Corporate activity is accompanied by opportunities and risks. For BLG LOGISTICS, the responsible management of possible opportunities and risks is a core element of sound corporate governance. Our opportunities and risks policy aims to increase the company’s value without taking any inappropriately high risks.
Uncertain events that increase the company’s value and may be the outcome of developments that are more favorable than planned.
Possible future developments that are unfavorable to the attainment of short-term strategic goals or that are hazardous or even threaten the existence of the company through a reduction in the company’s value.
Risk management in BLG LOGISTICS is mainly derived from the goals and strategies of the individual business areas. It aims to recognize potential risks in good time, take suitable countermeasures to avert the threat of damage to the company and eliminate any threat to the company’s continued existence.
The strategic orientation of BLG LOGISTICS, which operates both within Germany and internationally, is highly diversified. Thus the structure of having three divisions together with a number of associated business areas leads to a certain degree of autonomy. Significant capital expenditure is mainly substantiated and backed up through contracts with customers.
Opportunity and risk management system
The Board of Management is responsible for the opportunity and risk management system. The Supervisory Board and the Audit Committee monitor and examine the system to ensure it is appropriate and effective. The responsibility for identifying and managing significant risks and opportunities is managed centrally within BLG LOGISTICS. Different levels and organizational units are integrated into the system.
The relationship between expertise and frequency of decision-making can be seen in the following diagram:
Communication channel and responsibilities in BLG LOGISTICS’ opportunity and risk management system
In order for us to achieve our goals, measured by earnings before taxes (EBT), the broad spectrum of our logistics services requires the early identification of potential opportunities and risks. The Board of Management and the managers, as well as the Supervisory Board, receive monthly reporting on the key figures of BLG LOGISTICS. This is intended to ensure the creation of added value over the long term and to prevent any threat to the company’s continued existence. The central components of the opportunity and risk management system are therefore the planning and management process, the rules within the Group, and reporting. We give special consideration to opportunities and risks arising from strategic decisions, from the markets, from the operating activities and from financing and liquidity.
Opportunity and risk management at BLG LOGISTICS
BLG LOGISTICS’ principles of risk management are documented and published in a guideline. Risk managers and risk coordinators are appointed in the divisions and in the central and administrative departments in order to ensure that the risk management system runs efficiently. This ensures that risks and risk mitigating measures (risk avoidance and reduction, or the transfer of risk through insurance) and opportunities are identified and evaluated in the area of the business where they actually arise. The centrally implemented risk management department is responsible for coordinating the Group-wide identification, assessment and documenting of opportunities and risks. An IT-supported risk management system serves as the basis for this.
The risks and the related measures defined within the strategy which we currently believe could have a material adverse effect on our net assets, financial position and results of operations are identified, assessed and monitored on an ongoing basis in the sense of a permanent inventory. These are not necessarily the only risks to which BLG LOGISTICS is exposed. Other influences of which we are not yet aware or which we do not yet consider to be significant may also affect our business activities but are not included in the risk report.
The Internal Audit department is also integrated in risk communication within BLG LOGISTICS as a process-independent monitoring entity.
As a company with international operations and a broad spectrum of different services, BLG LOGISTICS is exposed to a variety of risks. These are analyzed through ongoing monitoring of both the macroeconomic environment and, especially, global logistics trends, and are taken into account in business decisions. Services and infrastructure risks as well as financial risks comprise the majority of the overall risks.
Insurance policies are taken out where available and economically viable in order to minimize the financial effects of possible damage. The cover provided and amount insured under these policies is examined on an ongoing basis.
In order to counteract potential risks which could arise in particular under a wide range of geographic, employment, cartel, customs, capital market, tax, contractual, environmental and competition regulations and legislation, BLG LOGISTICS bases its decisions and the design of its business processes on comprehensive legal advice, as well as on input from in-house and external experts. To the extent that legal risks relate to past circumstances, necessary accounting provisions are created and their appropriateness examined at regular intervals.
Aims and methods of financial risk management
The principal financial instruments used to finance the Group include non-current borrowings, current loans and cash, including short-term deposits with banks. The focus is on financing the operations of BLG LOGISTICS. BLG LOGISTICS has access to a range of other financial instruments, such as trade receivables and payables, that arise directly as part of its operations.
Financial risk management is the responsibility of the Treasury department, whose tasks and objectives are described in a guideline approved by the Board of Management. The central task besides managing liquidity and arranging financing is the minimization of financial risks at Group level. This includes preparing and analyzing financing and hedging strategies and contracting hedging instruments.
The material risks for the Group resulting from financial instruments are credit risks, foreign currency risks, liquidity risks and interest rate risks. The Board of Management creates risk management guidelines for each of these risks, which are summarized below, and verifies compliance with these guidelines. At Group level the existing market price risk for all financial instruments is also monitored.
Capital risk management
An important capital management goal for BLG LOGISTICS is to ensure the ability of the company to continue as a going concern in order to provide earnings to shareholders and to provide other stakeholders with the benefits to which they are entitled. Additional goals are to optimize liquidity security and maintain an optimum capital structure in order to reduce the costs of capital in general and the refinancing risk in particular in the long term.
BLG LOGISTICS monitors its capital on the basis of the equity ratio and other key figures. Assurances have been made to all partner banks with regard to equal treatment and the change-of-control clause.
In 2020, the strategy continued to be to secure access to external funds at acceptable costs.
Description of the main features of the internal control and risk management system with regard to the accounting process in accordance with Section 315 (4) HGB
Definition and elements of the internal controland risk management system
The internal control system of BLG LOGISTICS with regard to the accounting process includes all principles, procedures and measures to ensure the correct and legally compliant recognition, measurement and presentation of business transactions in the financial statements. The aim is to avoid any material misstatements in accounting and external reporting.
Since the internal control system is an integral component of risk management, it is presented in a condensed form.
The internal management and monitoring systems are components of the internal control system. The Board of Management of BLG LOGISTICS has assigned responsibility for the internal management system in particular to the Financial Services department (incl. financial controlling, finance and accounting), which cooperates closely under one management and with a focus on processes.
The internal monitoring system comprises controls that are both integrated into and independent of the accounting process. The controls integrated into the process particularly include the dual control principle, the separation of functions between related departments (particularly creditor and treasury management) and IT-supported controls, as well as the involvement of internal departments such as Legal or Tax departments and of external experts.
Controls that are independent of the process are carried out by the Internal Audit department (e.g. compliance with the authority and signature guideline and the purchasing guideline), the Quality Management department and the Supervisory Board, in the latter case principally through its Audit Committee. The Audit Committee concerns itself in particular with the accounting for the company and the Group, including reporting. The activities of the Audit Committee also focus on the risk situation, the further development of risk management and compliance issues. This also includes the effectiveness of the internal control system.
Process-independent audit activities are also performed by external auditing bodies such as the auditing company or the external tax auditor. With regard to the financial reporting process, the audit of the annual and consolidated financial statements by the auditing company forms the main component of the process-independent review.
Accounting-related risks can arise, for example, through the conclusion of unusual or complex business dealings or the processing of non-routine transactions.
Potential risks also result from discretionary scope in the recognition and measurement of assets and liabilities, or from the effect of estimates on the annual financial statements, such as for provisions or contingent liabilities.
Accounting process and measures to ensure its correctness
Business transactions are generally accounted for in the separate financial statements of the subsidiaries of BLG LOGISTICS using the standard software SAP R/3. The consolidated financial statements are prepared using the SAP consolidation module EC-CS, with the separate financial statements of the companies included in the consolidation being combined, if necessary after adjustment to comply with international financial reporting standards. The separate financial statements of foreign subsidiaries and domestic subsidiaries not integrated into the SAP system are included on the basis of the standardized, Excel-based reporting packages audited by audit firms, which are transferred into the EC-CS consolidation system by way of flexible uploads. This is a standard interface in SAP.
BLG LOGISTICS has issued accounting guidelines for financial reporting in accordance with International Financial Reporting Standards (IFRSs) to ensure consistent recognition and measurement. In addition to general principles, these guidelines cover in particular accounting principles and methods and regulations on the income statement, consolidation principles and special topics. To ensure the implementation of consistent, standardized and efficient accounting and financial reporting, guidelines for uniform Group-wide accounting have also been drawn up. Impairment tests for the Group’s cash-generating units are carried out centrally. This ensures that consistent and standardized measurement criteria are used, especially the underlying interest rates. The same applies to the specification of the parameters to be used for the measurement of pension provisions and other provisions based on expert opinions.
When preparing the debt consolidation, internal balances are regularly reconciled in order to clarify and remedy any differences in good time. At Group level, in addition to a validation by the system of the data reported in the separate financial statements, the reporting packages in particular are tested for plausibility and adjusted if necessary.
The disclosures in the notes to the consolidated financial statements are produced mainly from the EC-CS consolidation system and enhanced by additional information on the subsidiaries.
In addition, supporting disclosure management software is used for preparing material separate financial statements and the consolidated financial statements, which uses a uniform data pool and includes validations, history traceability and a clearly defined workflow. A high degree of automation significantly reduces the risk of error and increases efficiency.
Special software is used for tax accounting. Current and deferred taxes are calculated at the level of the individual subsidiaries and the recoverability of the deferred tax assets is tested. Current and deferred taxes to be recognized are thus calculated at the Group level in the statement of financial position and in the income statement, taking into account the effects of consolidation.
The internal control and risk management system ensures the correctness of the accounting process and compliance with the relevant legal requirements.
Discretionary decisions, controls containing errors, or malicious acts may, however, limit the effectiveness of the internal control and risk management system, with the effect that the systems established cannot guarantee with absolute certainty that the risks will be identified and managed.
Our business model
As an international Group with three divisions and their business areas, BLG LOGISTICS is exposed to a wide range of trends in the various national and international markets. Based on the business development described in this report and the company’s position, the current macroeconomic conditions present various potential opportunities. The effects of sustainable positive economic trends are of overriding importance here. The development of innovative solutions for our customers in the context of future-oriented research projects also has a high priority. For further information, please refer to the “Research and development” section.
We also want to make optimum use of opportunities in the various fields of activity that open up to us in future. The premise for this remains our network, and the innovative intermodal offering in the AUTOMOBILE Division.
The established business models in the trade and industrial logistics business areas offer the CONTRACT Division sales and acquisition opportunities combined with additional automation and digitalization activities in Germany and the rest of Europe. The individual business areas benefit from a continuing growth market because our customers want to improve their own cost structures and make them more flexible through increased outsourcing.
The CONTAINER Division continues to hold that deepening the shipping channel in the Elbe and Outer Weser Rivers for the purpose of securing and positioning the German ports in the North Range is urgently necessary so that ever larger container vessels can call at Bremerhaven and Hamburg without hindrance. The nautical problems caused by the continuing increase in the number of ever larger container ships in Hamburg especially did not improve in the 2020 financial year. Now that the fairway adjustment measures have got underway in the Elbe River, the nautical difficulties will be qualified somewhat following the widening and deepening of the shipping channel. If one or both of these measures should fail or be delayed further, this may have a not inconsiderable negative impact on future cargo handling development at these locations.
However, the CONTAINER Division can offer its customers an excellent alternative with Germany’s only deep-water port, EUROGATE Container Terminal Wilhelmshaven, and its facilities for the handling of container ships with corresponding deep-water access.
AUTOMOBILE Division: We support our customers in the areas of electric mobility and alternative drive systems
Our customers are backing a sustainable and more environmentally friendly future by constructing electric vehicles. Electric mobility is the key to climate-neutral mobility.
BLG’s AUTOMOBILE Division consistently supplements its logistics network with smart digital solutions and sustainable concepts for climate-friendly transport. Thus, we are currently converting our car terminal in Hamburg to make it climate neutral. And we actively advise and support our customers in the area of electric mobility. Alongside sustainability, digitalization is the big topic of the future for the automotive and logistics industries. BLG LOGISTICS is contributing to this by working with partners on a research project to develop complex planning and management tools for car terminals (see remarks below).
In the reporting year, we also expanded the Dodendorf location from a car transportation base into an independent car terminal. It was also developed into an electric mobility location, with an area extension already planned for 2021. Here and at other terminals, BLG LOGISTICS provides services for various manufacturers, including handling, technical processing, quality assurance and customs clearance for electric vehicles, and in this way contributes to the energy transition, while at the same exploiting for itself the opportunities arising from the development of alternative drive systems. In this, we benefit from our international network for handling, technical processing and transport using various modes of transportation (road, rail, inland waterway). We thus cover global logistics for finished vehicles, from the manufacturer to the dealer.
AUTOMOBILE Division: Artificial intelligence supports vehicle handling, “Isabella 2.0” started
In the Isabella research project, an intelligent planning and management system for logistics handling and the movement of cars at the seaports and inland ports was developed and prototypically tested at BLG AutoTerminal Bremerhaven. Isabella concentrated on the terminal processes and internal car shunting activities. Isabella 2.0 is now to integrate the external means of transportation railroad, ships and trucks, including their loading and unloading, and systematically expand the management system and the simulation environment to cover all handling processes. Relevant process parameters, such as the time required for individual process steps or systematically derived route utilization, are determined from operationally acquired data, increasing plannability and hence the efficiency of operational driving processes. BLG LOGISTICS acts in this research project as application partner and overall project leader.
CONTRACT Division: Securing and expanding services for e-commerce and fashion logistics in the retail logistics business area
BLG LOGISTICS has acquired the relevant experience and expertise over the years, especially in the handling of large-scale logistics projects, and has continuously extended this knowledge to a growing number of customers and locations in order to remain a competent, innovative contact partner for its customers in this area.
There was a lot of movement across the CONTRACT Division in 2020 – and this is set to continue in 2021. We acquired new customers or significantly expanded business with existing customers throughout Germany. Based on this development, we continue to see good opportunities for the future and are pursuing the goal of further expanding logistics activities in the field of e-commerce, developing the entire value chain in this area and driving potential equity investments and acquisitions.
CONTRACT Division and Group: Mission Climate and sustainable logistics center as flagship project
The topic of climate protection is right at the top of the agenda - in politics as well as in many companies. We are no exception. The German government is aiming to attain extensive climate neutrality for Germany by 2050; the same target exists at European level. As a logistics company, we want to play our part – and at the same time support our customers in improving their own climate footprint.
We are on a shared mission to protect our climate. Our target is to make BLG LOGISTICS a climate-neutral company by 2030. We are having our absolute target scientifically assessed and certified by the independent Science Based Targets initiative (SBTi). BLG LOGISTICS is thus the first German logistics provider with scientifically recognized climate protection targets.
At the Güterverkehrszentrum (GVZ) in Bremen, Germany’s largest cargo distribution center, BLG LOGISTICS is planning a new location for industrial logistics. From “C3 Bremen”, BLG LOGISTICS will provide sustainable and efficient supplies to the foreign assembly plants of a major car manufacturer. With intelligent intralogistics planning and efficient workflows, logistics handling will be tailored to customers’ needs. The processes inside the new facility are being designed in line with the lean management principle, supported by cutting-edge automation and digitalization systems. In addition to a comprehensive energy concept, which envisages CO2-neutral operation of the premises, it is hoped to obtain DGNB certification in Gold as a climate-positive building (DGNB = Deutsche Gesellschaft für Nachhaltiges Bauen – German Association for Sustainable Building). Among other things, it is planned to install a photovoltaic system on the entire roof area. The heating system and hot water production is to be supplemented by a solar thermal plant, and the building shell is consciously being insulated to an above-average standard.
CONTAINER Division: Back to former strength with the “Future EUROGATE” transformation project
In the reporting year, the first internal validation and prioritization steps were taken toward implementing the operational measures planned as part of the transformation process and the relevant employee representatives in the individual companies informed accordingly. From the start of the 2021 financial year, under the working title “Future EUROGATE”, this transformation and the accompanying implementation of a wide range of cost-saving measures and negotiation of organizational measures designed to increase efficiency and productivity will take center stage at the core companies of the EUROGATE Group. These negotiations require the full participation of the management and all employee representatives and a strong sense of responsibility on the part of all those involved in order to achieve the savings target of EUR 84 million p.a. with full recognition through profit or loss as early as possible, but no later than the 2024 financial year, and like this to secure the competitiveness and a viable and sustainable basis for the future of the EUROGATE Group.
Failure to implement the planned cost savings as well as productivity and efficiency improvements in the course of the transformation, or to do so only to a lesser extent, would seriously jeopardize the competitiveness and future viability of the EUROGATE Group. The negotiations began at the start of 2021 and the management is confident of being able to successfully implement the planned measures and associated positive effects within the foreseen timeframe.
BLG LOGISTICS had first developed and set mandatory climate change targets in the 2012 financial year. These aimed to reduce the company’s carbon footprint by 20 percent up to 2020 compared to 2011 (measured in terms of revenue). We had already surpassed this in 2019 with 29.6 percent. Motivated by this success and increased demands, we have set new, further-reaching targets. By 2030, we want to reduce our own greenhouse gas emissions by at least 30 percent in absolute terms compared with 2018 and the greenhouse gas emissions in our supply chain by 15 percent. BLG LOGISTICS will offset the remaining emissions through certified climate protection projects. This will make us a climate-neutral company by 2030. You will find more information in our Sustainability Report at reporting.blg-logistics.com
With this, BLG LOGISTICS is increasing transparency with regard to its climate footprint and boosting its credentials in the area of climate-neutral logistics. This also presents the opportunity to offer its target group climate-neutral services that do not burden their climate footprint.
Ongoing effects of the coronavirus crisis
The coronavirus crisis and the resulting government measures to contain the pandemic are having a significant impact on volumes and earnings in all business divisions and business areas of BLG LOGISTICS. The original forecasts for the 2020 financial year will therefore not be achieved and the 2021 financial year will continue to be characterized by the ongoing restrictions. We present our current estimates in our Outlook.
In the AUTOMOBILE and CONTAINER Divisions, import and export restrictions have an influence on the sequence of processes in the flows of goods. In the reporting year, volumes in some cases deteriorated by up to 80 percent, thus directly affecting revenue. In the CONTRACT Division, too, closures of service sectors in some business areas have led to substantial revenue losses due to lacking volumes. To compensate for the impacts of COVID-19, containment measures such as introducing short-time work, reducing the number of temporary staff, suspending investment activities and deferring the release of government grants have been put in place.
A sustained deterioration in the earnings situation may lead to impairment of non-current financial assets in the context of the measurement of goodwill.
Risk categories and individual risks
From the risk types defined for BLG LOGISTICS, the material risks for BLG LOGISTICS by risk category are described in the following sections. In selecting materiality, risks are included that would have a noticeable effect on the company’s net assets, financial position and results of operations if they were to occur. In principle, the assessment is made on the basis of scenarios, taking into account all known influencing factors from opportunities and risks.
Probability of occurence
Trend compared with previous year
Politcal, legal and social risks
Service and infrastructure risks
The necessary measures or provisions are then derived from the spectrum of the best and worst expectations. A standardization process has been specified for this procedure which involves dividing the risks into the categories of strategic risks, market risks, political, legal and social risks, performance and infrastructure risks, and financial and other risks.
Unless otherwise apparent, the risks shown are linked tothe affected segment.
An overview of material risks is presented in the table.
Risks from acquisitions and investments
In recent years, BLG LOGISTICS has grown through various acquisitions both in Germany and abroad. As part of process and quality management, a uniform guideline (M&A guideline) on the procedure to be followed for all share purchases has been drawn up for this purpose. This draws on both in-house and external advisers. This ensures that all risks associated with an acquisition or investment are taken into consideration and assessed.
Despite this, in particular political, legal or economic risks associated with share purchases in other European countries cannot be ruled out. The social environment when sourcing employee capacity and integrating the relevant third-party company culture into the structures and processes of BLG LOGISTICS present specific challenges. The strategic direction of the AUTOMOBILE Division towards Eastern Europe poses risks particularly in the area of economic capital maintenance and safeguarding service expertise. This circumstance is taken into account by our own “Southern/Eastern Europe” business area, in which professional, language and consulting abilities are bundled together.
Investments made in the past may entail a requirement for subsequent decisions, assuming continuation of the strategic decisions and statements made with the investments. The required subsequent investments associated with these decisions must be considered and evaluated overall under new premises, due to partly changed market and macroeconomic conditions. If these changed conditions continue in the long term, there may be future requirements for BLG LOGISTICS to write-down the entire investment.
Threat to market position and competitive advantages
The AUTOMOBILE Division continues to devote particular attention to competition with car terminal operators at the Western European ports, the growing significance of the Baltic Sea ports in short-sea transport and the Southern ports.
The contractually agreed prices for seaport cargo handling coupled with the persistently strong competitive pressure represent continuous challenges for us.
Due to the increasing shareholdings of shipping companies in seaport terminals, the internal optimization of shipping companies may result in further shifts in volumes at the expense of the Bremerhaven seaport terminal.
For seaport logistics in break bulk cargo business and project logistics the risks are essentially connected with the overcapacities at the North Sea ports and the related high competition and price pressure.
In the CONTRACT Division the principal risks are rapid replaceability and substitutability as a service provider. In the industrial logistics and retail logistics business areas there is a strong dependence on a single large customer. The logistics services performed there are, as a rule, personnel-intensive. In addition, customers are applying significant price pressure. We meet these challenges through extensive customer-specific optimizations, longer contract periods and continued development of the customer base.
In the CONTAINER Division, in addition to the macroeconomic trends, there are further influences and risks which affect future handling and transport demand and the associated handling volumes of our container terminals. As in the previous years, these include
commissioning additional terminal handling capacity in the North Range and in the Baltic region,
commissioning additional large container vessels and related operational challenges in ship handling (peak situations),
the market, network and process changes resulting from the changes in the structure of the shipping company consortia, and
price structures in the market.
In terms of customers, possible insolvencies could have an effect on shipping company consortia and on the structure of services and volumes.
After HMM switched from the 2M alliance to THE Alliance in the fall of 2019, three major consortia have continued unchanged to dominate market activity on the customer side:
2M with the individual shipping companies Maersk and MSC
Ocean Alliance with the individual shipping companies CMA CGM, COSCO, Evergreen, and OOCL
THE Alliance with the individual shipping companies Hapag-Lloyd, HMM, ONE, and Yang Ming.
The trend on the part of the shipping lines to commission additional large container vessels, in the meantime in excess of 23,000 TEUs, continues unabated. In light of this trend, the number of large container ships docking at the terminals of the EUROGATE Group can be expected to further increase.
The trend on the part of the shipping lines to commission additional large container vessels, in the meantime in excess of 23,000 TEUs, continues unabated. In light of this trend, the number of large container ships docking at the terminals of the EUROGATE Group can be expected to further increase.
Because the container terminals still have free capacity, at least in the medium term, the market power of the remaining consortia or shipping companies is increasing as a result of consolidation, as is the associated pressure on revenue and the need to identify and implement further cost reductions and efficiency improvements at the container terminals as well as for standardization and automation measures.
Dependency on the economic cycle and macroeconomic risks
As a logistics service provider with a global focus, BLG LOGISTICS is highly dependent on production and the associated flow of goods in the global economy. The dependency on both the manufacturing industry and on consumer behavior can be viewed as the largest risk. In addition to the current significant impediments due to the impact and constraints resulting from the coronavirus pandemic, other influencing factors on our business in this area are high energy and raw material costs, increasing restrictions on international trade, persistent foreign trade imbalances and the increase in political conflicts.
Due to the coronavirus pandemic and the related protective measures taken by many governments, many supply chains have been disrupted and there is a reluctance to invest and consume. The longer it takes for the global economy and daily life to return to normality, the greater the impacts on our business will be, as many of our locations are likely to experience volume declines, especially those dependent on the automotive industry. In addition to consumer reticence and disrupted supply chains, the latter is also affected by the transition from the combustion engine to alternative drive systems.
Ultimately it could be years before economic activity returns to pre-crisis levels and we may in the future have to learn to live with new virus mutations and pandemics.
With the election of the new president of the United States, it is likely that the trade disputes between the US and the EU will relax again – in contrast to the conflicts between the US and China, which can continue to have an impact on the global economy and consequently also on our business activities.
The completion of Brexit, including the still-to-be-negotiated future relationship between the EU and the United Kingdom, will not in our current estimate have a significant impact on our business. The same applies to the continuing low-interest rate phase.
Changes to legislation and in taxes or duties in individual countries may also have a significantly damaging effect on international trade and result in considerable risks for BLG LOGISTICS. However, due to the diversification referred to and described at the start of the Risk management section, there is no risk to the company’s continued existence.
The persistent shortage of skilled personnel and an above-average susceptibility to insolvency among both service providers and customers involved in straightforward transport and logistics services present further general risks for BLG LOGISTICS.
The growth markets in Asia, Africa, South America, the US and Central and Eastern Europe are particularly important with regard to the global development of finished vehicle logistics. These markets still have high potential, but the economic conditions in some countries in these regions are impeding the expansion of the logistics businesses located there.
The risk of a shift, particularly of the transportation of goods by commercial vehicles to other modes of transport, cannot be completely ruled out.
Western Europe is the main market for BLG LOGISTICS. Through the opening up of Western Europe to the East, increasing volumes of Eastern European transport capacity have accessed our main market, leading to tough competition and a slump in prices. There is also a dependency on the volume of exports of the automotive industry in Europe to overseas. The markets of China, the US, Japan and Korea are of special significance.
Employment in car parts logistics (industrial business area) is dependent on production in the foreign plants of the German original equipment manufacturers (OEMs) that are supplied with parts via our logistics centers worldwide. There is a continued tendency in this area to be dependent on just a few major customers.
Political, legal and social risks
Legal and political environment
It cannot be ruled out that the company could be hit with additional transport costs due to a price increase on the international crude oil markets, tolls, other traffic routing levies or additional tax burdens which cannot be passed on directly to our customers without being recognized as an expense.
Because of the United Kingdom’s exit from the European Union (“Brexit”) and the single market, it cannot be ruled out that this will also have negative effects on BLG LOGISTICS’ customers and their goods flows. However, no material risks are currently identifiable here.
The ongoing trade dispute between the US and China may affect our customers’ business and have a knock-on effect for BLG LOGISTICS in terms of volumes. At present, however, these effects cannot be conclusively assessed and quantified.
Significant contract risks result from the fact that the maturities of contracts with customers often do not match those relating to property leasing. Contracts with customers generally have significantly shorter maturities than rental contracts on real estate.
The subsequent change to market conditions and related effects on the logistics processes agreed with customers often have an effect on the contractual relationship agreed with the customer. The range of services offered to the customer and the prices calculated no longer match the services requested and commissioned by the customer. The resulting differences generally lead to risks and, thus, also to losses which can only be clarified with the customer through subsequent lengthy negotiations. Due to the obligation to fulfill the contract and thus provide services, further work is carried out for the customer during negotiations, because otherwise further risks would arise due to compensation for downtime. This fact, alongside the dependency on the automotive industry at many of our locations, led to significant losses during the coronavirus crisis in the 2020 financial year, especially in the seaport terminals and industrial logistics business areas.
Risk provisions have been recognized for risks from onerous contracts. The size of the risks may increase significantly as a result of changes in circumstances over time. Based on our current estimation, a risk of this kind should be viewed as low.
Service and infrastructure risks
Risks from business relationships
In all operating divisions, close customer relationships and the short, demanding contractual periods and conditions, especially with some large customers, make it necessary to monitor changes in economic trends and the demand and product life cycles especially closely.
Infrastructure capacity and security
High fluctuations in volumes at our customers can lead to temporary capacity bottlenecks at our indoor and outdoor facilities. We have actively searched the market and have found additional third-party indoor and outdoor capacity. This will be leased for a fee, if required.
In contrast, when there is lower usage of our in-house capacity, no short-term alternative usage is normally generated. This results in a negative effect from fixed costs that is not covered by income.
Indoor and outdoor facilities and transport and handling equipment are regularly serviced and repaired at fixed intervals. This ensures that we can provide services on an ongoing basis.
Due to the high personnel- and capital-intensive nature of our logistics services, there are, in principle, risks relating to the negative effect of high fixed costs when facilities and personnel are not being used. This has had a particular impact during the coronavirus pandemic, where volumes declined or failed to materialize in many places.
Our goal is to minimize personnel risks in respect of socio-demographic change, age structure, and the skills and turnover of the workforce. To this end, the acquisition of skilled personnel is coordinated and implemented through measures such as close cooperation with training providers and a consistent staff development policy from the training of first-time employees to the retraining of the long-term unemployed.
This staff development, which necessarily has a long-term orientation, harbors certain personnel cost risks in the event that business development does not occur as planned in the medium term. However, flexibility is achieved through the use of blue-collar workers provided by the Gesamt-Hafen-Betriebe (GHBV) employment agency in Bremen and Hamburg and other agency personnel. This ensures that the personnel requirement can, to a certain extent, be adapted flexibly to the development of the business. The demographic changes in the employment market also have a fundamental influence on the available staff and therefore on the flexibility and availability of qualified personnel at GHBV. These changes can lead to sustained deficits for GHBV, which it may be possible to offset by affiliated member companies and thus essentially also by BLG LOGISTICS. We have made appropriate provision for this.
The company has found that competition for skilled personnel remains intense. In order to secure and strengthen our position in this area, we are using our HR management activities to emphasize the attractiveness of BLG LOGISTICS as an employer and are aiming to retain skilled employees and managers in the company over the long term. In addition to performance-related pay and social benefits, we are also focusing particularly on future diversification at BLG LOGISTICS through trainee programs, multi-disciplinary career paths, deployment in different Group companies and attractive training and development courses. We limit employee turnover risks by means of timely succession planning.
Demands on the part of employee representatives for structural changes in the use of temporary workers in favor of permanent employees lead to increased basic costs. At the same time, this leaves only a limited amount of the cost flexibility required to balance out economic fluctuations.
Information technology is an important success factor for our logistics and service processes. The systems must be accessible and available at all times, and any unauthorized access to data and data manipulation must be eliminated. Delivery of new software with faults or not on time must also be avoided. Our services require the use of permanently updated or even newly developed software. However, delays and insufficient functionality can never be completely ruled out when developing and putting new, complex applications into operation. Efficient project management from design through to launch reduces this risk. We currently expect there to be only minor effects on a few business areas in this respect.
The increasing frequency of Internet attacks (cybercrime), both globally and on specific targets, is a constant threat and danger to BLG LOGISTICS. BLG LOGISTICS is well positioned to address these risks as it uses the latest antivirus software in conjunction with its own structured IT organization. Ongoing monitoring, control, updating and adaptation of these structures and systems is vital. In addition, the AUTOMOBILE, CONTRACT and CONTAINER Divisions have insurance against cyber risks, as economic damage caused by a cyberattack cannot be ruled out despite the extensive security measures.
The Group’s credit risk mainly results from trade receivables. The amounts shown in the consolidated statement of financial position do not include allowance accounts for expected credit losses, which were determined on the basis of the historical credit loss rates of the last five years, adjusted for management estimates regarding the future development of the economic environment. Due to the ongoing monitoring of receivables by the management, BLG LOGISTICS is not currently exposed to any significant credit risks.
The credit risk in respect of cash and derivative financial instruments is limited because these are currently held exclusively at banks that have been awarded high credit ratings from international rating agencies, that are highly secure thanks to a joint liability scheme and/or at which there are offsetting opportunities via non-current borrowings.
Foreign currency risk
With very few exceptions, the Group companies operate in the eurozone and invoice only in euros. In this respect, currency risk could only arise in isolated cases, such as from foreign dividend income or the purchase of goods and services from abroad. An interest rate and currency swap has been concluded to hedge against the foreign currency risk from a variable USD loan granted in the context of Group financing.
Liquidity risks may arise from payment bottlenecks and the resulting higher financing costs. The Group’s liquidity is ensured by central cash management at the level of BLG KG. All significant subsidiaries are included in cash management. Due to the centralized management of capital expenditure and credit management, financial resources (loans/leases) can be provided in good time to meet all payment requirements.
Assurances have been made to all partner banks with regard to equal treatment and the change-of-control clause.
Regarding the coronavirus pandemic, we expect business to bounce back in 2021. Nevertheless, considerable uncertainties remain with respect to future developments. On the basis of the estimates currently possible for the 2021 financial year, we assume that, despite possible pandemic-induced burdens, the liquidity of BLG LOGISTICS will continue to be sufficient to allow payment obligations to be met at all times.
Interest rate risk
The interest rate risk to which BLG LOGISTICS is exposed arises primarily from non-current loans and other non-current financial liabilities. Interest rate risks are managed with a combination of fixed-interest and variable-interest loan capital. The majority of the liabilities to banks have been concluded over the long term or fixed interest rates have been agreed through to the end of the financing term, either originally as part of the loan agreements or via interest rate swaps which have been concluded within micro-hedges for individual variable-interest loans. In addition, against the backdrop of the low interest rate, which is attractive for investments, a portion of the financing requirement of the coming years was hedged by agreeing forward interest rate swaps. The plan is to take out loans from partner banks totaling EUR 90 million in tranches of up to EUR 15 million each within six years, beginning in 2019. Further information is presented in note 32 /the “Derivative financial instruments” section of the consolidated financial statements.
Interest rate risks are disclosed via sensitivity analyses in accordance with IFRS 7. These show the effects of changes in the market interest rate on interest payments, interest income and expenses, other income items and on equity. The interest rate sensitivity analyses are based on the following assumptions.
With regard to non-derivative financial instruments with fixed interest rates, market interest rate changes only affect profit or loss if these financial instruments are measured at fair value. All fixed-interest financial instruments measured at amortized cost are not subject to interest rate risks within the meaning of IFRS 7. This applies to all fixed-interest loan liabilities of BLG LOGISTICS, including finance lease liabilities. When hedging interest rate risks in the form of cash flow hedge-designated interest rate swaps, changes to the cash flows and to the contributions to earnings induced by changes to the market interest rate of the hedged primary financial instruments and the interest rate swaps balance each other out almost completely, effectively eliminating the interest rate risk.
Gains or losses from remeasurement of hedging instruments to fair value are credited or charged directly to the hedging reserve in equity and are therefore included in the equity-related sensitivity calculation. Changes in the market interest rate of non-derivative variable-interest financial instruments whose interest payments are not structured as hedged items as part of cash flow hedges against interest rate risks have an effect on net interest income (expense) and are therefore included in the calculation of income-related sensitivities.
From today’s perspective, the likelihood of the financial risks described arising in BLG LOGISTICS is estimated to be low.
Further disclosures on the management of financial risks can be found in note 32.
There are currently no other identifiable risks that could have a long-term negative influence on the company’s development. There are currently no potential risks to the company’s continued existence as a going concern such as excessive indebtedness, insolvency or other risks that could significantly impact on the company’s net assets, financial position and results of operations. The material risks for BLG LOGISTICS currently result from the ongoing coronavirus pandemic and its ramifications for the supply chains and volumes of our customers, which have a significant knock-on effect on our business. Against this backdrop, the sovereign debt crises in the US and Europe, the trade conflict between the US and China and the geopolitical unrest with its effect on the real economy have faded into the background, but are not yet overcome. A renewed exacerbation of the risk situation in these areas cannot be ruled out.
Assessment of the overall risk situation
Since the coronavirus pandemic began, it has significantly determined the risk structure of BLG LOGISTICS. In the previous year, there was a high level of uncertainty regarding how it would pan out. That is still the case today. The overall risk situation has therefore changed to the extent that the impacts of the coronavirus pandemic have been taken into account in the existing business processes and the economy has adapted to the changed situation. Nevertheless, major disruptions to global goods flows and therefore to logistics processes and services could still arise in the future. A high level of uncertainty still exists with regard to the effects on the associated supply chains of BLG LOGISTICS’ customers due to the fact that the economy and daily life have not yet returned to normal. A temporary fluctuation in volumes is therefore expected in the 2021 financial year. The coronavirus crisis will continue to have a marked effect on the economic and financial situation of BLG LOGISTICS in 2021, albeit to a lesser extent than in 2020. We have assessed the probable effects and taken necessary steps. In our assessment, the BLG Group is therefore in a good position to meet the continuing challenges posed by the crisis.
Another major factor is the successful implementation of the transformation, including the related cost savings as well as productivity and efficiency improvements, within the CONTAINER Division. Failure to implement these, or to do so only to a lesser extent, would seriously jeopardize the competitiveness and future viability of the EUROGATE Group.
Based on our risk management system and consistent assessments by the Board of Management, there were no foreseeable risks in the reporting period that could jeopardize the company’s continued existence, either individually or as a whole. Against the background of our medium-term planning and the coronavirus pandemic, and accounting for the measures already taken, there are currently no indications of strategic or operational risks for future development that pose a threat to the continued existence of the company.