Clearly defined risk fields

A prerequisite of systematic risk management is that risks are identified in a timely fashion. The central, currently identified risks to which the Haniel Group is anticipated to be exposed to over the short- and medium-term are listed below. The identified risks are assigned to ranges in terms of their probability of occurrence and amount of damage, with the amount of damage presented as a possible impact on profit per year. Risk mitigation countermeasures are incorporated before assigning risks to the ranges. By combining the two criteria – probability of occurrence and amount of damage – the individual risks are allocated to the following categories in the Haniel risk matrix: “significant risks”, “material risks” and “other risks”. The central, identified risks are presented below broken down by these categories, commencing with “significant”:

Equity interests: Haniel holds a substantial equity interest in the METRO GROUP in particular. Factors that exert an unfavourable influence on the consolidated profit of METRO AG also have a negative effect on Haniel Group’s net investment income or could have a negative effect on the carrying amount of the investment. This risk in the Haniel Group must be classified as significant due to the size of the interest in the METRO GROUP. Risks to which the METRO GROUP is exposed arise in particular from changes in consumption patterns and customer expectations of retailers, as well as increasing competitive pressure from e-commerce. If the METRO GROUP fails to react appropriately to these challenges and fails to successfully implement the transformation projects it has launched, this may have a detrimental impact on its business development. In addition, a deterioration of the macroeconomic environment and an erroneous assessment of markets for international expansion could also have a negative effect on METRO GROUP’s business. The task of managing these risks primarily falls to the management of the METRO GROUP. As the largest shareholder, Haniel supports management in managing these risks through representation on the Supervisory Board and by exercising ownership rights in the Annual General Meeting.

Corporate strategy: Corporate strategy risks can arise above all from the erroneous assessment of future developments in the market and competitive environment. Erroneous assessments can also relate to the attractiveness of new regional markets or to the future feasibility of business models overall. The Haniel Group counters this risk by conducting in-depth analyses of the markets and competitors and by holding regular strategy discussions between the Management Board of the Holding Company and the management teams of the divisions. In addition, the diversified portfolio of business fields helps to mitigate the effects of adverse developments in individual sectors. However, the high relevance of strategic decisions to success means that the related risks in the Haniel Group count among the material risks.

Business acquisitions and disposals: In order to effectively counter risks associated with corporate transactions, investments and divestitures are carefully examined before their conclusion – including the assistance of qualified external consultants – and are evaluated using uniform DCF rate of return calculation methods. An acquired company is subsequently integrated into the Haniel Group on the basis of detailed timetables and action plans as well as clearly defined responsibilities. Additionally, the success of previously executed business acquisitions is reviewed on a regular basis. If, despite all diligence, the objectives envisaged with an acquisition are not or only partially attained, impairment losses on goodwill and other assets may be necessary. In the case of business disposals, the resulting commitments remaining in the Group are regularly monitored and assessed. In connection with the disposal of the previous Xella division, this also includes claims asserted in litigation arising from allegedly defective sand-lime bricks from previous Haniel building materials plants. The risks resulting from business acquisitions and disposals are material risks due to the high significance of portfolio management in the Haniel Group and the inherently related imponderables.

Overall economic development: The demand for the divisions’ services and products is also influenced by overall economic developments. However, the extent and timing of this dependency varies in the divisions: While a weakening economy directly impairs business development at Bekaert Textiles, ELG and TAKKT, at CWS-boco it is felt to a comparatively lesser extent and after a delay. This is due to the long-term nature of the contracts with customers in CWS-boco’s core rental business. Overall economic development represents a material risk even though the diversification of the Haniel business portfolio and its presence in various regions mitigates the effects of economic fluctuations. The strong market position of the individual divisions, comprehensive product and service offerings, a heterogeneous customer base and flexible capacities and cost structures also mitigate risks.

Human Resources: The corporate success of the Haniel Group is dependent largely on the expertise and commitment of its employees. Executives must exhibit the necessary competence, experience and personality in order to make and implement correct decisions in the sense of a value-driven and long-term development of their departments. Accordingly, the selection of executives who do not meet these requirements and who make poor decisions can noticeably impair the Company’s successful development. That is why the Haniel Group strives to recruit qualified staff, to provide them with continuing education and to foster their long-term loyalty to the Company. To that end the Haniel Group offers attractive compensation models and conducts regular succession planning aimed at filling jobs which become available with qualified internal candidates. But above all, the Haniel Group invests in the continuing education of its employees: The internal Haniel Academy offers specialists and managers from the Group seminars and modular programmes for interdisciplinary continuing education and to strengthen their leadership skills. The programmes in the Haniel Leadership Curriculum prepare emerging management talent, experienced executives and top managers for future challenges and management tasks. You can find detailed information on training and continuing education in the Haniel Group in the “Corporate Responsibility” section. Overall, risks from Human Resources are deemed to be material.

Information technology: Well-functioning IT systems tailored to strategy represent a necessary precondition for Haniel Group’s operating activities and administrative departments. Insufficient customisability of IT systems may entail significant competitive disadvantages when strategic requirements change. Haniel Holding and the divisions therefore review their IT strategy regularly and modernise or replace systems if required. In order to counter risks that are inextricably linked with such projects, systematic and substantiated selection processes and modern project management methods are applied when introducing new IT systems. Furthermore, the ongoing use of IT systems entails the risk of an outage and the risk of unauthorised data access or manipulation. In addition to heightened security awareness of employees, professionally organised IT operations prevent such risks from materialising. There are uniform minimum standards throughout the Group for IT operations. In compliance with these standards, Haniel Holding and the divisions have additional emergency systems available, perform regular backups of relevant data and ensure that unauthorised persons cannot access IT systems. Overall, the risks resulting from information technology in the Haniel Group are considered material.

Commodity prices: The ELG division’s performance is considerably influenced by the price trend for commodities – particularly for nickel, which is in turn affected by economic developments in the industry. Price hedges using derivative financial instruments stabilise business development at ELG, as does the broad geographic distribution of commodity flows in both procurement and distribution. Nevertheless, fluctuations in commodity prices remain a material risk due to the business model.

Receivables: Given the nature of the sector in which it operates, ELG in particular delivers its products to a small number of very large customers. In some instances this can lead to extensive receivables per customer. In order to limit the risks resulting from non-payment, ELG has a comprehensive receivables management system, systematically obtains default insurance to cover this risk where possible and sells accounts receivables within the context of forfaiting programmes. Even after factoring in these countermeasures, the default on receivables represents a material risk.

Exchange rates: Because the Haniel Group has business activities of a considerable scope in countries that do not use the euro as the local currency, its operating business and financing transactions are subject to exchange rate fluctuations, which could have a negative impact on the Haniel Group’s profit. On the one hand, this concerns transaction risks that arise primarily from earning revenue and incurring the accompanying costs in different currencies. On the other hand, there are translation risks that stem from translating income and expenses in other currencies into euros. While translation risks are generally not hedged against exchange rate fluctuations, the Group uses a variety of hedging instruments to limit transaction risks. These are explained in detail in the notes to the consolidated financial statements. In the Haniel Group, exchange rate risks are among the material risks, in particular with regard to the unhedged translation risks.

Interest rates and financing: Changes in interest rates can result in higher financing costs and thus have an adverse effect on profits. In this regard, changes in the market interest rate must be differentiated from the change in the margin that must be paid in addition to the market rate. The Group uses a variety of hedging instruments to limit the risks from fluctuations in market interest rates. These are explained in detail in the notes to the consolidated financial statements. Long-term credit agreements, promissory loan notes and bonds are appropriate forms of financing for limiting the volatility of interest margins. In the case of such financing, the interest margin also depends on the Holding Company’s rating. This is based on the market value gearing, that is, the ratio between net financial liabilities and the market value of the investment portfolio as well as the cash flow at the Holding Company level. In addition, the number and weight of the individual equity investments in the Haniel investment portfolio influence the rating.

Financing requirements for the operating business are secured in the Haniel Group through equity and debt capital. When outside financing is used, the Company seeks to diversify its financing instruments and its circle of investors in order to be able to respond flexibly to developments on the capital markets and in the banking sector. In addition to committed bilateral lines of credit, which are drawn upon only to a limited extent, capital market programmes at the Holding Company, such as the Debt Issuance Programme, are updated regularly. When financing with borrowed capital, it is of benefit that the Holding Company and its divisions, both as established and reliable partners, enjoy a high degree of trust from banks and other investors. The Haniel Group is thus able to ensure the continuation of the operating business, even if for example economic conditions cause declines in incoming payments from business activities.

Regarding the temporary investment of financial resources following the disposal of the Celesio division in 2014, there is, in principle, a risk that a counterparty will become insolvent and hence a risk of a loss of receivables. To counter that risk, Haniel divides the investments among a large number of contracting parties and sets limits corresponding to their creditworthiness. This is documented in the guidelines for the investment of financial resources and is regularly monitored.

In the Haniel Group, risks from interest rates and financing are currently of comparatively minor significance and thus counted among the other risks.

Compliance: The Haniel Group’s business activities are subject to statutory and internal corporate rules and regulations. A failure to comply with these rules and regulations may damage the Company’s reputation and may jeopardise its economic success. In order to prevent compliance risks effectively, the Haniel Group has established a comprehensive compliance management system. For this reason compliance risks are classified as other risks.

Litigation: Neither Franz Haniel & Cie. GmbH nor any of its current subsidiaries are involved in ongoing or currently foreseeable litigation that could have a significant impact on the Group’s assets or financial position or results.