PL
Integrated
Report 2021

Risk management

The body supervising the risk management process at the Capital Group is the Risk Management Committee, consisting of the Members of the Management Board of Grupa Kęty S.A. The operating activities related to risk management are performed by the Treasury and Risk Management Director, as well as by the Risk Teams at the particular segments of the Capital Group. The activities of all bodies and units with regard to risk management are regulated by the ‘ERM Risk Management Policy’.

The basic financial and business risks and their impact as well as the measures used to mitigate the particular risks are presented in the table below.

  • GRI: 102-15

Description

Companies of the Capital Group carry out exports, imports, sales and purchases in PLN based on variable prices depending on FX rates (denominated transactions).

The prices of base materials, including aluminium for the EPS and the ASS, and granulate for the FPS, undergo frequent changes on the world’s markets, which is translated into fast changes of the costs of production and finished products prices.

High level of the Company indebtedness exposes it to interest rates fluctuations.

Potential impact

  • Decline in exchange rates applicable to currencies in which export is made results in lower profitability
  • Increase in exchange rates of the import currencies results in higher costs of materials
  • Material price fluctuations may prevent adequate change of sales prices
  • Increase in interest rates may result in higher costs of finance

Risk-mitigating measures

  • ‘Natural hedge’ measures
  • Forward and futures contracts conclusion
  • Debt currency structure management
  • Futures and swap transactions based on aluminium prices at the LME
  • Contracts with fixed delivery prices
  • Contracts based on the price formula transferring the price and currency risk to the buyer
  • Part of financing with fixed interest rates
  • Finance based on various variable rates 1M-6M – adequate periods for interest rate changes

Description

The Companies purchase raw materials in many countries of the world. They are exposed to disturbances in deliveries in relation to limitations in foreign transport (e.g. with regard to the pandemic), but also sanctions and embargoes imposed on the specific companies, persons and countries. An additional risk may arise from the negligence of suppliers and extraordinary occurrences related to their organisations.

Potential impact

Lack of liquidity in raw materials supplies poses a hazard for the continuity of the production process and disturbs the timely order completion, which further leads to the negative financial results and loss of customer trust.

Risk-mitigating measures

  • Suppliers diversification
  • Warehouse policy focused on higher inventory stocks of materials, if the number of suppliers is limited
  • Reduction of the share of suppliers from markets exposed to risk

Description

IT infrastructure is exposed to many factors which may negatively affect its proper functioning. These include but are not limited to:

  • sabotage or staff error;
  • system failure;
  • infrastructure overloading – either servers or telecommunication lines;
  • cyber attacks;
  • exceptional occurrences.

Potential impact

IT systems failures may result in downtimes or inability to perform tasks by the business units.

Risk-mitigating measures

  • Cyber-Edge insurance
  • Outsource contract for IT operations
  • IT continuity plans
  • Back-up policy
  • Possession of test environments
  • HR procedures with regard to staff management (development, training)
  • IT staff participation in meetings devoted to the Segments’ strategic plans and budgets
  • Stress tests/ socio-technical tests
  • Data centre protected in compliance with the best sector practices (independent power supply, UPS, precise air-conditioning, extinguishing systems, monitoring, burglar control and access control systems, etc.)
  • Two independent, active data centres

Description

Changes in the labour market and the prevailing ‘employee focused market’ result in higher risk of attracting and keeping competent staff.

The factors may result, for example, in the risk of:

  • inadequate speciality competence staff availability on the market;
  • market competition;
  • hard working conditions due to monotony, lifting loads, high temperature (candidates are not interested in shift work or working at weekends), professional burnout;
  • high number of absences;
  • excessive concentration of responsibility and knowledge in one person resulting in a problem with their replacement.

Potential impact

Staff problems may result in a failure to secure business areas with regard to the performance of strategic and operating goals, failure to comply with law or customers expectations, or production downtimes.

Risk-mitigating measures

  • Market reports
  • Market research with regard to payroll and working conditions, and offering competitive terms to the employees
  • Competitive working conditions (flexible working time, well furnished workplaces)
  • Competitive pay (market level of remuneration, benefits, Company Social Benefits Fund)
  • Company renown, stability of employment, organisational culture

Description

Liquidity risk may result from the loss of creditworthiness and the associated withdrawal of funding by certain banks, rapid growth in the demand for working capital, for example due to a soar in materials prices, deterioration of the term structure of receivables, etc.

Potential impact

  • Problems with supplies of basic materials or their higher cost
  • Higher costs of finance resulting from the need to acquire new sources

Risk-mitigating measures

  • Diversification of the sources of funding in terms of entities and products and maintaining liquidity buffers in the event of sudden increases in material prices
  • Transfer of a portion of the trade credit risk to the insurer

Description

Gathering information from a large group of people within the organisation results in high error risk due to human factor (manipulation, leak of data, errors), as well as system errors, e.g. gaps in registering transactions or other business events.

Potential impact

Based on faulty reporting, faulty decisions may be made with regard to the contracts concluded, budgets, non-standard contracts valuation, which could result in their lack of profitability.

Risk-mitigating measures

  • Procedures regarding group reporting and consolidation
  • Procedures regarding books of account closure
  • Building replacement capacity within teams in case of absence
  • Automated reporting
  • Integrated financial and accounting system, reconciliation of partial data with the data reported on the higher level of detail
  • Preparing quotations/agreements based on prepared templates, verification and acceptance of commercial offers/agreements in compliance with the binding authority matrix
  • Verification of project assumptions by at least two employees/advisers
  • Verification of workshop documentation by the production department, insurance, hedging transactions

Description

Approximately 58% of consolidated sales are made to the construction industry, which means that a significant economic downturn in that business would adversely affect the Group’s performance.

Potential impact

  • Lower sales and thereby lower margins resulting from low level of production capacity utilisation

Risk-mitigating measures

  • Geographic diversification (exports growth)
  • Product diversification – sales growth in industries not related to construction (automotive, food)

Details concerning risk management are presented in note 37 to the consolidated financial statements of the Grupa Kęty S.A. Capital Group for 2021.

Details concerning derivative financial instruments are presented in note 38 to the consolidated financial statements of the Grupa Kęty S.A. Capital Group for 2021.

 

Risk management in reference to social, occupational, and environmental issues, as well as respect for human rights and corruption prevention

The body supervising the risk management process at the Capital Group is the Risk Management Committee, consisting of the Members of the Management Board of Grupa Kęty S.A. and the Heads of Segments. The operating activities related to risk management are performed by the Treasury and Risk Management Director, as well as by the Risk Managers and Risk Teams at the particular Segments of the Capital Group. The Segment Risk Managers and the Treasury and Risk Management Director create a team at the level of the Capital Group. The activities of all bodies and units with regard to risk management are regulated by the ‘ERM Risk Management Policy’. In 2021, the Company analysed major corporate risks and assigned them to the competencies of Directors in the Management Board Offices with regard to the risks applicable to the whole Capital Group, or persons responsible at the Segments with regard to risks in other areas.

Within corporate risks, two risks directly related to the environment and social areas were identified in 2021:

  • risk of non-performance or lack of update of strategy in the sustainable development (social responsibility) area, resulting in non-compliance with new legal and business requirements;
  • risk of non-compliance with the principles of ethics, resulting in non-ethical culture of the organisation and claims on account of breaching the Code of Ethics.

Both risks underwent estimation within the internal ERM system, blockers were developed, and Key Risk Indicators (KRIs) were set. The person responsible for the risks management is the CSR Director. The fist KRIs revision will be made in 2022.

With regard to providing more detail and supplementing social and environmental risks, the Company has separated additional risks in the non-financial area, as well as their impact, and prepared adequate tools to mitigate the particular risks.

Risk Description Potential impact Risk-mitigating measures
Risk of extraordinary events caused by climate changes The assets and the employees of the company may be exposed to a series of events of unforeseeable nature caused by growing climate changes, such as floods, extended heatwaves, droughts, whirlwinds, etc.
  • Loss of assets
  • Higher costs of operation
  • Temporary production suspension
  • Transfer of a portion of risk to the insurer
  • Diversification of the locations of production plants
Risk related to non-adjustment of the organisation to zero-emission economy Risk related to non-adjustment of the organisation to zero-emission economy
  • Loss of a portion of sales
  • Necessity of incurring additional capital expenditures
  • Higher costs of production
  • Implementation of a system for monitoring direct and indirect greenhouse gas emissions and carbon footprint
  • Actions aimed at greenhouse gas emission reduction and lowering of the products carbon footprint
  • Analysis of the possibility to offset a part of own emissions
  • Monitoring of legal regulations changes and analysis of the consequences of their introduction
Risk of direct and indirect emission of greenhouse gases and legal changes related to emission levels The operation of the Group companies is related to a significant demand for electric energy and energy-intensive products. The necessity to change the source of energy used in the process of aluminium melting and heat treatment (natural gas) may result in higher costs of purchase owing to the use of mainly purchased heat originating from fossil fuels.
  • Inclusion in the European Emissions Trading System (EU ETS) may result in the costs of adjusting systems or purchasing CO2 emission allowances on the market (lower production profitability)
  • Administrative decisions limiting the scope of production
  • Reputation risk
  • Control of emissions and optimisation of natural gas combustion processes
  • Implemented formal procedures of supervision of the greenhouse gases emission aspects
  • Supervision and monitoring of the Capital Group emission sources
  • Periodical tests of emission to air
Risk of emission to water, soil and air of any pollutants originating from the infrastructure, production and warehouse processes, or hazardous waste management In the production process of the Group companies there are used hazardous substances and mixtures, which generates the risk of uncontrolled spill.
  • Administrative penalties
  • Order to stop the production process
  • Reputation risk
  • Supervision of the legal requirements regarding failure prevention, or hazardous substances management
  • Training in EHS and fire-safety in accordance with the schedule
  • Supervision of infrastructure, particularly as regards efficiency maintenance of utilities systems, including air conditioning, as well as machines and plant using hazardous substances
  • Current identification and assessment of the conditions of applying and approving for use of hazardous substances and mixtures
  • Preparing workstations, machines, equipment and infrastructure in a manner which limits the possibility of a failure to the minimum
  • Keeping equipment and employees in permanent readiness to react to emergency situations
  • Determination and implementation of the principles of acting in crisis situations

Risk Description Potential impact Risk-mitigating measures
The risk of non- adjustment of the organisation, its structures, documents and policies to the changing formal and legal conditions in the area of corporate governance We have been observing fast changes in the domestic and European legislative processes, and best practices for stock listed companies.
  • Loss of the Company credibility, higher investment risk for the shareholders
 Current monitoring and analysis of the regulatory environment, internal control system, internal and external audits
Corruption risk Accepting personal or material benefits by an employee or a group of employees. Proposing personal or material benefits in exchange for a decision or action beneficial to the company.
  • Legal sanctions, including fines
  • Higher costs of purchase
  • Loss of customers or suppliers
  • Internal procedures, including anti-corruption policy and purchasing procedures
  • Internal controls and audits · Opening of whistleblowing channels
Reputation risk related to a failure to respect human rights Infringement of human rights within the organisation or the supply chain. Purchase of materials from and sales of product to companies that breach human rights.
  • Legal sanctions, including fines
  • Loss of customers or
  • Internal procedures, including the Code of Ethics and the Dignity at Work Policy
  • Internal controls and audits
  • Opening of whistleblowing channels
  • Introduction of regulations in the supply chain enabling audits of the practices applied by the suppliers with regard to respecting human rights
Diversity policy in reference to the Company governing bodies
ESG management