Wallenius Wilhelmsen is exposed to a variety of risks through its worldwide ocean and landbased operations and a global organisation, including financial risk, market and commercial risk, operational risk, environmental and safety risk and regulatory risk. A deliberate strategy and effective procedures for risk management and mitigation are required to keep our employees safe and our business in operation, and will, over time, impact profitability in a positive way. Wallenius Wilhelmsen has established a group-wide enterprise risk management model and maps all main risks regularly. Every quarter, management presents a detailed risk assessment including mitigating actions, covering all business units and functional areas, to the Board of Directors.
Governing bodies, management and employees must be aware of the current environment in which they operate and be responsible for implementing measures to mitigate risks, acting upon unusual observations, threats or incidents, and proactively trying to reduce potential negative consequences. Risk evaluation is integrated in all business operations, both at group and business unit level. Wallenius Wilhelmsen has internal controls, systems and processes for handling financial, market and commercial, operational and regulatory risks.
The main financial risk exposures for Wallenius Wilhelmsen are interest rate risks, currency risks, and fuel oil price development.
Wallenius Wilhelmsen has a policy to hedge between 30-70% of the net interest rate exposure, predominantly through interest rate swaps and fixed rate loans. The hedge ratio is currently about 60%.
US Dollar is the dominant currency for both revenues and costs across the group and also the group’s functional currency. Most of the currency exposure arises on the cost side in the ocean operating companies where KRW, JPY, SEK, CNY and NOK are most important currencies. As a main principle, Wallenius Wilhelmsen does not use financial instruments to hedge currency risk in the operating entities but assesses the merits of doing so in periods when the US Dollar is deemed historically strong compared to other currencies.
Fuel oil price risk is primarily managed through the inclusion of bunker adjustment factors (BAF) in customer contracts. Since BAFs are typically calculated based on the average price over a historical period, and then fixed during an application period, a lag effect exists, which means that the group is exposed to price changes in the short term.
The shift to very low sulphur fuel oil (VLSFO) represents a risk for Wallenius Wilhelmsen as both the supply and price of VLSFO could be subject to significant fluctuations in a transition period going into 2020. To mitigate the risk, the group has locked in the forward spread between heavy fuel oil (HFO) 3.5%, and marine gas oil (MGO) for about one third of the bunker volumes in the period November 2019 to April 2020, and a smaller share (about 10%) of expected bunker volumes in the period from May to July 2020.
For a detailed assessment of financial risk, see ‘note 22 – Financial risk’
Market and commercial risk
Demand for the ocean and landbased service offerings are cyclical and closely correlated with global economic activity in general and deep-sea transportation of automotive and high and heavy equipment in particular. Changes in the global economy are therefore highly decisive for the development of Wallenius Wilhelmsen’s volumes and financial performance.
Trade tensions and other geopolitical tensions that may lead to heightened barriers to trade can represent a risk for Wallenius Wilhelmsen. Furthermore, events such as spread of illnesses or other events that cause a threat to the health and well-being of our employees, customers and wider communities may cause disruptions to operations, supply chains or customer demand. Any short-term direct effect of reduction in volumes due to any of the above is not expected to be critical, as the group can implement measures to adjust capacity and reduce costs temporarily. On the other hand, indirect effects in case of slower global economic growth, combined with reduced deep-sea volumes across all cargo segments would not only directly impact the results, but could also lead to continued and increased overcapacity, and create further pressure on rates.
The geographical pattern of the production of automotive and high and heavy equipment is changing continuously. 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 factor of the fleet. A shift in customers’ market positions can represent both opportunities and risks for Wallenius Wilhelmsen’s operating entities. However, the group’s broad global coverage and client exposure contribute to reduce this risk element.
The main operational risks for Wallenius Wilhelmsen include tonnage imbalance, trade imbalance, vessel incidents, and adverse weather conditions.
Wallenius Wilhelmsen 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 scale down capacity to meet changes in demand cost-efficiently. Wallenius Wilhelmsen proactively handles trade imbalances through vessel swaps and space charter arrangements for excess volumes with other operators.
Through the increased digitalisation of the operations of Wallenius Wilhelmsen, the company will also become more vulnerable to cyber risks. The group could become a target of cyber-attacks designed to explore lack of people’s security awareness, penetrate the security of its network or internal systems, misappropriate proprietary information, commit financial fraud and/or cause interruptions to its operations. Wallenius Wilhelmsen is currently investing in a transformation of its digital platforms to allow for a more digital workforce as well as taking the needed steps to reduce exposure to cyber security risks. Partnerships with leading industry players in the digital and security space is allowing Wallenius Wilhelmsen to take advantage of the protection tools and mechanisms available. Wallenius Wilhelmsen has also implemented information campaigns and awareness programs in order to mitigate risk of security breaches related to phishing and impostering.
Environmental and safety risk
Wallenius Wilhelmsen is, by the nature of its activities, exposed to environmental and safety risks arising from both its ocean and landbased operations. These risks are mitigated through management systems on all vessels and facilities. The management systems include a sharp focus on training, routines and measures designed to ensure continuous compliance with environmental and safety regulation. Environmental and safety risks associated with equipment failure or human error are minimised through frequent emergency response drills. Also, the group has implemented programmes with KPI follow-up that seek to identify and prevent potential environmental and safety risks. Wallenius Wilhelmsen is in the process of assessing the financial impacts of climate-related risks and opportunities in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Physical risks due to harsher weather are considered manageable; regulatory and market risks will likely have the greatest impact on the company’s future business operations.
Changes in regulation concerning emission of Green House Gases (GHG) is one such risk factor for Wallenius Wilhelmsen. In April 2018, the International Maritime Organization (IMO), the shipping industry’s global regulator, agreed ambitious GHG reduction targets for 2030 and 2050. The regulations are expected to take shape over the coming few years and will impact the shipping industry. Wallenius Wilhelmsen seeks to contribute to progressive yet pragmatic outcomes through active engagement in the regulatory process and will work to deliver sustainable solutions to meet the targets.
For further information, please refer to the sustainability section of the Directors’ Report, and the section on “Navigating towards zero emissions” in particular.
The Covid-19 pandemic is affecting demand for vehicles and equipment, disrupting supply chains and production patterns and is likely to affect Wallenius Wilhelmsen’s operations. The company is taking a precautionary approach to safeguard the health and safety of employees, crew, business partners and members of the public, whilst striving to avoid adverse operational impact.
The pandemic continues to progress and evolve, and at this juncture it is challenging to predict the full extent and duration of resulting operational and economic impact on the company. The development of the pandemic and the mitigating actions implemented create uncertainty as to demand for our customers’ products as well as their ability to operate, putting pressure on volumes. In the same way, mitigating actions restricting freedom of movement can disturb our ability to operate efficiently. The impact of COVID-19 on the company’s business in 2020 is at this stage very hard to predict, and Wallenius Wilhelmsen will continue to monitor developments closely and respond accordingly.
Regulatory risk / anti-trust investigation
The operating entities WW Ocean and EUKOR have been part of anti-trust investigations in several jurisdictions since 2012. Wallenius Wilhelmsen expects the proceedings with the outstanding jurisdictions to be largely resolved in the first half of 2020, while the timeline for the resolution of civil claims is more uncertain. In 2019, the provisions set aside for antitrust claims were increased by USD 30 million, recognised as an operating expense in the income statement, to cater for higher legal costs in disputed cases. In total, USD 194 million in provision remains to cover expected payments related to jurisdictions with ongoing anti-trust proceedings and potential civil claims as of 31 December 2019. The ongoing investigations of WW Ocean and EUKOR are classified as confidential, and Wallenius Wilhelmsen is therefore not able to provide more detailed comments.