of risk management within HKScan Group is to enable uninterrupted business operations and to safeguard conditions for achieving business objectives.

Risk management is embedded in the HKScan management system and is based on the consistent identification, assessment and reporting of risks throughout the Group. The company’s Enterprise Risk Management (ERM) process aims to systematise risk identification and promote proactive risk management throughout the Group, and to ensure that management and the Board of Directors are in possession of sufficient information about risks to support their decision-making. The risk policy approved by the Board is applied in all operative HKScan Group companies.

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 the Group’s strategic intents. Operative risks are the responsibility of the heads of the respective market area or the Group function in question. The CFO is responsible for managing financial risks and Group insurance policies.

At HKScan, risks are divided into four main categories: strategic risks, operative risks, economic risks and risks of damage. At Group level, the company regularly assesses all significant risks inherent in the material balance sheet and income statement items and determines key controls for risk prevention.

Strategic risks are assessed as a part of the annual strategy process and in connection with major business decisions.

Operative risks are assessed not only in connection with the annual plans, but also as part of day-to-day business operations.

Economic risks and risks of damage are minimised as far as possible by applying policies and guidelines drafted for this purpose.

HKScan’s most significant risks

Strategic risks

Fluctuation in the availability and prices of raw materials

There is variability in the prices and availability of raw materials needed for the production of HKScan products, such as feed, pork, beef and poultry. Global overproduction of feed and raw materials decreases the prices of raw materials and increases their availability, while underpro-duction leads to lower availability and rising raw material prices. Economic cycles, the EU’s Common Agricultural Policy, trade barriers and subsidy changes affect the balance of supply and demand in the long term.

Factors rapidly affecting supply, such as animal disease epidemics and extreme weather phenomena (e.g. drought) may occasionally create an imbalance of supply and demand. The prices of products sold to retail are agreed months in advance in Finland, Sweden, Denmark and the Baltics, and under these circumstances, it may be challenging to carry unforeseen increases in raw material prices over into product prices quickly enough. This may also be difficult even in situations where prices have not been agreed in advance.

From HKScan’s main brands, HK®, Kariniemen® and Scan® have delivered a promise of 100 per cent domestic meat content. Although this gives HKScan a competitive edge over imported products, it may also change HKScan’s position if domestic meat production declines.

HKScan actively monitors the prices and availability of raw materials used in production. The Group may use external specialists for making estimates for future development.

In HKScan’s market areas, competition is tightened by the private label products and brands of retail chains.  This local competition is intensified by multinational operators and competitors based in lower-cost countries.

The company is responding to this tightened competition by strengthening its brands and product development, improving the efficiency of its core processes, investing in high-quality products and supply reliability, good co-operation with its producers, and more efficiently leveraging Group synergies.

Adaptation of operations to possible changes in legislation or regulation and dependence on the authorities

HKScan’s operations are regulated by the legislation of the respective countries in which the company operates. Regional and supranational regulation, such as EU legislation, also affects the company. The management affirms that HKScan operates in full compliance with all relevant legislation and other regulations. Legislation and other regulations and the interpretations thereof may change, however, and the company cannot guarantee compliance with altered requirements unless the required material actions are taken. The company is also dependent on the authorities in the countries in which it operates. Official procedures may also vary considerably in the company’s various sectors of business. In addition, various unexpected actions potentially taken by pressure groups may cause restrictions to the business or volatility in demand.

Acquisitions and integration of acquired businesses

HKScan may acquire, either in its current market areas or in new geographical areas, companies that enhance its competitive position. Risks relating to acquisitions include potentially unknown liabilities, potential inability to integrate and manage the business and personnel of an acquired company, and the risk of benefits of scale or synergies not materialising as planned. In addition, exclusion from industry consolidation might have an adverse effect on HKScan’s strategic competitive position. Expansion into new geographical areas might also cause situations relating to exchange rate fluctuations, unexpected changes in statutory requirements, changes in and compliance with local legislation and regulations, as well as political risks.

Operative risks

Animal health and welfare-related risks

Animal diseases that spread easily, such as African swine fever, avian influenza, Newcastle disease or foot-and-mouth disease, pose a risk to the company’s business. Animal disease risks are mitigated by continuous follow-up of the animal disease situation, collaboration with authorities, veterinarians and HKScan’s producer services and animal producers. Preventing of the most serious contagious diseases is part of national animal disease prevention programmes. At farm level biosecurity and high hygiene standards and procedures are followed.

An outbreak of an easily transmitted animal disease may affect the company’s business and demand for its products. For example, export bans between countries may be possible. Animal diseases may have a long-term impact on consumer behaviour, although HKScan believes that consumption usually normalises within a reasonable period of time after the discovery of an outbreak. The animal disease risk is evened out to some extent by consumption shifting to the company’s other meat product groups.

In a fully integrated value chain, such as is the case with most of the company’s Estonian operations, the discovery of an animal disease may in the worst-case scenario temporarily sever the supply of raw materials if no substitute raw material source exists.

Dependence on production plants and the uninterrupted operation of distribution chain

HKScan is dependent on the uninterrupted operation of its production plants and distribution centres. If a key production plant is destroyed or closed for any reason, if 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 the product, it may be possible for HKScan to transfer production to other locations, thus avoiding any significant interruptions to its operations. Changes in production of this kind may be more difficult to implement in some product groups and may lead to significant delays in the deliveries of products and to lost sales, giving rise to additional expenditure before insurance coverage.

Very short lead times on delivery of orders are characteristic of the meat industry. Short lead times increase the importance of an effective and dependable supply chain, underscoring the need to be able to anticipate consumer behaviour. Likewise, the reliability of logistics systems and other technological systems is extremely important. If distribution centres are damaged, destroyed or decommissioned for any reason, or if the products held in the distribution centres suffer significant damage, HKScan must come up with an alternative method of delivering products to customers until such time as the damaged distribution centre is made available again.

HKScan mitigates these risks with business continuity and recovery plans and by planning and implementing preventive maintenance at operational locations regarded as critical, among others.

Possible product quality issues and food safety risks

HKScan performs systematic risk assessments to identify and control food safety-related risks at all stages of the value chain. Among other things, the risk assessments focus on the purity of raw materials (foreign substances, residues, harmful microbes), the compliance of packaging materials, the risk of foreign objects in production and raw materials, the use of chemicals, the control of allergenic substances, and especially the microbiological safety of foods. With the globalisation of the food chain, food fraud and deliberate sabotage have emerged as central themes alongside other food safety risks. To identify and prevent risks related to them, HKScan Group has created a separate risk assessment model covering the entire chain.

To control risks, we require all players in our value chain to have a comprehensive food safety management system, and we monitor its implementation with regular audits both in our own facilities and in other production plants in our value chain.

Risks related to data systems and information security

Risks related to data systems and information security are central to HKScan, as disruptions involving them may materially hamper the continuity of operations. These risks are continuously and critically assessed. Based on the assessments, HKScan carries out, among other things, updates and modernisations relating to information networks, data systems and information security.

Environmental responsibility-related risks

Environmental risks have been identified as part of the ISO 14001 environmental management system, and they are controlled and managed by each production plant. Identified environmental risks include risks related to waste-water and chemical leaks; these risks are managed with regulatory inspections of equipment condition, preventive maintenance, and alarm and monitoring equipment.

Risks related to respect for human rights and corruption or bribery

HKScan’s risk management has identified risks related to human rights in work safety management and in inappropriate treatment of employees. Work safety risks are managed through work safety campaigns, training, and by ensuring that work guidelines are followed. HKScan has zero tolerance for any kind of inappropriate treatment of employees and has in place guidelines related to inappropriate treatment. Ethical risks in the supply chain are managed in the risk evaluation of the sourcing process.

HKScan’s Code of Conduct describes the company’s policy on corruption and bribery, and these are monitored in internal audits. Corruption-related risks in the supply chain are managed in the risk evaluation of the sourcing process.

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.

The possibility of legal or illegal strikes cannot be ruled out in HKScan’s own operations or in its supply chain. The risks are mitigated by developing wellbeing at work and alternative supply structures and processes.

Economic risks

Financial and other risks

Financial risks refer to unfavourable movements taking place in financial markets that may erode accrual of the company’s result or reduce cash flow. The company’s financial risk management aims to harness financial means to hedge the company’s intended earnings performance and equity and to safeguard the Group’s liquidity in all circumstances.

Financial risk management, including external and internal funding of the Group, is centralised in the Group Treasury function. HKScan’s funding is obtained through the parent company, while funding to subsidiaries is arranged by the Group Treasury through intra-Group loans in the local currency of each subsidiary. Part of the Group’s profits and costs are denominated in foreign currencies. Additionally, some investments and earnings are denominated in foreign currencies. The most significant exchange risks in the company’s business arise from the euro, Swedish krona and US dollar. The largest equities of HKScan companies are in euros, Swedish krona, and Danish krone.

Other risks include various unexpected actions potentially taken by tax authorities, other authorities or pressure groups, which may cause restrictions to the business, volatility in demand, or significant increases of taxes or other fees. HKScan is also involved in some juridical proceedings in its home markets.  The Group abides by its Code of Conduct and sound business practices, but potential breaches of these instructions may also cause risks.

Risks of damage

Unforeseeable factors

Natural disasters, fires, bioterrorism, sabotage, 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. Such factors may also hamper the company’s operations and cause power outages, damage to production and property, disruptions in distribution chains, or other handicaps. HKScan mitigates these risks caused by unforeseeable factors through insurances, when possible and necessary.