Risks related to operations
Proactive risk management is a foundation for successful business
Outotec operates in accordance with its enterprise risk management policy, which specifies the principles and responsibilities of risk management and the reporting and follow-up procedures. Outotec’s risk management framework is described in Outotec’s Corporate Governance Statement.
Outotec’s business units and market areas are responsible for managing the specific risks related to their business operations. The company’s shared functions facilitate the implementation of the risk management policy and develop ways of working that benefit the whole company. Based on information reported by the business units and market areas, quarterly risk reports are compiled for the Audit and Risk Committee, Executive Board, and auditors.
Risk management throughout the project life-cycle
Outotec uses a procedure for identifying, assessing and mitigating operational risks. The assessment and reporting of such risks in sales and delivery phase are carried out according to the guidelines set forth in Outotec’s Operational Risk Management policy.
Outotec’s business operations comprise hundreds of different projects. Key issues in successful project execution are good project management skills, processes and tools. Project risk management at Outotec is an integrated process covering all stages of a project. Projects undergo a comprehensive risk assessment covering identified risk areas, starting in the sales phase and continuing through the bidding, negotiation, and execution phases up until the end of the warranty period.
Identification and mitigation of risks is documented in the risk assessment, and, on the basis of the analysis, appropriate follow-up actions are specified. These actions may also include abandonment of the proposal. The goal is to identify proposals that can be expected to strengthen Outotec’s sales, operating profits, cash flow, basis for lifecycle service business and competitiveness, as well as the availability of resources and technology.
Key strategic and operational risks
Strategic and operational risks are associated with the nature of Outotec’s business and on-going projects as well as changes in the business environment. Among others, strategic risks may relate to Outotec’s business portfolio, business environment, technology, major investments as well as mergers & acquisitions. Operational risks, in turn, are mainly connected with operating environment, project deliveries, our customers’ and subcontractors’ operations, compliance, quality, health and safety and overall economic outlook.
The risk factors described below can potentially have an adverse effect on Outotec’s business operations and financial position and, as a result, on the value of the company. Other risks, which are currently either unknown or not considered as material, may also become material in the future.
Cyclical nature of the mining and metallurgical industries
The market for technology providers for the mining and metallurgical industries is driven strongly by the overall investment activity in these industries and the global GDP growth, underlying global consumption of metals, the balance (or imbalance) of metals supply and demand, the capacity utilization rate, and metal prices.
Volatility in Outotec’s sales is driven primarily by the changes in global supply and demand related to metals and the capital expenditure plans of the mining and metallurgical companies. The cyclical nature of Outotec’s business sets demands for a scalable operating model and cost structure that can respond and adjust to market cycles. In order to be less dependent on the cycles of the mining and metals industries, Outotec’s strategy is to strengthen its services offering and pursue opportunities in selling its technologies to other process industries such as the fertilizer industry, energy and industrial water treatment. Entry into new markets such as alternative energy technologies also entails strategic risks and these markets may be affected by factors such as low fossil fuel prices or uncertainty regarding government subsidies for energy-producers.
Ability to implement large and complex customer projects
Outotec has been delivering projects to over 80 countries in the past decades and has strong experience in global project management and execution work in different cultures and difficult conditions. Failure to adequately manage resourcing, quality of delivery, or other critical aspects in projects, could result in delays in deliveries and unplanned costs, which in turn could have an adverse impact on the profitability of the company. Especially during difficult market situation, Outotec sees an increased risk of disputes relating to project implementation, which may result in extra costs or penalties for delay or guaranteed performance of a plant solution. In contracts relating to the delivery of major projects, the liquidated damages attributable to, for instance, delayed delivery or non-performance of a plant solution may be significant. If these risks materialize, this can have a material impact on Outotec’s financial results. During long implementation times, also changes in the regulatory environment, including interpretation of global and local tax rules, may result in a need for adjustments or increase direct or indirect taxes, thus reducing the company’s net results.
Outotec manages project risks through focusing on project risk identification and mitigation in an end-to-end process from sales to delivery and project governance in form of unified project steering practices. Availability of skilled project management resources is also vital. Target is to have projects that are cash flow neutral, or positive if risk profile so requires, starting from an advance payment and continuing with milestone payments. If a termination or suspension by a client occurs, own and committed costs and profits can be covered either from received cash flow or by collaterals like payment guarantees.
Competitive environment and changes in customer requirements
Each of Outotec’s business units and market areas operate in somewhat different competitive business environments. For some technologies, the market entry barrier is high because of the decades of practical experience needed in order to successfully design and optimize processes to meet the needs of different ore contents. In order to maintain and strengthen its competitive position and market share Outotec must continuously invests in research and development of its technologies and services. Outotec’s competitive advantage is also highly dependent on skilled experts.
Outotec closely monitors the markets to stay ahead of competition and any possible new entrants in different technologies. Weak market demand typically increases cost competition and has led to increased competition from suppliers from emerging economies. Outotec has an extensive installed base of solutions and equipment delivered over the decades and will continue to utilize the opportunities associated with its installed base.
Political, economic, and other uncertainties
Business operations in emerging markets may present risks that are not encountered in countries with more established economic and political systems. These risks are related to economic instability and potential difficulty of anticipating future business conditions in these markets.
Risks related to Outotec’s business operations are high in certain markets, such as the Middle East, Russia, and Turkey. The geopolitical and security situation, sanctions, or economic conditions may rapidly change, which may cause delays in the placement of orders for awarded projects as well as in the execution of projects and thereby subject the company to volatile markets, or completely prevent Outotec from operating in these areas.
Technology and offering development and new industry applications
Outotec introduces new technology and continuously develops its existing offering and solutions based on customer needs and market requirements. Outotec’s research and testing facilities are used in testing customers’ raw materials in order to select and design the optimum process and describe parameters for given performance guarantees. The development of new technology and execution of first of its kind projects involves risks related to the performance of the solution, implementation costs and functioning of the delivery chain.
The company’s aim is to develop new technologies and services and to commercialize them. With technology and product development, the time-to-market and right allocation of investment resources are vital. Outotec’s future success will depend on its ability to enhance its existing technologies and services, address the increasingly sophisticated and diverse needs of its customers, stay at the front line of technological advances, and conduct its business on a cost-effective and timely manner.
Credit risks, foreign exchange fluctuations and liquidity
Outotec is also exposed to risks related to the liquidity and payment schedules of its customers. The risk of credit losses increases during down-cycle in the mining and metallurgical industry. The risks related to accounts receivable is mitigated through the use of advance payments and payment securities.
Outotec operates internationally and is thus exposed to risks arising from foreign exchange rate fluctuations related to currency flows from revenues and expenses, as well as from the translation of income statement and statement of financial position items of foreign subsidiaries into euros.
In the current market situation, the short-term risk and uncertainties involved may lead to decreasing headroom under financial covenants related to the capital structure and liquidity in Outotec’s main credit facilities.
Outotec Treasury is responsible for the centralized management of financial risks in accordance with Outotec’s Financial Risk Management Policy. Financial risk management is discussed in more detail in Note 18 of the Consolidated Financial Statements.