Risk report

As an international supplier of industrial gases, the Messer Group is exposed to opportunities and risks which inevitably arise in connection with entrepreneurial activities. Moreover, future earnings will depend both on the operating performance of the gases business and on the state of the economies in individual countries, a factor over which the Messer Group has no influence. It is the task of all concerned to take advantage of opportunities when they arise, whilst at the same time ensuring that risk is kept to a minimum and pro-actively managed.

The main risks which could be significant for the net assets, financial and earnings position of the Messer Group are as follows:

Macroeconomic risks

The industrial gases business is subject to intense competition. The level of competition is increasing in conjunction with the process of globalization. This highly competitive environment could reduce Messer’s earnings and cash flows in the future. The Messer Group operates globally, making it susceptible to local political, social and economic conditions and to the resulting risks arising in each market.

Market risks

We supply a cross-selection of industries and sectors (including steel, metal processing, chemicals, petrochemicals, food and beverages, healthcare and glass) on the basis of long-term contracts over periods of up to 15 years in Europe and up to 30 years in Asia. A significant reduction in market demand in any one of these key industries or sectors – particularly given the prevailing critical situation in the steel industry which is suffering from worldwide over-capacity – could adversely affect future earnings. Our strong position in China also means that this region makes an above-average contribution to earnings, and conversely, that any economic downturn on this market cannot be fully compensated by improved performance in other markets.

Cost risks

Regulatory or government amendments or interventions in the energy sector may lead to rising energy prices in some countries. The re-occurrence of crisis situations within oil-producing countries, the growing demand for energy in emerging economies, particularly in China and India, give reason to believe that oil and energy prices will rise again in the long term with a corresponding impact on supplies and primary products necessary for the Messer Group’s business. Purchase prices of some important bought-in products, such as helium, fluctuate considerably. Although Messer is often able to pass on cost increases partially to its customers via price escalation clauses in supply contracts (in particular for electricity price increases) or reduce the risk by entering into long-term purchase agreements, it is possible that price increases for energy and bought-in items could adversely affect the profitability of the Messer Group.

Selling price risks

The intense competition may lead in certain countries to disproportionate downward price trends, which could have a negative impact on future sales and earnings. The integration of member states which have only recently joined the EU entails risk in that many previously state-run businesses will need to be privatized and restructured in accordance with EU and International Monetary Fund requirements. The number and scale of state grants could be drastically reduced, culminating in numerous closures and mergers in these countries, and an adverse impact on the Group’s sales. In these circumstances, the downward pressure on selling prices would probably increase.

Operational risk

An operational interruption at one of our production facilities can result in loss of supplies to customers. We endeavor to avoid this situation by regularly maintaining and monitoring our equipment. In the event of breakdowns or defects, emergency plans and instruments are in place to reduce the financial consequences of a business interruption at one of our customers. The Messer Group is currently expanding its supply structure and maximizing flexibility in order to ensure that supplies to customers are safeguarded even in emergency situations. The range and quality of our products depend on the availability of bought-in hardware and on the production equipment used (e.g. cylinders and tanks) on the one hand and on the quality of service/products of our suppliers and business partners on the other.

Acquisition risks

The Messer Group is continually developing new strategies. As well as expanding and strengthening our existing business and continually optimizing our sourcing and logistics processes, we are intent on achieving growth both organically and through other means such as acquisitions and joint ventures. Our aim is to consolidate operations on existing markets and to divest non-core business operations. The sale of entities or business activities can, however, result in retrospective risks for the Group. Appropriate provision is recognized if a risk is probable. When deciding to make acquisitions or entering into new partnerships there is always a risk that future market potential and the feasibility of projects being put into action may have been wrongly predicted. The Messer Group therefore has internal committees which highlight the development potential of a project prior to its approval and analyze any information which has a bearing on decisions which need to be made. In order to be as certain as possible that M&A projects have future development potential, due diligence investigations are carried out by experienced staff in specialist departments before any acquisitions are made in connection with M&A projects. Risk is also reduced by including relevant terms of agreement in sales contracts.

IT risks

The use of state-of-the-art information technology plays a decisive role in handling and securing business processes within the Messer Group. Our IT center in Germany provides the scope to create a modern and efficient infrastructure and to improve our business processes where necessary. This concentration does, however, mean that there is a greater risk of business interruption, cyber criminality and sabotage, caused by natural hazards or human error. In order to avoid this risk, our IT center applies its own IT risk management system, including ongoing testing of the system architecture. Particular attention is paid to the provision of IT infrastructure and services and especially to guaranteeing fail-safe and interference-free operations. The integrity and reliability of the data and important information are ensured by means of appropriate measures, services and systems. Most of the business processes of the Messer Group are provided by internal or external IT services. The security and compliance of the information systems are set out in the IT strategy objectives, on the basis of which the Messer Group designs, implements and reviews measures to ensure protection of data, applications, systems and networks on an ongoing basis. Both preventive and corrective measures are considered in this process.

Financing risks

We require funding to finance our growth and ambitious capital expenditure program. We are therefore dependent on the financial sector remaining stable and liquid. The Messer Group is reliant on cash flows from operating activities to repay debt. This is dependent to a large extent on the ability to generate positive cash flows from operating activities.

The Group has recognized goodwill in the consolidated balance sheet. The application of IAS 36 (i.e. the performance of impairment tests) could result in the requirement to recognize impairment losses on goodwill, if the business and market prospects of a group subsidiary or cash-generating unit deteriorate compared to the original date of measurement. Impairment losses could have a significant adverse impact on earnings and on balance sheet/ performance ratios. In China, the steel industry is in a State-run restructuring process which may lead to the closure of individual production sites. The resulting uncertainties were taken into account in the forecast through corresponding allowances on receivables and scaled-back business assumptions.

There is always a risk that financial and debt crises could result in global economic downturns or slowdowns. The Messer Group will continue to observe developments very closely. Cost reduction measures and capital expenditure programs initiated and implemented in recent years have helped to counter the negative impact of previous financial and economic crises. Many of these programs remain in place. A potential deterioration in the creditworthiness of our customers increases the risk of bad debts and delays in joint projects.

It is essential that we ensure compliance with the covenants attached to the USPP and RFA financing arrangements. Particularly worthy of mention is the net debt (i.e. gross debt less liquid funds)/EBITDA covenant which is required to be complied with for the Messer Group as a whole and for the Messer Group excluding its subsidiaries in China. Financial risks can also arise for the Messer Group from changes in exchange and interest rates. The management of interest rate, currency and liquidity risks is handled by Group Treasury in compliance with guidelines approved by executive management. Group Treasury identifies, measures and hedges financial risks. The Messer Group currently employs marketable forward currency contracts, interest rate swaps and cross-currency interest rate swaps as hedging instruments. Treasury guidelines contain general risk management principles and specific rules for defined areas such as the exchange rate risk, interest rate risk, the use of derivative financial instruments and the investment of surplus cash. The related risks are observed continuously and the scope of hedging adjusted where considered necessary.

Currency risks

Transaction risks arising in conjunction with the export of products are generally hedged as soon as the order is received. At an operating level, for the most part the individual Group entities transact their business locally in their functional currency. For this reason, the currency risk element of transaction risks is generally considered to be low. However, some Group entities are exposed to foreign currency risks that arise on transactions that are not denominated in their functional currency. These transactions relate mainly to payments for imported products or services and are hedged to the maximum extent possible. Like any other market participant, we may be confronted with the unexpected appreciation of a functional currency which weakens the international competitiveness of the country concerned and hence the ability of our local business to export its products. Translation risks which may arise when converting foreign currency exposures into euro are classified as customary for the business. Assets and liabilities denominated in non-euro currencies can give rise to exchange losses when converted into euros, thereby reducing Group equity.

Legal and contractual risks

Enterprises are confronted from time to time with allegations that they have infringed industrial rights or legal obligations, that defective products have been supplied or that environmental protection laws have not been adhered to. Regardless of their prospects of success, this type of claim can result in very high defense costs. In cases like these, the Messer Group defends itself energetically with the support of both in-house and external experts.

Our international operations are subject to a wide range of country-specific environmental legislation and regulations in areas such as gas emissions, groundwater pollution, the use and treatment of dangerous substances as well as ground surveys and decontamination. This can give rise to liability risks in conjunction with either past or current operations. New environmental requirements, partially resulting from the adoption of EU directives in the new EU Member States, necessitate that our existing environmental standards (which are already at a very high level) are brought into line with the new requirements. This may result in higher production costs and modifications to the production process. That said, the recent past shows that the implementation of stricter environmental regulations often results in a more efficient production process and a higher quality product.

Overall assessment by management

The above-mentioned opportunities show that both internal and external potential are involved. We endeavor to develop in-house potential on a targeted basis and will put external potential to good use whenever the opportunity arises. The risks presented above are not the only ones to which the Messer Group is exposed. Some risks, which have not yet been identified or which are not considered to be significant from today’s perspective could have an adverse impact on the Messer Group if general business or economic conditions were to change. However, no risks were identified in 2017, either individually or in aggregate, which could have a material adverse impact on the going-concern status of the Messer Group. From today’s perspective, no such risks are pending in the foreseeable future. The principal risks during the period under report encompassed market developments, with at times intensive competition and price pressure, as currently in China, and production processes. Organizational measures are in place to identify potential risks at an early stage. Our vigil risk management system (described below) and pro-active management of risks enable us to reduce risk.

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