Risk management is part of Aspo’s internal control. The target of risk management is to ensure the fulfilment of Group strategy, development of financial result, shareholder value, dividend payment capability and business continuity. The business unit management has the responsibility for risk management. The business unit management defines the necessary actions, ensures their realization and evaluates the actions as a part of their normal operations guidance. The Group CFO coordinates the risk management and reports to the Group CEO.
Each business area has a separate risk management program and a corresponding business continuity plan. Business risks and their management are dealt with in the executive teams of the business units. The functions common to the whole Group will attend that sufficient risk assessment and reporting procedures are incorporated into the processes they are responsible for. For certain risks, the risk management principles and key contents are defined in Group level policies and instructions. The Group management is responsible for the Group level insurance policies.
The risk management is essentially based on the aforementioned procedures of internal controls, where the chain of responsibility is extended throughout the Group. The most important factors in business risk management are a profound understanding of the business and command of the tools, which are used for daily business operations and their controlling. Characteristic risks to each business area are identified in the business units, assessed in the business unit management teams, and reported to the executive teams and, if need be, also to the Aspo Board of Directors, responsible for the tasks of the inspection board. The Group CEO acts as the chairman of the Boards of Group companies.
Risks are continuously assessed and their managing is discussed in the business unit executive teams. Risk assessments are updated according to the Aspo management policy and the most noteworthy findings are presented in the quarterly issued interim reports. Larger projects always include a separate risk analysis. The most significant risks for the Group are assessed once a year and the results are presented in the annual report.
Aspo Group’s financing and financial risk management are handled centrally by the parent company in accordance with the financial policy approved by the Board of Directors.
Interest Rate Risks
Aspo hedges against interest rate risks by binding interest-bearing debt partly to floating rate loans and partly to fixed rate loans. The company also uses interest rate derivatives.
The Group uses terms of payment based on advance payments and bank guarantees to hedge against credit risks.
Exchange Rate Risks
Aspo Group’s hedging measures include forwards and intra-Group currency transactions.
For more information on financial risks, the principles of financial risk management and administrative model, see Notes to the consolidated financial statements, Aspo’s Annual Report 2009, page 74.
The deep economic recession that began in 2008 continued in 2009, maintaining an elevated risk level in all of Aspo’s business areas. The economic uncertainty and slow or even negative growth increased uncertainty throughout early 2009, but did not prevent operations and controlled growth in most of our business areas. Towards the end of the year, stabilization in the economy and a slight recovery in prices also decreased risks.
The Group is growing in developing market areas where growth risks are also affected by investments, interest rate levels, exchange rates and customers’ liquidity, as well as changes in legislation and import regulations. In terms of Aspo’s market areas, the general economic uncertainty also affects industrial demand in Western countries. Of customer segments, basic industry in particular has announced that its order book has decreased from 2009. Changes in demand in developing markets are more difficult to estimate.
The Group has avoided considerable exchange rate losses due to active hedging of currency positions and currency flow. Risks of bad debt have increased, and in 2009 the group recognized some provisions for bad debts, of which a significant was made in the last quarter.
The risks caused by the economic recession were monitored in 2009 particularly actively at Aspo. The merger of operations as a result of the 2008 acquisition was completed in the fall of 2009 and the risk management of the merger was combined with the general Group risk management. The business areas still continued carrying out risk analyses controlled by external assessors and making continuity plans. Risks were also analyzed to ensure sufficient insurance coverage and no major shortcomings were detected. In December, Aspo’s Board of Directors approved internal control principles in which risk assessment and management instructions are included as an integral part.
Risks related to goodwill are monitored through impairment testing in each business area at least once a year, but more frequently in 2009 due to the recession. In 2009, there was no need to make changes to goodwill.
The near-term operational risks focus on the effects of the global economic recession. Particular attention is paid to maintaining customer relationships and the validity of contracts. In operational risks, the main risks in terms of likelihood and effect are connected to the permanence of customer relationships, equipment sufficiency, maintaining the balance level and key personnel. Therefore, risk management in Aspo does not simply mean maintaining sufficient insurance coverage but it is an integral part of continuous operations and is built into all operational processes.
The main business risks for ESL Shipping are unfavorable changes in demand and competitive position, loss of customer confidence, labor conflicts, optimizing capacity and shipments, and an emergency or accident at sea. With long-term customer contracts and the constant monitoring and development of operations, Aspo Shipping has been able to manage its risks successfully.
In the business areas of Leipurin, the biggest risks are exchange rate risks and the strengthening of the euro as a factor affecting pricing, especially in Russia; exchange rate risks are also recognized in the Baltic countries and Poland. The recession may affect the demand for bakery machines as the willingness to invest decreases. Other operational risks are international food crises and import restrictions. Leipurin has been successful in its risk management. The direct effects from foreign exchange rate fluctuations have been controlled and no significant losses have occurred.
Telko’s result is affected in particular by the general lack of demand caused by the economic recession. Exchange rate risks and the weakening of the customer company’s solvency are also an outcome of the recession. Other essential business risks with a potential impact on operations include mergers and acquisitions between raw material suppliers, reorganization of distribution channels, and changes in the chemical industry and legislation. Telko has recorded exchange rate losses and value decreases on inventories.
A decrease in customers’ domestic market or export sales is a risk for Kaukomarkkinat. Selling of products based on energy conservation may suffer if energy prices decrease. The main exchange rate risks are connected to the strengthening of the Japanese yen and rising import prices. In China, the economic situation and a slowdown in growth may affect customers’ willingness to invest. Risk management has been successful; exchange rate fluctuations have not had a significant effect on earnings.