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Risk

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 that follows an annual schedule. 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 take a proactive approach to adapting business processes and controls to meet, manage or mitigate these risks, or to prevent any increase in the current level of exposure. 

Identified risks are evaluated based on their possible safety, business, reputational or 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 these where necessary.

As part of the NATURE’S NO. 1 strategy update, the key risks were categorized into five categories where the mitigating actions are of a similar nature, to further ensure a high-quality and consistent approach in the risk management process. The categories are:

  • Products
  • Technology
  • Customers & consumers
  • Partners
  • Markets

Chr. Hansen continues to work on identifying and evaluating relevant risks, and the list does not include all the risks that could ultimately affect the Company.

Products

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In order continuously to deliver high-quality products while growing the business, Chr. Hansen is focused on improving process standards of all aspects relating to the production 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. 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 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 preventive maintenance and replacements.

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.

This concentrated production setup entails the risk of a production breakdown interrupting the Company’s operations and leading to a 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 effect of a production breakdown are mitigated through maintenance, fire safety measures, behavior-based training, continuous improvements to operational processes, insurance and business continuity plans, including alternative production possibilities.

Developments in 2015/16
Chr. Hansen has successfully implemented and upscaled production in the new fermentation capacity installed in the Copenhagen factory in August 2014. 

The increased utilization of new fermentation capacity means that production bottlenecks in other parts of the production process are now imminent. To mitigate this, Chr. Hansen has initiated the next expansion phase of capacity in Copenhagen, which is expected to be inaugurated in the autumn 2017. 

Significant volume growth in human health in recent years means that utilization of the existing facilities has reached a very high level. Installation of a new fermentation line has been initiated. 

Additional freeze-dryers have been installed, making Chr. Hansen less dependent on external providers for this critical production step.

The environmental footprint from Chr. Hansen’s production improved in 2015/16 in terms of energy and CO2 efficiency by 2% and 5% respectively, while water consumption was on par with 2014/15. 

The capacity bottleneck in the production of cultures and the inherent risk of expanding capacity next to ongoing production mean the production risk is considered to have temporarily increased slightly.

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 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.

Developments in 2015/16
There were three product retrievals in 2015/16, compared to four in 2014/15. In all cases, the retrievals were carried out as a precautionary measure due to identification of a potential risk and not as a result of an actual confirmed safety risk related to the product.

A major FDA Dietary Supplements inspection at the human health sites in Denmark was passed without observations over six days of inspection in January 2016. The risk related to product safety is considered 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 have been raised 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. Focus has also been sharpened on behavior in relation to IT security due to the increased risk of cybercrime. 

Developments in 2015/16
Chr. Hansen intensified its focus on health and safety in 2015/16. A global Health and Safety Organization was established, working to build a safety mindset across the entire Company and share best practice to prevent incidents from happening. 

In 2015/16, the Lost Time Incident Frequency (LTIF) increased from 3.3 to 4.0. The main reason for this was an improved global awareness of when and how to report incidents and injuries as a consequence of the ongoing work to improve the focus on safety in Chr. Hansen. The risk of health, safety and security incidents is considered unchanged.

Technology

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The increased technical complexity of new solutions demands a growing number of highly skilled employees not only in research & development but also in sales & marketing to ensure that continued innovation is introduced 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 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. Equally essential, however, are integrating these highly qualified employees into the day-to-day business and helping them become better at converting their expertise into business value. A number of tools are utilized to retain key personnel, including appropriate incentive systems, education and succession planning.

In 2015/16, Chr. Hansen decided to transition from the previously biennial employee satisfaction survey to an annual employee engagement survey. Employee engagement is a better measure of the employees’ desire to perform, be productive and have an emotional connection to their workplace. These are strong drivers of overall business performance. The average score was 3.8 out of 5.0, showing clear strengths to build on as well as areas needing improvement.

Developments in 2015/16 
The average number of training days per employee was 3.4 in 2015/16, unchanged from 2014/15. Employee turnover was 10%, compared to 12% in 2014/15, which is considered an acceptable level. During 2015/16, the average number of full-time employees increased by 135, partly due to 50 employees joining as part of the acquisition of NPC. Work is ongoing, particularly to integrate these new employees in the organization and to further enhance talent development and leadership training. In addition, new retention programs for specific core employee groups have been implemented. The risk related to attracting and retaining the best employees and new talents is considered unchanged.

Intellectual property rights
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 close to 2,000 patents granted or pending.

Developments in 2015/16 
Chr. Hansen filed 37 new patent applications in 2015/16, compared to 30 in 2014/15. New applications were filed in almost all our business areas. Thanks to these filings, the risk related to intellectual property rights is considered unchanged.

Customer & consumers

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Chr. Hansen is highly dependent on delivering relevant and value-creating solutions to its customers and to the end consumers. The Company depends on close relationships with customers and a strong understanding of consumers and regional taste preferences. To ensure this, direct sales representation is established 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 2015/16
In connection with the NATURE’S NO. 1 strategy review, a study examining long-term structural trends in food and health was conducted. The study confirmed dairy as an essential and healthy food category for consumers and one with a stable outlook. The risk related to customers and consumers is considered unchanged.

Partners

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

Existing partnerships are also monitored to ensure a continued high standard. Chr. Hansen has various kinds of partnerships, including large farmers producing raw materials for natural colors, production and packaging partners, universities and biotech companies in the human microbiome space, and FMC Corporation in plant health.

Developments in 2015/16
During 2015/16, Chr. Hansen entered into its first partnerships within the human microbiome and continued to build a position in plant health together with FMC Corporation. The risk related to partners is considered unchanged.

Markets

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Competing globally and having an increasing share of revenue in emerging markets can add 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 in due time.

Business environment
With offices in more than 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, which 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. 

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

Developments in 2015/16
Macroeconomic and political tension in many countries has led to increased uncertainty associated with doing business in certain regions. While the impact on the short term is minimal for Chr. Hansen, the long-term impact is more uncertain. The risk related to the business environment is considered to have increased.

Documentation
Chr. Hansen has some of the best-documented probiotic strains on the market and works continuously to improve the documentation of health claims related to the probiotic strains as well as to respond to changing documentation requirements from authorities.

Developments in 2015/16
Chr. Hansen continues to work on better clinical data supporting the health claims of existing and new strains in specific settings. The Company has adopted a new approach to these studies, which is in line with EFSA’s new guidelines on the subject, such that the effect is now evaluated on the basis of quantifiable responses in biomarkers and not subjective outcome measures such as questionnaires.

In September 2016, Chr. Hansen acquired the rights to LGG®, the world’s best-documented probiotic strain, which it previously produced under a license agreement. Complete control of LGG® further strengthens the Company’s position as a leading player within documented probiotic strains. The risk related to documentation is 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 countries where business is conducted. Chr. Hansen works constantly 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 receive increasing 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 a positive dialogue with local tax authorities is pursued to prevent disputes. The Group Tax function constantly strives to support business activities worldwide in the best possible way.

Developments in 2015/16
During 2015/16, Chr. Hansen ensured that its transfer pricing documentation is compliant with the OECD transfer pricing guidelines and requirements. Chr. Hansen’s overall transfer pricing setup has been confirmed by international tax audits, including one concluded in 2015/16. Please refer to note 2.8 to the Consolidated Financial Statements for further information on taxes.

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