Risk management system

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Risk management system


Through its international business in the field of specialty lubricants and its expansion to new markets, the,FUCHS PETROLUB Group is exposed to a large number of risks that are intrinsically linked to its business activities. For this reason, effective risk management is an important success factor for securing the company’s value in the long term. Risk management The FUCHS PETROLUB Group’s risk management system is an integral component of the management, planning and controlling process. FUCHS pursues a strategy of limiting potential risks that arise in connection with its activities at an early stage. At the same time, however, any opportunities that arise are systematically exploited to continue to generate sustained, earnings-driven growth. The risk management of the FUCHS PETROLUB Group consists of a large number of interlinked processes, the aim of which is to identify potential risks early on, to evaluate them using specified criteria, to assess their quantitative and qualitative consequences and to bring in suitable prevention and safety measures. The risk management system consists of the following core elements: strategic planning, medium-term planning and budgeting, reporting and permanent controlling, risk reporting, process organization and internal audits. Our global risk management is based on periodic risk inventories carried out in a decentralized manner in all company and head-office departments, since this is where detailed knowledge of company risks and their causes is to be found. In order to ensure that the risks are identified and quantified efficiently, risk identification is based on standard Group specifications. The risks are analyzed according to risk categories defined within the Group, which have been derived directly from the success factors critical for the implementation of the corporate strategy and its objectives. The risks are evaluated in terms of probability and expected losses. In addition, measures for risk avoidance, reduction or diversification within the relevant area of responsibility are identified. The risk notifications from the individual business units are recorded in a web-based system, analyzed and compiled into an overview of the FUCHS risk profile. The Executive Board of FUCHS PETROLUB AG is regularly informed of changes to the risk profile, which provides a basis for decision-making. An essential component of the risk management system is the monitoring of risk management and of the internal control system via process-independent audits. The internal auditing team fulfils a key function and operates in all areas of the FUCHS PETROLUB Group on behalf of the Executive Board. In essence, it assesses compliance with directives, guidelines and authorization limits, the securing of assets and the achievement of an appropriate return on capital invested. It examines the organization and its processes for efficiency, effectiveness and compliance with the rules, and assesses the reliability and functional capability of the risk management system and the reliability of the reporting. The basic components of the internal control system include general risk prevention principles, such as functional separation and the two-person principle for important processes. In addition, during their annual audit, the external auditors assess the effectiveness of the risk early warning system. The KPMG auditors have confirmed that the system meets the requirements. The FUCHS PETROLUB Group has an effective risk management system for responsible corporate management as defined by the German Corporate Governance Code. In the following, significant risks are presented, which could have an effect on the Group’s asset, financial and earnings situation. These are not necessarily all the risks to which we are exposed. Risks that we are not yet aware of, or risks that we currently assess as being insignificant based on our current knowledge could also have an effect on our business activities. Individual risks Economic risks As a global player, FUCHS is exposed to the general economic and political opportunities and risks in the countries and regions in which it operates. There are potential risks involved in ongoing oil price fluctuations, in the impact of the crisis on the US financial market and in an intensification of geopolitical tensions in some parts of the world. The FUCHS PETROLUB Group is not dependent on individual companies, regions, customers or industrial sectors. The company produces several thousand lubricants and related specialty products for all applications and industries in 38 plants, and sells them to over 100,000 customers in more than 100 countries. This geographic positioning, the breadth of its portfolio of shareholdings and its wellbalanced customer structure minimize the risk of earnings dependency. All Group companies make a positive contribution to Group profits. Sector risks FUCHS takes advantage of technological leadership to counter risks typical for the industry, such as cyclical fluctuations in demand from key downstream industries like the automotive, capital equipment and supply industries, and intense competition on sales markets. Innovative power is a key competitive factor for FUCHS. The company is the technology leader in strategically important niche markets and high-quality business segments. FUCHS sees itself in many respects as a provider of solutions rather than a supplier of products. In order to secure and expand its market position, FUCHS is constantly researching and working on new products and processes. Its research and development work is backed by application support on our customers’ premises. In addition, lubricants for new machines, components and units are developed in partnership with customers. This innovation and niche strategy, our global presence, high level of specialization and ongoing disciplined cost management will help to secure our market position now and in the future. The new European chemicals regulation (REACH) came into force in June 2007. The pre-registration phase will run from June 1, 2008 to December 1, 2008 and all substances requiring registration must be registered with the European Chemicals Agency in Helsinki. From January 1, 2009 the agency will start publishing the data for the pre-registered chemicals online. REACH brings with it the risk that FUCHS and FUCHS’ European customers could find themselves at a disadvantage compared with non-European competitors as a result of costly test and registration procedures. In addition, the supply of raw materials could be reduced if suppliers discontinue production of certain raw materials on economic grounds, resulting in a need to find alternatives. FUCHS has been preparing intensively for REACH for over a year. The internal organization is being restructured to take account of the additional tasks. Substitutes are being sought for raw materials that are already regarded as critical. Some substitutes are already being used. Procurement market risks Availability levels and higher prices for raw materials, such as base oils, additives, chemicals and packaging materials, pose a risk to FUCHS. Base oil prices rose again at the end of 2007 and are likely to rise again in 2008 because of crude oil prices and the demand for fuel. As well as the base oils, nearly all the other raw material groups have seen price increases, including petrochemicals and, in particular, oleochemicals and base chemicals. FUCHS is endeavoring to minimize these risks by means of suitable measures, such as centralizing base oil procurement, finding alternative suppliers and leasing additional storage capacity Risks from research and development For FUCHS, innovative ability and a high degree of specialization coupled with customer proximity are the key to sustained market success. Risks are inherent in the high level of complexity and limited predictability of research and development projects. To minimize these risks, most products are developed in collaboration and consultation with our customers. Joint research in cooperation with universities and appropriate research facilities also plays an important role in promoting innovation and a high level of specialization. Financing and currency-related risks Significant risks in this area are those associated with exchange-rate movements and interest-rate fluctuations. Financial risks are monitored and managed by the central treasury department of FUCHS PETROLUB AG. Detailed guidelines and requirements for dealing with such risks have been approved by the Executive Board. Financial and currency risks are reduced by entering into term and currency-matched financing and by making use of derivatives. We employ these instruments for hedging purposes only. The risk associated with changes in interest rates lessened once again because of further repayments of financing liabilities and therefore no longer requires hedging. An interest rate increase of one percentage point would have only an insignificant impact on profits. In the area of currency rate risks we need to differentiate between operating transaction risks, which the Group primarily incurs as a result of income and expenditure in foreign currencies (procurement of raw materials and finished products in foreign currencies by operating companies, or dividend payments and license fees received by the holding company), and the translation risks that occur as a result of currency conversion for individual companies on different closing dates. At Group level, the effects of transaction and translation risks tend to offset each other. Regulatory and legal risks As a company operating on the international market with a diverse portfolio, the FUCHS PETROLUB Group is exposed to a large number of legal and regulatory risks. In particular, these include risks in the areas of product liability, competition and antitrust law, recalls, occupational health and safety, patent law, tax law and environmental protection. FUCHS has implemented an appropriate compliance structure as well as training measures in this area to limit risks from possible violations of rights or laws. In addition, by continually improving its organization, processes and quality management, and by taking out suitable insurance cover, possible risks are minimized right from the start. Legal risks may result from the many regulations and laws that concern us. There has recently been a sharp increase in legislation relating to listed companies. In order to avoid any possible risks, our decisions and conduct are based on comprehensive legal and insurance law advice provided both by our own experts and by proven external experts. The Group also has appropriate insurance cover. Where necessary, appropriate provisions are made to protect against risk. There are currently no pending or threatened court cases that have a significant effect on the companies in the FUCHS PETROLUB Group. Risks from acquisitions and investments Acquisition and investment projects entail complex risks. Such projects are therefore carried out using defined workflows and procedures that control and minimize risks. There are currently no discernible risks from acquisition and investment activities. IT risks As a group with global operations, FUCHS needs to network its IT systems and locations both in organizational and technical terms. Because of the increasing complexity of electronic communication technologies, the FUCHS PETROLUB Group is exposed to risks ranging from data loss or data theft to business disruptions and interruptions and system failures. A large number of processes, guidelines and measures have been developed to counter these risks. Among other things, this involves regular investments in modern hardware and software, implementing detailed backup and recovery procedures and using virus scanners and firewalls. Comprehensive training provided to all staff enables employees to keep up to date with the latest knowledge and developments at all times. There are currently no discernible IT-related risks at FUCHS. Country and location risks The FUCHS PETROLUB Group’s global presence brings with it certain country and location risks. Potential risks include natural disasters, pandemics, terrorism, nationalization or expropriation of assets, legal risks, bans on capital transfers, war and other unrest. To manage these risks, the security measures in such locations are constantly reviewed, assessed and adjusted accordingly. At the same time, political risks are taken into account when assessing individual investment projects. Furthermore, property and liability risks, as well as the risk posed by business interruptions, are sufficiently covered by insurance policies. Personnel-related risks Personnel-related risks are found primarily in staff fluctuations in key positions and in the recruitment and development of specialists and managers. FUCHS mitigates these risks through intensive further training programs, remuneration packages commensurate with performance, stand-in regulations and timely succession planning. Product and environmental protection risks The manufacture of chemical products involves risks connected with the production, filling, storage and transportation of raw materials, finished products and waste. An incident can lead to damage to persons or to the environment as well as causing production losses. In order to counter potential risks in these areas, FUCHS applies high technical and security standards in the construction, operation and maintenance of production plants. In addition to the rigorous monitoring of quality standards for preventing business interruptions, FUCHS is taking concerted action to improve soil and water conservation. The company is also insured against resulting losses to an extent that is standard for the industry. There are currently no significant discernible product or environmental risks. Other risks There are currently no other significant discernible risks. Overall risk No significant changes have taken place in the risk situation of the FUCHS PETROLUB Group since the last reporting period. The assessment of the overall risk situation is the result of a consolidated view of all significant individual risks and risk combinations. At present, there are no discernible risks that could threaten the continued existence of the Group. The FUCHS PETROLUB Group’s risk management system ensures that opportunities and risks are identified and recorded early on, and dealt with accordingly. We have provided for typical business risks capable of having a major influence on the Group’s assets, finances and profits.