Risk management is an integrated part of doing business at Chr. Hansen. Risks relate to future events or developments that can have an influence on the Company achieving its targets.
Relevant risks are identified, monitored and reported to the Executive Board and the Board of Directors through an Enterprise Risk Management process following an annual cycle. Furthermore, the identified risks are presented to and discussed by Management on a quarterly basis. The purpose of this process is to identify risks as early as possible and enable Management to proactively adapt business processes and controls to meet, manage or mitigate these risks.
Identified risks are evaluated based on their possible safety, business or financial impact and the likelihood of the risk materializing. Clear roles and responsibilities are assigned for major risks, and mitigation initiatives are identified, prioritized and launched. The most significant risks identified and reported to the Board of Directors are described below, including measures taken to mitigate these.
Chr. Hansen continues to work on identifying and evaluating relevant risks, and the list does not include all risks that could ultimately affect the Company.
Chr. Hansen has five main production sites: two in Denmark and one each in France, Germany and the US. These sites represent the core of Chr. Hansen’s business, and each site carefully monitors product safety and delivery performance to manage all potential risks. This consolidation of production allows capacity to be optimized in order to reduce production costs. To minimize the risk of production breakdowns or failures, Chr. Hansen has implemented a risk prevention program where regular audits are conducted, which ensures preventive maintenance and replacements. The Company also maintains idle capacity for key processes. As production processes are optimized and automated, dependence on robust IT systems and infrastructure increases. Chr. Hansen continues to reduce complexity in IT systems and conduct regular restore tests.
With this concentrated production setup, there is a risk of a production breakdown interrupting the Company’s operations and leading to a loss of income in both the short term and the longer term due to long lead times on the replacement of key equipment.
The causes might be contamination of production equipment, key equipment breakdown, fire, terrorism and natural disasters.
The risk and effect of a production breakdown are mitigated through maintenance, insurance, fire safety measures, behavior-based training, continuous improvements to operational processes and business continuity plans including alternative production possibilities.
Chr. Hansen continued to invest in optimizing production processes and removing bottlenecks before they occur. Implementation and upscaling of production in the new fermentation capacity installed in 2013/14 was ongoing during 2014/15. Other large projects include a new freeze-dryer installed in the Roskilde plant for human health products.
Energy, water and CO2 emission efficiency per unit produced increased by 5%, 4% and 13% respectively. With these improvements the EPI levels are back to the same level as the base year 2012/13, and further improvements will be needed to reach the targets for 2019/20.
With the new capacity up and running and other mitigation activities carried out, the risk of production disruptions is considered to have been reduced.
The majority of Chr. Hansen's products are sold to the food & beverage, human health, animal health and plant protection industries. Most products are components in customers’ end products that are consumed as food, beverages or dietary supplements.
To ensure the highest product safety, Chr. Hansen has an extensive quality assurance and food safety program covering the entire value chain, from the sourcing of raw materials until the finished products are delivered to customers. The risk assessment performed in the food safety program includes an evaluation of the use of our products in customers’ end products. Chr. Hansen’s food safety program is certified according to internationally recognized food safety standards. All production sites are FSSC 22000 certified, and central product development functions are certified according to ISO 22000.
By the end of August 2015, all 14 production sites had achieved FSSC 22000 certification, including China which received certification in 2014/15.
There were four product retrievals during the year, of which one had potential food safety implications while the remainder related to product performance. With increased efforts, including a comprehensive project to do with allergens, the risk of product safety incidents is considered to have been reduced.
Chr. Hansen has some of the best-documented probiotic strains on the market. However, governments and agencies, especially the European Food Safety Authority (EFSA ), have introduced more stringent rules and regulations for the documentation of health claims for food-related products. Chr. Hansen works continuously on improving the documentation of health claims related to the probiotic strains as well as responding to changing documentation demands from authorities.
The sale of probiotics for fermented milk products in the EU has continued to decline as a consequence of a lack of EU-approved probiotic health claims. It is likely that there will be a continued decline in the EU markets. Also in the US and Australia there has been a decline in the sale of probiotics for fermented milk. Chr. Hansen continues to discuss with agencies and governments the possibility of marketing well-documented health claims. The risk related to existing documentation is considered to be unchanged.
Chr. Hansen is a global company with a vision to improve food and health around the world. With offices in 30 countries and sales to more than 140 countries, Chr. Hansen is from time to time affected by geopolitical uncertainties and unrest. As a supplier of ingredients mainly to the food industry, Chr. Hansen is rarely directly affected by trade restrictions. Customers of Chr. Hansen are more likely to be affected by trade restrictions, and that could potentially have an adverse effect on the Company’s sales. In those instances where the Company’s products are or will be affected by sanctions, Chr. Hansen acts in full compliance with these sanctions.
Political and economic unrest in countries and regions where Chr. Hansen operates or plans to operate is constantly monitored and taken into account when making strategic decisions.
Geopolitical tensions have continued in 2015, and trade restrictions have affected trade, especially between the EU and Russia. The industry as a whole has been affected by the trade restrictions, which have led to a changed flow of products that Chr. Hansen has mitigated by leveraging its strong global market position. While the Company has not yet been directly impacted by these restrictions, such barriers to international trade may have a negative effect on opportunities for further organic growth. Political and economic unrest in certain countries has led to increased focus in these areas to protect both the business and staff. Risk related to the business environment is considered to have increased.
Chr. Hansen is a global business that operates in multiple jurisdictions with different tax rules and regulations. It is the Company’s intention always to fulfill the tax requirements in all countries where business is conducted. Chr. Hansen constantly works on creating tax awareness in the organization and has defined clear roles and responsibilities between line management, local finance and the Group Tax function. However, tax and transfer pricing disputes do arise from time to time as cross-border transactions receive increasing attention from local tax authorities.
Group Tax ensures compliance with the Group’s tax position. In cooperation with tax advisors, requests from local tax authorities are met, and a positive dialogue with local tax authorities is pursued in order to prevent disputes. The Group Tax function constantly strives to support the business activities worldwide in the best possible way.
Chr. Hansen ensured that its transfer pricing documentation is compliant with the new OECD transfer pricing guidelines and requirements. Chr. Hansen’s overall transfer pricing setup has been confirmed by international tax audits, including one concluded in 2014/15. Please refer to note 2.8 to the Consolidated Financial Statements for further information on taxes. The risk related to taxes and transfer pricing is considered to be unchanged.
A strong and protected technology platform is important for Chr. Hansen. Focus on protecting intellectual property has increased significantly in the industries in which Chr. Hansen operates. The Company has a proactive patent strategy and protects new knowledge created to support and protect its business. Chr. Hansen has more than 1,500 patents granted or pending.
Chr. Hansen filed 30 new patent applications in 2014/15, around the same level as in 2013/14. The applications were in areas such as fermentation of carmine, probiotic formulations, bioprotection and new enzyme variants. With these filings, the risk related to intellectual property rights is considered to be unchanged.
Chr. Hansen is committed to continuously improving both the physical and psychological working environment for its employees. The Company has implemented several initiatives to underline the importance of a safe working environment. Monitoring and follow-up of incidents have been strengthened from departmental level to the Executive Board. All major sites have implemented or are in the process of implementing measures to increase awareness of safe behavior and site security. There is also focus on behavior in relation to IT security due to the increased risk of cybercrime.
The lost-time incident frequency decreased from 4 per million working hours in 2013/14 to 3 in 2014/15. A project to increase the security level at all major sites has been initiated, and findings will be implemented during 2015/16. With continued focus and efforts to train employees in behavior-based safety and security, the risk of health, safety and security incidents is considered to be unchanged.
Attracting and retaining the best employees and new talents remain crucial if Chr. Hansen is to continue to excel. Human knowledge is critical to Chr. Hansen’s business, and there is a strong focus on continuously building and expanding the knowledge base by actively developing employees’ key skills. The Company employs a large number of scientists and other experts in their fields. Developing their skills and knowledge is an important part of building competencies globally. It is, however, equally essential to integrate these highly qualified employees into the day-to-day business and help them become better at converting their expertise into business value. In order to retain key personnel, a number of tools are utilized, including suitable incentive systems, education and succession planning. One priority is the next-in-line talent for top management positions.
The average number of training days per employee was 3.4 in 2014/15, compared to 3.1 in 2013/14. Employee turnover was 12%, compared to 11% in 2013/14; 8 percentage points of this was voluntary, and this is considered to be an acceptable level. Work is ongoing to further enhance talent development and leadership training. The risk related to attracting and retaining the best employees and new talents is considered to be unchanged.
As an international business, Chr. Hansen is exposed to a number of financial risks relating to currency and interest rate fluctuations, funding, liquidity, credit and counterparty risks. Please refer to note 4.2 to the Consolidated Financial Statements for further information on these risks.
Chr. Hansen is from time to time party to legal proceedings arising in the ordinary course of its business. The legal department is focused on analyzing possible risks in a timely manner and mitigating them in an appropriate way using both internal and, if needed, external capabilities. Despite the focus from Chr. Hansen on these matters, the outcome of legal proceedings cannot be predicted with certainty. Please refer to note 3.8 to the Consolidated Financial Statements for further information on legal proceedings.