Orkla’s risk profile largely reflects the prevailing global uncertainty. In the financial markets, the crisis in Southern Europe has resulted in tighter credit, greater demand for risk premiums and higher credit margins. The situation may escalate into another financial crisis and subsequent recession. The sale of Elkem and the sell-off of securities in the share portfolio have reduced the exposure of the Group’s portfolio of businesses to economic trends, but another financial crisis and recession will still have a negative impact on the Group. It is primarily Sapa and Orkla’s financial investments that will be affected. Orkla Brands is less affected by the global economic situation. On the whole, given its diversified portfolio, the geographical spread of its operations and its solid balance sheet, Orkla is considered to be well prepared to weather any recession.
There is an inherent risk related to the lack of optimisation of the Group’s portfolio of businesses. Orkla maintains continuous focus on, and an opportunistic attitude towards, developing the portfolio, as its revised strategy has clearly demonstrated. In the long term, the Group’s revised strategy will help to further reduce the cyclicality of its operations, thereby also reducing the level of risk. In the short and medium-term perspective, however, there is risk related to the actual implementation of the strategy. Risk will primarily be related to the implementation of complex transactions, as well as to difficult financial planning. An example of such risk is not having the financial leeway to exploit business opportunities. Orkla has good financial flexibility, and ensuring sufficientfreedom of action and flexibility is a priority.
All in all, the greatest risk in Orkla in the next few years is considered to be risk related to capital reallocation.
At the end of 2011, Orkla had a strong balance sheet, with an equity-to-assets ratio of 51.8% and net gearing of 0.31. The Group has a robust financing structure with sufficient long-term committed drawing facilities totalling NOK 15 billion. Despite the turbulence in the financial markets, the refinancing risk is considered to be relatively low.
In many business areas, Orkla has production and sales operations in several different countries, and is exposed to financial risks such as price risk linked to raw materials and finished products, currency risk, interest rate risk, liquidity risk and credit risk. Orkla’s financial risk factors and risks related to hedge instruments are continuously assessed to ensure that the exposure limits imposed by the Board of Directors are observed. A more detailed discussion of Orkla’s financial risk factors and risks related to hedge instruments may be found in Note 25.
Among the different business areas in Orkla, the risk level for 2012 is considered to be highest for the Group’s financial investments. The risk in this area is primarily related to changes in the value of the REC shareholding and the share portfolio, and is thus more of a balance-sheet risk than an operations-related cash flow risk. Sapa also ranks relatively highly in the risk profile, and its risk level has been estimated to be somewhat increased at the start of 2012, due to uncertain global market trends. Orkla Brands operates in relatively stable markets and is less exposed to cyclical and market fluctuations. The business area therefore presents a lower level of risk.
The figure below illustrates the relative risk exposure of the different business areas and companies in Orkla through a qualitative and relative presentation of the downside risks. Risk in the business areas as a proportion of the Group’s total risk must be seen in conjunction with the size of the businesses and the potential losses that the relative sizes represent.
In Orkla Brands, risk is related to raw material price trends. However, the business area’s broad-based product portfolio limits its exposure to individual raw materials. Orkla Brands monitors raw material price trends closely, and expects to be able to largely compensate for
market-based increases in raw material prices by raising prices correspondingly. The risk of margin squeeze due to higher raw material prices is assessed as lower than at the same time last year, but this improvement is counteracted by higher risk related to changes in consumer habits as a result of the difficult economic situation. Over time, Orkla Brands must succeed with its innovations, product launches and efficiency improvement programmes if it is to be able to maintain its current level of value creation. The business area is intensifying its focus on acquiring companies that can strengthen its existing business systems. The overall level of risk in Orkla Brands is considered to be the same as last year.
For Sapa, volume remains the main risk. Growth in demand declined in the course of 2011. The businesses in southern Europe were particularly affected by weak demand and difficult market conditions. This trend is expected to continue, and there is considerable uncertainty as regards global demand in 2012. Greater focus on improving the efficiency of existing operations, implementing structural measures and increasing risk awareness (the ability to react) all serve to reduce the risk associated with the consequences of an economic downturn. Nevertheless, the overall risk level in Sapa is considered to have increased.
Borregaard is exposed to fluctuations in exchange rates (especially USD and EUR), energy prices and the prices of strategic raw materials. Borregaard’s specialisation strategy, along with its biorefinery concept and LignoTech’s global market position, reduce the cyclicality of its
operations and provide it with greater flexibility and leeway to act. However, its cellulose business is exposed to risk related to price fluctuations in the speciality cellulose market. Furthermore, operations have at times been unstable at the Sarpsborg plant. Nevertheless, the new operations centre that started up at the end of 2010 and the ongoing efficiency improvement programme helped to improve operational regularity in 2011.
In a normal year, the power business in Sauda is expected to supply approximately 1,850 GWh. Rent is paid for 1,026 GWh under a long-term lease agreement with Statkraft, and long-term delivery agreements have been entered into for the same volume on corresponding terms. Any production exceeding that volume may be sold on the power market. The risk in Sauda is thus related to the operation of the power plants, precipitation amounts, reservoir levels and power market price trends.
In the Financial Investments area, on balance, Group transactions in 2011 resulted in a net sale of shares. This helped to reduce the level of risk, but this gain was counteracted to some extent by increased volatility and demand for higher risk premiums in the financial markets.
For the share portfolio, general market risk presents the greatest challenge to profitability. Orkla’s share portfolio is primarily concentrated on listed shares in the Nordic region. More information on matters related to the structure and composition of the share portfolio may be found in Note 19 to the consolidated financial statements. The investments in real estate represent relatively low potential losses at Group level.
The investment in REC presents a significant risk for Orkla. For more detailed information about the risk factors for this company, see REC’s website. Orkla’s equity interest in Jotun is not considered to entail significant risk. See Jotun’s website for further information.
Orkla HQ accounts for a small proportion of the Group’s overall risk exposure, but a large proportion of contingency risks (risks with low probability, but severe consequences), such as risk related to financing, taxes, compliance with laws and regulations, financial reporting, intellectual property rights, corporate reputation and corporate governance. The Group Executive Board monitors these risks through routine operational reporting and regular meetings with senior corporate function staff.