A conscious strategy and controllable procedures for risk mitigation will, over time, impact profitability in a positive way. WWL has a thorough enterprise risk management model and maps all main risks on a regular basis. On a quarterly basis, management presents a detailed risk assessment, including mitigating actions, covering all business units and functional areas, to the Board of Directors.
The responsibility of governing bodies, management and employees is to be aware of the current environment in which they operate, implement measures to mitigate risks, prepare to act upon unusual observations, threats or incidents, and proactively try to reduce potential negative consequences. Risk evaluation is integrated in all business operations, both at group and business unit level. WWL has sound internal controls, systems and processes for handling financial, market and commercial, operational and regulatory risks.
Financial risks
The main financial risk exposures for WWL is interest rate risk, currency risk and bunker price development. WWL seeks to hedge between 30-70% of the net interest rate exposure, predominantly through interest rate swaps and fixed rate loans.
The dominant currency for both revenues and costs across the group is USD, which is the WWL’s functional currency. The majority of the currency exposure arises on the cost side in the ocean operating companies with EUR, KRW, JPY, SEK and CNY representing about 20% of the operating costs. As a main principle, WWL does not use financial instruments to hedge currency risk in the operating entities, but will assess the merits to do so in periods when the USD is historically strong vs. other currencies.
As a general principle, BAF in customer contracts are the main mechanism to manage bunker oil price risk in WWL. In the short term WWL is exposed to changes in the bunker price since BAF is calculated based on the average price over a historical period, and then fixed during an application period, creating a lag effect.
For a detailed assessment of financial risk, see “note 13 – financial risk”
Market and commercial risk
Demand for WWL’s ocean and landbased service offerings are cyclical and closely correlated with global economic activity in general and deep-sea transportation of auto and high & heavy equipment in particular. Changes in the global economy are therefore highly decisive for the development of WWLs’ volumes and financial performance.
The geographical pattern of production of autos and high & heavy equipment is continuously changing. A shift in the balance between locally produced and exported cargo may affect the overall demand for deep-sea ocean transportation, resulting in changed utilisation of the fleet.
A shift in customers’ market positions can also represent opportunities and risks for WWL’s operating entities. However, the company’s broad global coverage and client exposure reduces this risk element.
Operational risk
Main operational risks for WWL include tonnage balance, trade imbalance and adverse weather conditions. WWL strives to ensure sufficient fleet flexibility by combining owned tonnage with both long and short-term charters. The owned tonnage and long-term charters represent the core fleet while the short-term charters enable the operating entities to scale up and down capacity to meet changes in demand cost effectively . At the end of 2017 WWL had six short term charters compared to the end of 2016 where two vessels (net) were chartered out on short term contracts. WWL proactively handles trade imbalances through vessel swaps and space charter arrangements for excess volumes with other operators.
Regulatory risk / anti-trust investigation
The operating entities WWL AS and EUKOR have been part of anti-trust investigations in several jurisdictions since 2012. This process is now drawing towards an end with outstanding jurisdictions likely to reach their conclusion in 2018. The antitrust provision was increased with USD 140 million in the fourth quarter based on updated evaluations, taking into account the possible outcome of pending investigations and the possibility for civil claims. The preliminary purchase price allocation has been updated to reflect the increased fair value of liability. As such, the increased provision did not impact the income statement for WWL. WWL’s provision at year end was USD 440 million and no payments were outstanding at year end 2017.
Environmental and safety risk
WWL is, by the nature of its activities, exposed to environmental risks both at sea and on land. Environmental risks are reduced through a Global Reporting Initiative (GRI) based environmental management system and environmental due diligence for acquisitions and divestments. As WWL in its current form was created in April 2017, the company has this year established a GRI standard environmental management system based on a thorough materiality assessment. This included identifying and evaluating the importance of ESG (environmental, social and governance) risks and opportunities throughout the value chain, which was done by conducting a stakeholder assessment.
Cyber risk
WWL ASA recognizes information security as an important focus area for a modern and global organization. The company maintains electronic records and relationships with its stakeholder groups, including customers and employees. The interests of the company and its stakeholders are aligned in ensuring the security and privacy of such information is not compromised and or exploited by third parties.
To further enhance cyber resilience, mid- to long-term initiatives are under way, focusing on strengthening the Information Security Management System (ISMS) to meet cyber threats and increase preparedness for handling such incidents.
Regulatory requirements, particularly introduced by EUs General Data Protection Regulation (GDPR) will remain an important focus area in 2018 and WWL ASA is committed to compliance with the binding corporate rules (BCR).