Discussion of notes

Risk management

As an innovative and ambitious global company, effective risk management underpins Marel's continued growth and our position as an industry leader.

An active approach to risk management

Marel has a strong track record of growth. Detailed, holistic risk practices are the key to Marel’s sustainability and long-term relationships with customers and stakeholders. The risk management process is supported and monitored by the Board of Directors. As part of the steady expansion of its enterprise risk management process, Marel has launched a number of initiatives throughout the company.

 

Each initiative will contribute to achieving the company’s objectives with regard to efficacy and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations.

Risk appetite

All business operations involve some form of risk. Marel has identified ten Risk Appetite Categories and defined how they relate to its strategic operations.

The Board of Directors reviews and approves the company’s risk appetite on an annual basis, or more frequently in the event of unexpected changes to the risk environment, to ensure it remains consistent with Marel’s strategy, business and regulatory environment and stakeholder requirements. Reports on the company’s risk profile and risk appetite are presented regularly to the Board of Directors.

Taking risks is an integral part of daily business activities. By carefully balancing our objectives against the risks we are prepared to take, we strive to conduct business operations in a socially responsible and sustainable manner. This approach helps Marel attain its strategic objectives.

Risk management process

Marel has a vigorous risk management process which consists of 5 steps:

  1. Risk appetite sets out the amount of risk the company is willing to accept in pursuit of value.
  2. Risk assessment involves mechanisms for identification of risks, e.g. a brainstorming session to assess risk and controls. Risks are ranked by the likelihood of their occurrence and magnitude of their impact in a risk register.
  3. Risk treatment is the process of selecting and implementing measures to minimize the probability of identified risks materializing and alleviate their potential effects.
  4. Monitoring is done through dashboard reporting and updating of the self-assessment document.
  5. Communication of priority risks to the Board is made via a designated dashboard. Predetermined parameters are measured against the risk appetite to give a clear visual overview.

Risk categories

Marel’s activities expose the company to a variety of risks, which are categorized in four categories: Strategic, Operational, Financial Reporting and Compliance.

Risk Categories

Sub-categories

Each category has sub-categories that can be defined broadly as follows

STRATEGIC RISK Risks that affect Marel's strategic ambitions, including economic and political developments   FINANCIAL REPORTING RISK Risk related to treasury and accounting, including finance, market and credit risk
 
BUSINESS RISK Risks related to customers, competition, government policy etc.   MARKET RISK Risk related to financial markets, including FX and interest rate risks
 
REPUTATIONAL RISK Risks of damage to Marel's brand and reputation, resulting from actions that could be perceived as inappropriate, unethical or incosistent with Marel's values   CREDIT RISK Risk that relates to credit quality of our customers and other business partners
 
OPERATIONAL RISK Risk related to inadequate internal processes, people and systems   COMPLIANCE RISK Risk arising from failure to comply with lows and regulations, including internal standards and policies

 

Marel’s risk management has focused especially on financial risks (including market and credit risk), which are managed by the Treasury department.

Market risk

Market risk is the risk related to financial markets, including foreign exchange risk, cash flow and fair value interest rate risk.

Foreign exchange risk

As an international company, Marel is exposed to foreign exchange risk arising from various currency movements, primarily with respect to the EUR/USD exchange rate for revenues and EUR/ISK rate on the cost side.The general policy is to take advantage of natural currency hedges by matching revenues and operational costs as economically as possible.

The company’s funding is denominated in its main operational currencies to create natural hedging in the balance sheet. Where necessary, financial exposure is hedged in accordance with Marel’s general policy on permitted instruments and exposure limits.

Cash flow and fair-value interest rate risk

The company’s income and operating cash flows are substantially independent of changes in market interest rates.

The interest rates of financial leases, where the company is lessor or lessee, are fixed at their inception. These leases expose the company to fair-value interest rate risk. The company reports separately an embedded 0% floor in its long-term EUR borrowing. The valuation of this embedded derivative depends on market interest rates and is reported in the income statement. The company’s cash-flow interest rate risk arises from long-term borrowings.

Borrowings at variable rates expose the company to cash-flow interest rate risk, while borrowings at fixed rates expose it to fair-value interest rate risk. Marel manages its cash-flow interest rate risk by using floating-to-fixed interest rate swaps.

Such interest rate swaps have the economic effect of converting floating-rate financing to fixed rates. The company obtains long-term financing at floating rates and swaps a portion of this to fixed rates. The risk involved, measured as the potential increase in interest paid during the coming year based on a defined movement in interest rates, is monitored and evaluated regularly.

Credit risk

Marel minimizes credit risk by closely monitoring credit granted to customers and by obtaining security to cover potential losses.The company has policies in place to ensure that sales of products and services are made to customers with an acceptable credit history and that products are not delivered until payments are secured.

Marel does its banking with a diversified set of financial institutions around the world. Policies are in place to limit the amount of credit exposure to any one financial institution.

Liquidity risk

Due to the dynamic nature of its underlying businesses, the company has prudent liquidity risk management to ensure sufficient flexibility of funding under the revolving part of facilities agreements and by maintaining sufficient current financial assets.

Insurance policies

The company maintains both global and local insurance policies. Coverage includes property damage, business interruption, general and product liability, marine cargo/mounting, directors’ and officers’ liability, employers’ practice liability, business travel, and accidents. The company believes its current insurance coverage to be adequate.

You may also be interested in