Enterprise risk management
Since 2013 Haldor Topsoe has operated an enterprise risk management program, with quarterly reporting from business and resource units to Executive Management, followed up by reviews and mitigating activities. In 2013 Haldor Topsoe prepared a description of the various risks as part of the company’s corporate bond issuance. This risk factor description can be found as part of the company description on www.topsoe.com. During 2014 the Topsoe Code of Conduct was implemented throughout the entire organization, including policies covering anti-corruption, competition law as well as other compliance issues.
Below are mentioned the general risk factors and the associated mitigating actions.
Strategic operational risks
Based on our continued development of current as well as new products and processes, we expect demand to be strong. Catalysts are involved in 90% of the world’s chemical processes today, and we see no indication of reduced demand or substitutes. For new products, processes and services being developed, we are depending on market demand picking up in order to increase our sales of these.
Intellectual Property (IP) protection
As a highly innovative company, Haldor Topsoe pursues IP protection through e.g. patents, trade secrets, trademarks, design and copyright law. Our IP could, however, be challenged, invalidated, circumvented or rendered unenforceable. Defending and prosecuting our IP is therefore of paramount importance.
Raw material prices and availability
The cost of raw materials is a signiﬁcant cost component in our products, and prices can ﬂuctuate considerably.
We seek to pass any increased raw material cost on to our customers through escalation clauses in contracts. In addition, we use ﬁnancial hedging to a certain extent. Moreover, we seek to have multiple suppliers for each raw material.
Haldor Topsoe’s production of catalysts takes place in Frederikssund, Denmark, and Houston, USA and from 2015 also in Tianjin, China and Joinville, Brazil. If production for some reason is closed down for an extended period in one of our operational plants or if commissioning of new plants is substantially delayed, it will have a material impact on Haldor Topsoe’s earnings. We seek to mitigate this risk by having multiple production lines for certain products as well as a safety stock policy. We have also taken out insurance against loss of contribution and property insurance, etc.
Issuance of bonds in support of contractual liabilities is an inherent and necessary part of Haldor Topsoe’s business model, e.g. in the form of bid bonds, advance payment bonds and performance bonds issued by banks on behalf of Haldor Topsoe. Risk mitigation is obtained via thorough structuring of contracts and related bonds.
Product liabilities and compliance
The products and services supplied by Haldor Topsoe have to meet the highest standards in the industry. With complex processes being involved, Haldor Topsoe will always be subject to the risk of product liability. In order to reduce this risk, quality in all areas of the value chain is monitored continuously. In addition, Haldor Topsoe never accepts unlimited liability in our contracts. Besides property insurance and insurance against loss of contribution, a number of other operational risks are insured. General liability and product liability as well as professional indemnity and transportation for example.
The presence of Haldor Topsoe across the globe, exposes earnings to geopolitical events. Political actions, such as trade barriers, embargoes, new taxes, currency restrictions, the passing of environmental legislation etc., may impact the result and cash ﬂows of Haldor Topsoe. This risk is to a certain degree mitigated through the monitoring of regulatory initiatives, geographical diversiﬁcation, and – when possible – that cash ﬂows are maintained positive for our individual contracts.
As Haldor Topsoe operates globally, the statement of proﬁt and loss, balance sheet, and cash ﬂows are subject to the risk of currency ﬂuctuations, mainly in relation to Haldor Topsoe’s ﬂows of EUR and USD. Part of the risk is mitigated through natural hedges arising from activities where Haldor Topsoe has both income and expenses in the same currency. However, the risk is not fully covered by natural hedges, and consequently, Haldor Topsoe hedges certain future cash ﬂows. A 5% increase in the USD/DKK exchange rate is assessed to have a positive EBIT effect of DKK 20–25 million.
Interest rate risk
Long-term debt consists of loans and bonds with ﬁxed and ﬂoating interest rates. In order to secure a distribution between ﬁxed and ﬂoating rate debt that matches the asset distribution, interest rate swaps are applied. For the ﬂoating rate portion of Haldor Topsoe’s interest bearing debt, a change in the interest rate level of 1 percentage point will inﬂuence interest expenses by DKK 9 million.
The credit risk of Topsoe is primarily related to trade receivables which to some extent consist of large, multinational or government-owned corporations. For other types of clients, and for most sales in emerging markets, we seek to mitigate credit risk by application of instruments such, as letters of credit and bank guarantees as well as through selective structuring of payment terms etc.
In this context counterparty risk is deﬁned as credit risk on ﬁnancial institutions when dealing with them, either by placing deposits, entering into derivative ﬁnancial instrument transactions or otherwise. In order to reduce counterparty risk, Haldor Topsoe only deals with ﬁnancial counterparties, which – based on management’s assessment – have a satisfactory credit rating from a recognized international credit rating agency.
Haldor Topsoe must maintain suﬃcient liquidity to fund daily operations, debt service, and for future expansion purposes. Haldor Topsoe’s access to liquidity consists of cash and cash equivalents including access to credit facilities.
Some of the ﬁnancing arrangements of Haldor Topsoe are subject to ﬁnancial covenants, and if violated this could limit the ability to ﬁnance the company’s operations and capital needs for pursuing acquisitions and other business activities. Dividend policy The Haldor Topsoe Group has since 2007 ﬁnanced the operations of Haldor Topsøe Holding A/S through dividend payments in order for this company to operate. The liquidity effect of the expected future dividend payments has been incorporated in the cash ﬂow forecasts of Haldor Topsoe.
Haldor Topsoe is exposed to a large number of different tax regimes across the countries in which we operate, and there is a risk of unexpected taxation due to uncertainty of the interpretation of local tax regulations. To mitigate this risk, Haldor Topsoe consults external advisors.