As a global organisation, Wallenius Wilhelmsen is exposed to a variety of risks through its worldwide ocean and landbased operations, including financial, market and commercial, operational, regulatory, environmental and safety. 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 and currency rates, 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%.
The US dollar is the dominant currency for both revenues and costs across the group and is 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 the 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 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.
In addition to BAFs, the group has entered into fuel oil swaps securing around a quarter of expected fuel oil volumes in the period July to December 2021.
For a detailed assessment of financial risk, see ‘note 18 – Financial risk’.
Through 2020, the COVID19 pandemic hit demand for vehicles and equipment, disrupting supply chains and production patterns and affected Wallenius Wilhelmsen’s operations. The company has taken a precautionary approach to safeguard the health and safety of employees, crew, business partners and members of the public, while striving to avoid adverse operational impact.
At the end of 2020, the markets in which the group operate have recovered significantly since the sharp drop in volumes observed during April and May 2020. However, volumes remain below 2019 levels and sales patterns remain unstable. Looking further into 2021, it is hard to predict the potential impact on production from increased virus intensity in parts of the world.
Wallenius Wilhelmsen has taken a range of actions to adjust capacity, reduce costs and protect its cash position through this turbulent phase. Together with an efficient and adjustable cost base and starting from a strong financial situation, the company is well prepared to continue to manage its way through this unprecedented market situation.
Market and commercial risk
Demand for ocean and land-based service offerings are cyclical and closely correlated with global economic activity in general and deep-sea transportation of LVs and H&H 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, illnesses or other events that may threaten the health and well-being of employees, customers and wider communities may cause disruptions to operations and demand, as seen during the COVID19 pandemic. 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. New emissions standards in the LV markets as well as incentives will also influence sales mix and trading patterns.
The geographical pattern of the production of LVs H&H 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 represent both opportunities and risks for Wallenius Wilhelmsen’s operating entities. However, the group’s broad global coverage and client exposure contributes 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 down capacity to meet changes in demand in a cost-efficient manner. Wallenius Wilhelmsen proactively handles trade imbalances through vessel swaps and space charter arrangements for excess volumes with other operators.
The implementation of the IMO 2020 0.5% global sulphur cap as of 1 January 2020 did not pose any major operational issues across the fleet, as the company and fleet were well prepared and continued the ongoing focus on quality suppliers of fuel.
The COVID19 pandemic has greatly impacted vessel crew change and shore leave. At an early stage, Wallenius Wilhelmsen assembled a COVID19 response team across the group to ensure that best practice, risk assessments and analytics were shared and adopted across the fleet as well as throughout landbased organisation to meet both global and local regulations. During 2020, no registered cases of COVID19 were reported on onboard vessels.
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 exploit people’s lack of 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 programmes in order to mitigate risk of security breaches related to phishing and imposter fraud.
Regulatory risk/anti-trust investigation
The operating entities WW Ocean and EUKOR have been part of anti-trust investigations in several jurisdictions since 2012. There has been a delay in several jurisdictions due to the COVID19 pandemic, but Wallenius Wilhelmsen expects the proceedings with the outstanding jurisdictions to be largely resolved in 2021, while the timeline for the resolution of civil claims is more uncertain.
In the second quarter, an increased provision of USD 55m was recognised as an operating expense in the income statement. The increase was related to updated estimates on outstanding customer claims. In the third quarter, USD 63m and USD 62m were reclassified from Non-current provisions and Current provisions to Other non-current liabilities and Other current liabilities, respectively, due to amounts no longer being uncertain in amount or timing. During the year, the provisions were further reduced with USD 12m due to commercial settlements. In total, USD 110m remains classified as provisions as amounts and timing are uncertain. The provisions will cover expected pay-outs related to jurisdictions with ongoing anti-trust proceedings and potential civil claims as of 31 December 2020.
The ongoing investigations of WW Ocean and EUKOR are confidential and Wallenius Wilhelmsen is therefore not able to provide more detailed comments.
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 their respective management systems on all owned 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, toolbox talks and risk assessments. The group has well-implemented programmes with key performance indicator follow-up and undesired event root cause analysis to identify and prevent potential environmental and safety risks.
Forthcoming GHG regulatory changes from the International Maritime Organisation (IMO), the shipping industry’s global regulator, and the European Union (EU) are another significant risk factor for Wallenius Wilhelmsen. For example, in April 2018 the IMO adopted ambitious emission reduction targets for 2030 and 2050. Regulations to ensure the targets are met are taking shape and will impact the shipping industry. Wallenius Wilhelmsen seeks to contribute to progressive yet pragmatic outcomes through active engagement in the regulatory process. For further information, please refer to the sustainability section of the Directors’ Report.