Risk management
Risk policy
The business policy of the K+S Group is geared towards securing the existence of the Company, sustainably generating risk-adequate returns as well as systematically and continuously increasing enterprise value. To achieve this objective, our global business activities require a permanent, responsible consideration of opportunities and risks. The Board of Executive Directors bears overall responsibility for effective risk and opportunity management, which is an integral part of corporate management.
Opportunity management
Opportunity and risk management are closely interlinked within the K+S Group. Chances are internal and external developments, which may have a positive impact on the Group. We essentially derive our opportunity management from the goals and strategies of our business segments and ensure a balanced relationship between opportunities and risks. Direct responsibility for the early and regular identification, analysis and utilisation of opportunities rests with the operational management of the business segments and/or the heads of the central holding units. Opportunity management is an integral part of the groupwide planning and controlling systems. We occupy ourselves intensively with market and competition analyses, relevant cost elements and key success factors, including those in the political environment in which the Company operates. This serves as the basis for identifying concrete opportunity potentials that are specific to business segments and corresponding targets, which are discussed and then defined between the Board of Executive Directors and the managers responsible for the business segments. Selected opportunity potentials for the K+S Group are discussed in the “Opportunities” section of the forecast report. Selected opportunity potentials for the K+S Group are discussed in the forecast report.
Risk Management
We define risks as the possible occurrence of internal and external events, which may adversely affect the achievement of our short-term and strategic goals. The goal of the K+S Group’s risk management is to identify and assess risks as early as possible and to limit potential business losses by means of appropriate measures. This is intended to prevent the Company’s continued existence from being jeopardised and, through corporate decision-making on this basis, to create long-term value. For this purpose, we use planning, management and control systems that are standardised across the Group.
Organisation and tools of the risk management system
The Board of Executive Directors has defined groupwide principles and rules of behaviour as well as guidelines for systematic and effective risk management of the K+S Group. The groupwide risk management system draws on existing organisational and reporting structures and consists of the following elements:
- The guideline on risk management organisation in the K+S Group,
- the risk management holding unit,
- the persons responsible for risk management in the business segments and the holding company,
- standardised risk profiles specific to business segments,
- information about the complete, quantified risk situation in goal-setting talks held between the Board of Executive Directors and the managers responsible for the business segments and holding units,
- regular, uniform risk reporting at Group and business segment level as well as
- immediate reporting in urgent cases.
The guideline on the risk management organisation in the K+S Group includes principles of risk policy and processes of risk management. It governs the tasks and authorisations of those involved in the risk management process. Thus direct responsibility for the identification, assessment, control and communication of risks rests with the operating management of the business segments and the central holding units respectively. Equally, the requirements for risk reporting, which include the reportable thresholds for risks, are defined as mandatory. The risk management holding unit coordinates the risk management process and is supported by persons responsible for risk management in the business segments.
The proper functioning of the risk management system of the K+S Group is regularly reviewed by our internal audit department. Furthermore, the functionality and effectiveness of the early risk detection system of K+S Aktiengesellschaft is regularly reviewed by our auditors.
Risk identification
The regular identification of risks is decentralised and is carried out in the business segments and holding units through the use of various tools. The methods used for risk determination range from analyses of markets and competition through close contacts with customers, suppliers and institutions to observing risk indicators in an economic and socio-political environment.
Risk assessment and quantification
Identified risks are assessed according to a uniform methodology. For each risk, we quantify its likelihood of materialisation and, in addition to the gross loss potential, the net loss potential. The latter includes effects from countermeasures. If a gross loss potential can be reliably reduced by effective and appropriate measures, the focus of consideration will be on the net loss potential. This approach makes it possible to understand which influence individual risk-reducing measures have. Additionally, a so-called expected value of the effect on earnings is determined by multiplying the net loss potential by the likelihood of materialisation. Risks are assessed in terms of time periods both for the current year and for a time horizon of three and ten years. Expected risks with a likelihood of materialisation of over 50% are taken into consideration in the medium-term planning and annual forecast with corresponding deductions from earnings.
Risk control
A building block of risk management is the development of suitable countermeasures taking account of alternative risk scenarios. Measures for preventing or diminishing risks have the goal of reducing the loss potential and the likelihood of materialisation. Risks can also be transferred to a third party (e.g. by taking out insurance). The decision regarding the implementation of corresponding measures also takes into consideration the costs related to the effectiveness of possible measures.
Risk aggregation and reporting
Our risk management system is intended to ensure a transparent presentation of the risk situation. The risks from the business segments and the holding company are aggregated at Group level. The risk reporting is based on a threshold concept. This involves the business segments reporting risks independently of their likelihood of materialisation if defined thresholds for the gross or net loss potential are reached. At Group level, we observe risks starting from a likelihood of materialisation of at least 5% and a net loss potential of simultaneously at least € 10 million.
Every quarter, the Board of Executive Directors receives an overview of the current risk situation via a standardised reporting system. Material risks that arise in the short term are, if urgent, immediately communicated directly to the Board of Executive Directors outside customary reporting channels. The Supervisory Board is briefed by the Board of Executive Directors in just as regular and timely a manner and, if urgent, immediately.
Risk management in relation to financial instruments (IFRS 7)
The financial objective of the K+S Group is to limit financial risks (e.g. price change risk, interest change risk, risk of default and liquidity risk) through systematic financial management. To this end, centralised financing management has been established in K+S Aktiengesellschaft. Furthermore, the K+S Group manages its capital structure and, if necessary, makes adjustments, taking into consideration the expected economic framework conditions. The aim of the capital structure management is to sustainably secure the financing of the operating business and ability to invest of the Company.
Our international business activities can give rise to currency-related market price risks, which we counteract under our currency management system by hedging transactions. Internal procedure instructions and guidelines regulate the permitted hedging strategies as well as hedging instruments, responsibilities, processes and control mechanisms. Other market price risks may result from changes in raw material prices (e.g. energy) and transport costs (e.g. sea freight). To the extent that derivative financial instruments are used in a targeted way for this, analogous rules apply. The hedging instruments are used exclusively to secure the underlying transactions, but not for trading or speculation. Financial transactions are only concluded with appropriate banks. Through regular monitoring, the suitability of counterparties and compliance with position limits are constantly reviewed. Furthermore, in order to limit the risk of default, the guideline stipulates a balanced distribution of derivatives across various banking institutions. Hedging transactions are entered into, on the one hand, in the case of already existing underlying transactions. By means of this, we intend to largely avoid exchange rate risks arising from underlying transactions on the balance sheet (normally receivables). On the other hand, we enter into hedging transactions for future transactions, which can be anticipated with a high level of probability on the basis of empirically reliable findings (forecast hedges). Forecast hedges are intended to reduce the exchange rate risks of future financial years.
