The Novozymes Group is subject to a number of risks which may have a negative effect on the Group's future activities and results. Novozymes works continuously to identify these risks, and, where the Group has the opportunity to influence risks itself, activities are implemented with a view to countering and limiting the effect of these risks.
The following section describes a number of the most significant identified risks and the measures which Novozymes has implemented. The list is not in any order of priority and is not exhaustive.
Market and customers
Novozymes sells its products worldwide, and we are subject to the financial and political risks which this naturally entails. Growth in individual markets is therefore influenced by the local economic situation.
A small number of customers account for a high proportion of our sales in certain product areas, which means that Novozymes is affected by the trend in these customers' market conditions. We work closely with our major customers to limit this risk, for example by means of joint production planning, joint development projects, integration of IT systems, etc.
We try to maintain our position as market leader by continually launching new and improved high-quality products which meet our customers' needs. This places high demands on our research and development, requiring development to keep pace with our customers' needs. Failure here would entail the risk of a negative impact on Novozymes’ sales targets.
Enzymes produced using genetically modified organisms (GMOs)
Novozymes produces a large number of enzymes using genetically modified organisms. Without this technology it would be necessary to use larger quantities of raw materials, water and energy, and in many cases commercial production of an enzyme would not be profitable.
The use of gene technology and GMOs is the subject of regular debate around the world, mainly concerning foods containing GMOs. Novozymes’ use of gene technology has only featured in the debate to a limited degree. However, it is possible that Novozymes’ production and sales to the food and feed industries in particular may be affected by the public debate on gene technology and the impact this may have on consumer demand.
Read more about Novozymes’ use of gene technology in the article Biotechnology offers new possibilities and at Our science at www.novozymes.com.
Novozymes has been experiencing constant price pressure on its markets for a number of years, while there is considered to be a risk of increasing competition in the future from producers based in low-cost countries, particularly China and India.
One of the ways in which we are trying to counter this risk is by using our technology to optimise production, thereby reducing costs per unit produced. To maintain optimal production Novozymes is dependent, among other things, on reliability of deliveries from suppliers and, to safeguard this, cooperation agreements have been entered into with a number of key suppliers.
These cooperation agreements also help to reduce the sensitivity to fluctuations in the price of raw materials and energy to which Novozymes is subject. This is a result of operating in a business-to-business market with large international customers. Opportunities to pass on increases in raw material prices, for example, to our customers are limited because of our relatively poor negotiating position in relation to major customers.
Novozymes' technology is the basis of our business, and the company pursues an active patent strategy by protecting new discoveries as early as possible in order to stop our products, etc. being copied.
Environmental and social aspects
Environmental and social responsibility in how we run our business are among Novozymes' fundamental values. This is significant to all business activities, and a number of targets are set each year for environmental and social responsibility.
Novozymes is highly dependent on being able to attract and retain skilled employees, and one important parameter here is the company's reputation. Novozymes tries to maintain its current reputation through open and transparent communication, both internally and externally. Efforts are also under way to reduce the risk of situations arising which impair Novozymes' reputation. The Group's newly introduced business integrity policy is one example of this.
Novozymes uses animal testing in connection with the development and approval of products. The use of animal testing is the subject of public debate and as such constitutes a risk to Novozymes' reputation. The current product portfolio involves relatively few animal tests, but this may change as a result of the development of new business areas. We are continuously trying to reduce the number of animal tests by further refining the methods used and replacing test methods wherever possible. Read more about Novozymes' use of animal testing in Financial, environmental and social discussion.
Where suppliers are concerned, we try to reduce the risk of environmental and social aspects of their own production impacting negatively on Novozymes' reputation. We do this by evaluating these aspects and measures taken on the basis of internationally recognised standards and conventions in a dialogue on opportunities for potential improvements.
Financial risk factors
Novozymes’ international operations mean that the income statement and balance sheet are exposed to a number of financial risk factors. Financial risks are managed centrally. The use of financial instruments is governed by the treasury policy approved by Novozymes’ Board of Directors. This policy contains rules on the financial instruments that can be used for hedging, the counterparties that can be used and the risk profile that is to be applied. Financial instruments are used to hedge existing assets and liabilities or expected future net cash flow.
Currency exposure arises due to imbalances between income and costs in each individual currency and because Novozymes has more assets than liabilities in foreign subsidiaries.
Operating profit is most exposed to the EUR, USD and JPY. A 2.25% movement in the EUR would, other things being equal, result in a change in operating profit of around DKK 40-50 million. A movement of 5% in the USD would result in a change in operating profit in the region of DKK 30-40 million. A movement of 5% in the JPY would result in a change in the region of DKK 5-15 million.
Novozymes’ policy is to hedge existing net assets in foreign currencies and expected future net exposure from the company's operations. Hedging is carried out through a combination of currency loans, forward exchange contracts, currency swaps and options. The hedging transactions are based on Novozymes’ expectations of future exchange rate movements and are carried out to minimise the risk of loss and therefore increase the predictability of the Group's financial results.
Currency exposure relating to investments in foreign subsidiaries is hedged where this is deemed appropriate. Currency exposure is managed primarily by taking out currency loans and entering into currency swaps. Currency swaps, which are used to hedge participating interests, generally have a maturity period of over 12 months.
Interest rate exposure
Interest rate exposure arises in relation to interest-bearing assets and liabilities. A change of 1 percentage point in the average interest rate on Novozymes' net interest-bearing assets would have an effect on profit before tax of DKK 1 million. 77% of the loan portfolio at year-end 2005 was at fixed rates of interest. According to Novozymes’ treasury policy, free funds may only be invested in government bonds, extremely liquid domestic mortgage-credit bonds and money-market deposits.
Credit risk is managed by dealing in financial instruments and placing deposits only with banks having a satisfactory credit rating from one or more of the recognised rating agencies. Credit risk is calculated on the basis of net market values and is governed by the company's treasury policy. Novozymes has entered into netting agreements (ISDA) with all the banks used for dealing in financial instruments, which means that Novozymes' credit risk is limited to net assets. At December 31, 2005 the maximum credit risk related to one counterparty was equivalent to DKK 245 million.
In connection with the Group's ongoing financing of operations, including refinancing risk, the finance function shall ensure adequate and flexible liquidity. This is guaranteed by placing deposits in cash and extremely liquid negotiable instruments, and using binding credit facilities.
Energy consumption and prices
The manufacture of industrial enzymes requires high inputs of energy, and the trend in energy prices will therefore impact cost of goods sold. The risk of a negative impact from rising energy and CO2 prices is managed through optimisations in the production process, for example by using gene technology, and to a certain extent by hedging energy prices for a future period.
Novozymes is subject to ongoing developments in the energy markets, such as the recent introduction of a European CO2 quota system, which is another component in companies' energy management systems. Novozymes is in the process of developing and implementing an energy strategy which will improve risk management in this area.
Novozymes operates in many markets via subsidiaries and distributors, while production is restricted to a small number of countries. This entails a number of internal transactions, etc., which are covered by internal settlement prices. Novozymes follows the OECD principles in setting internal settlement prices, but this is a complicated area and always entails a tax risk as the area is subject to political judgement in each individual country. Novozymes regularly enters into dialogue with the tax authorities in the countries involved to reduce this risk.
The risk of personal injury, material damage and other events beyond the company's control is covered via a comprehensive insurance programme. However, the current price of the policies and the cover provided may be affected by external circumstances such as natural disasters and similar.