Annual report 2017
Effective risk management is the key to Marel’s sustainability and underpins the company’s long term relationship with its customers and other stakeholders. All risk management within the company is implemented through, and approved 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.
All business operations involve risk. Risk appetite expresses the aggregate level of risk that Marel is willing to assume in order to achieve its business objectives, as defined by a set of minimum quantitative metrics and qualitative statements.
The Board of Directors approves the risk appetite and reviews this 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 relating to our risk profile and risk appetite are presented regularly to the Board of Directors.
Marel has a vigorous risk management process which consists of 5 steps:
Risk appetite sets out the amount of risk the company is willing to accept in pursuit of value.
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 self-assessment document.
Risk treatment is the process of selecting and implementing measures to minimize the probability of identified risks materialising and alleviate their potential effects.
Monitoring is done through dashboard reporting and updating of the self-assessment document.
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.
Marel’s activities expose the company to a variety of risks, which are categorized in four categories: Strategic, Operational, Financial Reporting and Compliance.
Each category has sub-categories that can be defined broadly as follows:
Marel’s risk management has focused especially on financial risks (including market and credit risk), which are managed by the Treasury department.
As an international company, Marel is exposed to foreign exchange risk arising from various currency movements, primarily with respect to EUR/USD on revenues and EUR/ISK on the cost side. The general policy is to take advantage of natural currency hedges by matching revenues and operational costs as economically 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.
The company’s income and operating cash flows are substantially independent of changes in market interest rates. The interest rates of financial leases, to which 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 is dependent on market interest and is reported in the income statement. The company’s cash-flow interest rate risk arises from long-term borrowings.
Borrowings issued at variable rates expose the company to cash-flow interest rate risk, while borrowings issued 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 raises long-term borrowings at floating rates and swaps a portion of them into 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.
Marel minimizes credit risk by 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.
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.
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.