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Risk

Enterprise Risk Management is an integral part of doing business at Chr. Hansen. The objective of enterprise risk management is to support the achievement of the Natures no. 1 strategy objectives, while managing risks appropriately. 

In 2017/18, Chr. Hansen adopted an enterprise risk management position stipulating how the Company works with enterprise risk as a concept and how this is integrated into Chr. Hansen’s business processes. To execute risk management, supporting the Nature’s no. 1 strategy requires a shared understanding of the key risks and the overall level of risk exposure. For that purpose, Chr. Hansen has defined risk appetite and risk tolerance levels for relevant risk areas. 

Enterprise risk management at Chr. Hansen is a structured, consistent and continuous approach to managing risk exposure and covers all types of risk across the organization. 

Relevant risks are identified, monitored and reported to the Executive Board and the Board of Directors as per the enterprise risk governance structure. Identified risks are presented to and discussed by Management several times during the year. The purpose of this process is to ensure focus on current risks and to identify risks as early as possible, enabling Management to take a proactive approach to adapting business processes and controls to meet, manage or mitigate such risks, or to prevent any increase in the current level of exposure. 

Identified risks are evaluated on the basis of their potential impact on a number of criteria, including safety, business, reputational and financial impact, and the likelihood of the risk materializing. Clear roles and responsibilities are assigned in relation to 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 such risks where necessary.

To further ensure a high-quality and consistent approach in the risk management process, the key risks have been divided into five categories, each with mitigating activities of a similar nature. These categories are:

  • Products

  • Technology

  • Customers & consumers

  • Partners

  • Markets

The Executive Board and the Board of Directors maintain a strong focus on the Enterprise Risk Management process in order to ensure that risk management is an integral part of decision-making processes. 

The following list of risks that could ultimately affect the Company is not exhaustive. 

 

Products

In order to continue delivering high-quality products while also growing the business, Chr. Hansen is focused on improving process standards for all aspects relating to the manufacture of its products. This includes long-term planning of the production footprint to minimize the risks of a consolidated production setup, strong focus on quality and purity to meet the highest food safety standards and ensuring a safe working environment.

Production footprint

Chr. Hansen has five main production sites: two in Denmark and one each in France, Germany and the US. Each site carefully monitors product safety and delivery performance to manage all potential risks. This consolidation of production allows capacity to be optimized and thereby to reduce production costs. To minimize the risk of production breakdowns or failures, Chr. Hansen has implemented a risk prevention program of regular audits, which ensures that preventive maintenance is performed, and replacements made. 

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, as well as improving cyber security and contingency plans.

This concentrated production setup entails the risk of a production breakdown interrupting the Company’s operations and leading to loss of income in both the short and long term due to long lead times for the replacement of key equipment. The causes might be contamination of production equipment, key equipment breakdown, fire, terrorism or natural disasters. 

The risk and impact of a production breakdown are mitigated through inventory policies, maintenance, fire safety measures, behavior-based training, continuous improvements to operational processes, insurance and business continuity plans, including alternative production possibilities.

DEVELOPMENTS IN 2017/18

With the capacity expansion project at the Copenhagen facility complete, Chr. Hansen has doubled its fermentation capacity. In addition, to gain flexibility of supply, in case of a breakdown, the asset utilization of certain critical production processes has been reduced. 

To cope with the volume growth in Human Health, a new fermentation line at the Roskilde, Denmark site is expected to become operational at the end of the 2018 calendar year. Due to the constant increase within the Human Health domain, capacity utilization at the existing facilities had become extremely high. The additional fermentation line will reduce the risk of supply issues due to a potential breakdown of critical equipment. 

To meet the expectations of growing demand for natural colors in North America, Chr. Hansen is expanding the production capacity and adding new capabilities in North America. Hence, Chr. Hansen acquired the Banker Wire manufacturing facility in Mukwonago, Wisconsin. 

Additional freeze dryer packaging capacity is being built on-site at the Copenhagen facility. The objective is three-fold. Firstly, it will almost double Chr. Hansen’s capacity, supporting growth volumes in both enzymes and Human Health, secondly, for compliance reasons, and thirdly, to insource processes that were previously outsourced. 

Throughout the year, focus has been on strengthening business continuity plans. It is essential that there is an alignment at supply chain level and a clear understanding between sites of how to transfer production should an irregularity occur. All relevant employees are to be trained in the execution of these plans. 

These initiatives have reduced the risk of capacity breakdowns significantly.

The rate of recycled solid waste increased to 42% in 2017/18. A number of sites completed minor waste projects that combined for most of the overall improvement. The energy efficiency rate improved to 9%. Major projects focusing on the energy-efficient use of process and utility equipment were initiated in France, Italy, Germany and the US. Water efficiency increased to 6% in 2017/18 and was mainly due to water preservation projects in Brazil and Peru. 

Product safety
The majority of Chr. Hansen's products are sold to the food & beverage, Human Health, Animal Health and Plant Health industries. Most products are components in customers’ end products that are consumed as food, beverages or dietary supplements.

To ensure the highest level of product safety, Chr. Hansen maintains 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 as part of the food safety program includes an evaluation of the use of our products in customer end products. Chr. Hansen’s food safety program is certified to internationally recognized food safety standards. All production sites are FSSC 22000 certified, and central product development functions are certified to ISO 22000.

DEVELOPMENTS IN 2017/18
There were two product retrievals in 2017/18, compared with two in 2016/17 and three in 2015/16. A retrieval constitutes a situation, where a Chr. Hansen product has been withdrawn but there has not been a regulatory requirement to remove the product. The latter situation is generally referred to as a recall. 

All inspections by authorities during the year were concluded satisfactorily. The risk related to product safety is considered to be unchanged. 

Health, safety and security
Chr. Hansen is committed to continuously improving both the physical and psychosocial 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 take place at both departmental and Executive Board level. All major sites have implemented measures to increase awareness of safe behavior and site security. 

Cyber security is a strategic focus area for Chr. Hansen given the increasing risk of cybercrime incidents. 

DEVELOPMENTS IN 2017/18
The creation of a global Health and Safety Organization has sharpened focus on establishing a zero-accident mindset across the organization, so all employees can work safely, with clear instructions on how to minimize accidents at work. This has resulted in Chr. Hansen’s best-ever health and safety performance. The Lost-Time Incident Frequency (LTIF) decreased from 4.0 in 2015/16 to 2.5 in 2016/17 and to 2.46 in 2017/18, keeping Chr. Hansen on track to achieve the target of ≤1.8 in 2022. The main reasons for the positive results are a combination of a high level of Management attention, global safety assessments, global minimum requirements and the launch of new behavior-based safety tools.

As noted above, cyber security is a strategic focus area and several activities have been launched. Chr. Hansen arranged for an external assessment of the cyber security activities and organization. 

Additional resources have been dedicated to IT security, ensuring that Chr. Hansen is proactive in preventing potential cybercrime incidents. Initiatives include an upgraded IT platform and an enhanced disaster recovery organization. The General Data Protection Regulation (GDPR) has also had a high impact on Global IT procedures and systems. IT Security ensured alignment of IT Security guidelines and adequate compliance with GDPR. 

The overall risk of health, safety and security incidents is considered to be unchanged, as the risk related to health and safety has decreased, while the risk related to cybercrime has increased.

Technology

The increased technical complexity of new solutions requires a growing number of highly skilled employees, not only in research & development but also in sales & marketing, to ensure a continued flow of innovation to both existing and new markets. To continue to deliver relevant innovation to customers and navigate the complex patent landscape, it is paramount that Chr. Hansen continues to attract the best resources.

Human capital
Attracting and retaining the best employees and new talent remains 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. Equally essential, however, is integrating these highly qualified employees into the day-to-day business and helping them become better at converting their expertise into business value. Chr. Hansen applies a number of tools to retain key personnel, including appropriate incentive systems, education and succession planning. A program focusing specifically on Core Scientists has been implemented.

DEVELOPMENTS IN 2017/18 
Chr. Hansen continues to generate significant growth which places an increased demand on our Human Capital Resource Management. Retention of staff, onboarding of new people and ensuring a culture match between new people and our organizational values are three essential challenges which are being addressed explicitly. 

Employee turnover was 12%, which was similar to the 2016/17 rate. In 2017/18, the average number of full-time employees increased by 211. The risk related to attracting and retaining the best employees and new talents is considered to be unchanged. 

High employee engagement is key to Chr. Hansen’s future business success. The results of the 2018 Engagement Matters survey showed strong progress. For the second straight year, Chr. Hansen outperformed Gallup’s benchmark in terms of increasing the score. Progress was seen across all the questions, though some more than others

The risk has slightly increased, being reflected in the importance of an optimal onboarding of new employees 

Intellectual property rights
A strong and protected technology platform is important for Chr. Hansen. The need to protect intellectual property is increasing. The Company has a proactive patent strategy and protects new knowledge created to support and protect its business. Chr. Hansen has more than 2,000 patents granted or pending.

DEVELOPMENTS IN 2017/18 
Chr. Hansen filed 26 new patent applications in 2017/18, compared to 27 in 2016/17. New applications were filed in all business areas. The risk related to intellectual property rights is considered to be unchanged. 

 

Customer & consumers

Chr. Hansen is highly dependent on delivering relevant and value-creating solutions to customers and end consumers. Relying on close relationships with customers and a strong understanding of consumers and regional taste preferences, the Company has established direct sales representation in all major markets.
The strong focus on customer intimacy often leads to long-term and strategic relationships that yield increased visibility. In general, Chr. Hansen becomes less dependent on individual customers as local and regional players take share from larger players. However, certain individual customers grow in importance, and if the Company fails to deliver on e.g. innovation or quality, the potential downside of losing strategic customers increases. Chr. Hansen monitors its customer dependency across business areas to understand potential vulnerabilities and to initiate mitigating activities.

DEVELOPMENTS IN 2017/18
Chr. Hansen finalized a digitalization strategy intended to ensure that the Company embraces new digital technologies in order to, among other things, add more value to our customers across different touchpoints.

Chr. Hansen has a structured process to measure customer satisfaction. The results for 2017/18 confirms a continuous strong and loyal partnership with our customers across geographies. 

Chr. Hansen continues to see incremental growth opportunities across segments, which is reconfirmed by a recent update of our market plans.

The risk related to customers and consumers is considered to be unchanged.

 

Partners

In some parts of its business, Chr. Hansen relies on partners to handle key areas where the Company does not possess the required key competencies. To ensure that such partners live up to Chr. Hansen’s standards, diligent evaluation of fit is performed when engaging with new partners. 

Existing partnerships are also monitored in order to maintain high standards. Chr. Hansen has various kinds of partnerships, including large farmers producing raw materials for natural colors, production and packaging partners, and FMC Corporation in Plant Health.

DEVELOPMENTS IN 2017/18
Chr. Hansen amended and extended the collaboration with FMC Corporation on Plant Health product development and commercialization. 

Within the Microbiome area, Chr. Hansen partnered with Prota Therapeutics, the developer of oral immunotherapies to treat food allergies. This partnership will assess the world’s best documented probiotic strain, LGG®, in a Phase III clinical trial to develop a potential treatment for peanut allergy.

 

Markets

Competing globally and generating an increasing share of our revenue in emerging markets can cause uncertainty and obstacles in certain markets, which can impact both revenue and profitability. Examples are changes in the competitive landscape, limited or no access to markets due to sanctions, fluctuations in currencies and raw material prices, and regulatory changes. Close surveillance of the markets in which the Company operates is important in order to take any necessary mitigating actions on a timely basis.

Business environment
With offices in more than 30 countries and sales to more than 140 countries, Chr. Hansen may from time to time be 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, which could potentially have an adverse effect on the Company’s sales. Chr. Hansen acts in full compliance with any imposed product-related sanctions.

Political and economic unrest in countries and regions where Chr. Hansen operates or plans to operate is monitored continually and taken into account when strategic decisions are made.

DEVELOPMENTS IN 2017/18
The current economic environment has become more volatile than was the case the last year. The level of volatility depends very much on any political intervention. The political instability in some regions and the risk of trade disputes have increased the uncertainty related to the future business environment. 

Documentation
Chr. Hansen has some of the most extensively documented probiotic strains on the market and works continuously to improve the documentation of health claims related to these probiotic strains and to respond to changing documentation requirements from authorities. 

The Company’s approach to the underlying studies is in line with EFSA’s guidelines on the subject, meaning that the effect is evaluated on the basis of quantifiable responses in biomarkers in scientifically valid tests.

DEVELOPMENTS IN 2017/18
Chr. Hansen continues to work to produce better clinical data to support the health claims of existing and new strains in specific settings. 

The acquisition of LGG® has further strengthened Chr. Hansen’s leading position within documented probiotic strains. The risk related to documentation is therefore considered to have decreased.

Direct and indirect taxes and transfer pricing
Chr. Hansen is a global business operating in multiple jurisdictions with different tax rules and regulations. It is the Company’s intention always to fulfill the tax requirements in all the countries where business is conducted. Chr. Hansen works consistently to create 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 increasingly receive attention from local tax authorities. 

Chr. Hansen’s Group Tax function ensures compliance with the Group’s tax position. Enquiries from local tax authorities are addressed in cooperation with tax advisors, and the Company pursues a constructive and open dialogue with local tax authorities to prevent disputes. The Group Tax function constantly strives to support business activities worldwide in the best possible way.

As a global business, Chr. Hansen is affected by tax legislation in many countries. Changes to tax legislation in one country may have a positive or negative impact on the Group’s tax expenses.

DEVELOPMENTS IN 2017/18.
Chr. Hansen has continued the work to ensure that its transfer pricing setup and transfer pricing documentation comply with all OECD transfer pricing guidelines and meet all local requirements. Chr. Hansen’s transfer pricing setup has been confirmed in various tax audits and advance pricing agreement negotiations in recent years, including in one tax audit in 2017/18. Hence, the transfer pricing risk was reduced.
 
Chr. Hansen also continued the work on managing the corporate income- and indirect tax risks, but both increased in various countries where Chr. Hansen operates. While the short-term impact is minimal for Chr. Hansen, the long-term impact is more uncertain.

The aggregate risk related to taxes and transfer pricing is considered unchanged.

Legal risk 
From time to time, Chr. Hansen is party to legal disputes 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 disputes cannot be predicted with certainty.

DEVELOPMENTS IN 2017/18
During 2017/18, Chr. Hansen was summoned in nine diacetyl-related litigations relating to the period when products containing diacetyl were produced in the Company’s former flavor business. Two of these nine new litigations are settled.
In addition, Chr. Hansen has initiated one case as claimant in relation to the diacetyl matter. Chr. Hansen has insurance cover for potential losses on these claims. Please refer to note 3.8 to the Consolidated Financial Statements for further information on legal disputes.

Financial risk
Being a global growth company, Chr. Hansen is exposed to a number of financial risks, such as currency risk, liquidity risk, interest rate risk, credit risk and risks connected to funding.

Chr. Hansen has policies and procedures in place which address each type of financial risk and the company is working consistently to manage and mitigate any kind of financial risk.

Currency risk is an important financial risk for Chr. Hansen, impacting both the income statement and the balance sheet. Sales are mainly denominated in EUR, which is not considered to constitute a currency risk due to Denmark’s peg to the euro. Sales in USD and AUD involve a particular foreign exchange exposure to these two currencies but there is risk towards several currencies from balances and sale activities. Currency risk is to some extent naturally hedged by the loan portfolio while also partly hedged by way of FX derivatives.

DEVELOPMENTS IN 2017/18
In 2017/18, Chr. Hansen extended its EUR 700 million Revolving Credit Facility by one year to now expire in August 2023. This change was made to benefit from the low funding costs and to stabilize and minimize new funding risk over the coming years. The long-term capital structure remains leveraged at just below 2 for an optimal relationship between liquidity and funding costs.

Interest rate risk applies to Chr. Hansen’s debt portfolio, as part of the loans carry a fixed rate of interest, while other loans carry a floating rate and are hedged by way of interest rate swaps. In 2017/18, Chr. Hansen converted a DKK 371 million floating rate loan into a fixed rate loan and set up a number of interest rate swaps to secure low funding costs and hedge against higher interest rates.

Liquidity risk is considered low as Chr. Hansen generates healthy cash flows and has relatively easy access to capital markets.

To manage credit risk on financial counterparts, Chr. Hansen as a general rule cooperates only with financial counterparts with a satisfactory credit rating from Moody’s, S&P or Fitch and applies a credit maximum on all financial counterparts.

See note 4.2 to the Consolidated Financial Statement for further information on these risks.

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