RISK FACTORS
ENTERPRISE RISK MANAGEMENT
Risks related to operational complexity
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| Description of the risk | Impact | Mitigating actions |
|---|---|---|
Due to the operational complexity arising both from the intrinsic characteristics of shipbuilding activities and from the Group’s geographical and product diversification, as well as growth through external lines, the Group is exposed to the risk of:
| Should the Group fail to implement adequate project management activities, with processes and actions that are sufficient and effective to ensure control over the proper completion and efficiency of its shipbuilding processes, or be unable to properly manage group synergies and the complexity deriving from its product diversification, or fail to efficiently allocate workloads according to production capacity (facilities and workforce) available at its various production sites from time to time, it could experience a decrease in revenues and profitability, with possible negative effects on its financial position, operating performance, and cash flows. | To manage such complex processes, the Group implements procedures and activity plans designed to manage and monitor the execution of each individual project throughout its entire duration. In order to safeguard integration processes, constant channels of dialogue are established between Group entities, sometimes with the inclusion of resources from the parent company. Furthermore, the Group has adopted a flexible production structure to efficiently respond to fluctuations in demand for ships across various business areas. This flexible approach allows the Group to overcome the constraints imposed by the production capacity of a single plant and to pursue multiple contractual opportunities in parallel, ensuring timely delivery. The Group implements actions to improve production and design processes to strengthen competitiveness and increase productivity. |
Risks related to market structure
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| Description of the risk | Impact | Mitigating actions |
|---|---|---|
| The shipbuilding industry in general has historically been characterized by a cyclical trend, sensitive to the trends of its respective reference sector. The Group’s customers operating in the offshore and cruise sectors base their investment plans on end-customer demand, which is mainly driven, for offshore, by the demand for energy and forecasts for oil prices driving investments in exploration and production activities, and for cruise, by the performance of the leisure market. In the military business area, demand for naval vessels for defense purposes is heavily affected by government military spending policies. | Delays in fleet renewal programs or other actions affecting workload at the Group’s main cruise business customer (Fincantieri) may have consequences in terms of workload and business profitability, just as a negative trend in the offshore reference market may lead, as has already happened, to a reduction in the order intake in this sector by the subsidiary VARD, as well as to a risk of cancellation or postponement of ongoing orders. Moreover, the availability of resources allocated by the State to military expenditure for fleet modernization programs represents a variable that can influence the Group’s economic, patrimonial and financial performance. | To mitigate the impact of the cyclical nature of the shipbuilding industry, the Group has, in recent years, pursued a diversification strategy, expanding its business both in terms of products and geographical presence. Since 2005, the Group has expanded into offshore, mega yachts, naval systems and components, repairs, refitting, and after-sales services. In parallel, the Group has also expanded its activities internationally through acquisitions or the creation of new companies focused on specific businesses such as the construction of steel structures. Given the current contraction in the offshore market volumes, the subsidiary VARD has successfully continued its diversification strategy into new market segments, such as expedition cruise (for which VARD has already signed orders for 13 ships between 2016 and today) and specialized vessels for fishing and aquaculture, to reduce its exposure to the cyclicality of the Oil & Gas sector. |
Risks related to maintaining competitiveness levels in reference markets
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| Description of the risk | Impact | Mitigating actions |
|---|---|---|
| Standard merchant ship production is now dominated by Asian shipyards; therefore, maintaining a competitive edge can only be achieved through specialization in high value-added markets. In the civil production segment, for several years the Parent Company has focused on cruise ships and cruise-ferries, where it has historically been active—a focus that, following the acquisition of VARD, has been extended to include offshore support vessels and specific sectors such as fishing and aquaculture. Additional factors that may impact competitiveness include the risk of not paying sufficient attention to customer needs, or that product quality and safety levels do not meet market demands and new applicable regulations. Furthermore, aggressive commercial policies, the development of new products and new technologies, or increased production capacity by competitors may lead to higher price competition and impact the required level of competitiveness. | Insufficient focus on the markets in which the Group operates and untimely responses both to competitor challenges and to customer needs may lead to a reduction in competitiveness, with consequent impact on production volumes and/or less profitable pricing, resulting in reduced profit margins. | Maintaining a competitive position in key business areas is achieved by ensuring high quality and innovation standards for products, combined with efforts to seek cost optimization and flexibility in technical and financial solutions, so as to remain competitive during the commercial offer phase. The subsidiary VARD, alongside commercial initiatives to penetrate new market segments, has developed a series of new ship designs, utilizing both the engineering and design expertise it has gained in the offshore sector and the know-how of the Fincantieri Group. |
| Description of the risk | Impact | Mitigating actions |
|---|---|---|
| A challenging political and economic environment and worsening regulatory frameworks in the countries where the Group operates may negatively impact operations and future cash flows. In addition, the pursuit of business opportunities in emerging countries, particularly for military production, entails greater exposure to country risk and/or international corruption. | Country risk situations may have negative effects on the Group’s economic, financial, and asset position, leading to the loss of clients, profits, and competitive advantage, as well as reputational harm in the event of legal action or sanctions. | When pursuing business opportunities in emerging countries, the Group mitigates risks by prioritizing commercial actions supported by intergovernmental agreements or other forms of interstate collaboration, and by establishing within its organization appropriate controls to monitor risk-prone processes. |
Risks related to project management
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| Description of the risk | Impact | Mitigating actions |
|---|---|---|
| The shipbuilding contracts managed by the Group are mostly multi-year contracts with a set price, and any price variation must be agreed upon with the customer. When entering into the contract, price determination requires careful assessment of the costs of raw materials, machinery, components, subcontracting, and all other construction costs (including labor and overhead), an operation that is even more complex in the case of prototypes or particularly complex vessels. | Unexpected cost increases not envisaged during the pre-contract phase, and not matched by a corresponding increase in price, may result in a reduction of margins on the affected contracts. | The Group takes expected increases in contract cost components into account during the pricing process. In addition, at the time of signing the contract, options for the fixed-price purchase of some main ship components have already been defined. |
| Description of the risk | Impact | Mitigating actions |
|---|---|---|
| Many factors may affect production schedules and the use of production capacity, impacting ship contract delivery lead times and possibly resulting in penalties for the Group. These factors include strikes, poor industrial productivity, inadequate logistical and warehouse management, unexpected problems in design, engineering and production, adverse weather events, project changes, or procurement issues with key supplies. | Ship contracts generally provide for penalties in case of late delivery not contractually recognized as excusable, with penalty amounts usually growing the longer the delay persists. | The Group manages contracts through dedicated teams monitoring all aspects of the contract lifecycle (design, procurement, construction, outfitting). Supplier contracts include provisions for penalty charges in case of delays or interferences attributable to them. |
| Description of the risk | Impact | Mitigating actions |
|---|---|---|
| In managing contract execution, there is a risk that one or more counterparties the Group has contracts with fail to fulfill their commitments, specifically that one or more customers may default on contractual obligations, or one or more suppliers may fail to deliver required goods or services for operational or financial reasons. In the Offshore segment, marked by a globally deteriorated market situation affecting all players, a significant number of shipowners are undergoing restructuring, increasing the counterparty risk. For VARD in particular, the deterioration in the financial situation of offshore customers has led to the cancellation or rescheduling of certain orders in the backlog. | The bankruptcy of one or more counterparties, whether customers or suppliers, may significantly impact the Group’s production and cash flow, given the high unit value of ship contracts and the strategic production role of some supplies. In particular, if orders are canceled by customers during ship construction, the Group could be forced to sell such vessels under unfavorable market conditions or at prices below cost. In addition, postponed delivery dates could significantly worsen the Group’s working capital requirements, entailing higher indebtedness and increasing financial charges. | When acquiring new contracts, the Group may, where deemed necessary, verify the financial soundness of counterparties, including information from major credit risk assessment agencies. Suppliers are subject to a qualification process involving assessment of potential counterparty risks. From a financial perspective, the Group provides support tools to its suppliers to improve credit access. To address the difficult offshore market environment, VARD has worked with clients and financial institutions to secure deliveries for most offshore vessels in its backlog, and is continuing efforts to find commercial solutions for the few remaining offshore projects. The subsidiary is also evaluating, where possible, technical and commercial opportunities to convert and reposition already built vessels from canceled orders to new served markets. |
| Description of the risk | Impact | Mitigating actions |
|---|---|---|
| A significant number of the Group's shipbuilding contracts (in general for merchant vessels such as cruise ships and offshore support vessels) provide that only a portion of the contract price is paid by the customer during the shipbuilding period; the remaining amount is paid upon delivery. As a result, the Group incurs significant upfront costs, taking on the risk of covering these costs before receiving full payment from clients, thus having to finance the working capital absorbed by ships under construction. | If the Group is unable to provide customers with sufficient financial guarantees for advances or to meet the working capital needs created by ships under construction, it may not be able to complete existing contracts or acquire new ones, with negative economic, asset, and financial consequences. Furthermore, the cancellation or postponement of orders by customers in difficulty could have a major impact on the Group's financial structure and profitability, with the risk that banks may limit the Group's access to credit by restricting or raising the cost of necessary working capital financing such as construction loans. | The Group pursues a funding strategy aimed at diversifying both financing instruments and lending counterparties as much as possible, with the ultimate goal of maintaining sufficient credit capacity to meet working capital needs generated by operating activities. |
| Description of the risk | Impact | Mitigating actions |
|---|---|---|
| The Group’s clients often rely on financing to complete contract acquisitions. If the clients are foreign, they may benefit from export credit support schemes established under OECD rules. These schemes allow foreign ship buyers to obtain financing from lending institutions upon receipt of a guarantee from a national export credit agency—SACE S.p.A. for Italy, and GIEK for Norway. Export financing availability is therefore crucial for foreign clients to award contracts to the Group, especially for cruise ship construction. | The lack of export financing for the Group’s clients or uncompetitive terms could significantly adversely affect the Group’s ability to secure new orders as well as customers’ ability to meet contractual payment obligations. | Fincantieri supports foreign clients in the process of securing export credit financing, especially in managing relationships with the entities and companies involved in structuring such financing (e.g., SACE, Simest, and lending institutions). Moreover, the financing structuring process is managed in parallel with the finalization of the commercial contract, and the effectiveness of agreements is often subject to the shipowner obtaining SACE commitment and the banks agreeing to guarantee export credit financing. The subsidiary VARD also works actively with the Norwegian export credit agency GIEK, especially in the new local expedition cruise segment. To further protect the Group, in the event of customer default on contractual obligations, Fincantieri is entitled to terminate the contract. In such a case, the company is entitled to retain any payments received and the ship under construction. The client may also be held liable for the reimbursement of costs advanced by the Group. |
Risks related to production outsourcing, relationships with suppliers, and local communities
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| Description of the risk | Impact | Mitigating actions |
|---|---|---|
| Fincantieri Group’s decision to outsource certain business activities is driven by strategic needs and is essentially based on two criteria: a) outsourcing activities for which there are insufficient internal resources, despite having the required expertise; b) outsourcing activities for which the Company lacks internal expertise and considers it costly or inefficient to develop. Dependence on suppliers for certain business activities may result in an inability to ensure high quality standards, failure to meet delivery deadlines, suppliers gaining excessive bargaining power, or lack of access to new technologies. Moreover, the significant involvement of suppliers in the production process impacts local communities, with possible social, political, or legal issues the Company may need to address. | Negative contributions from suppliers in terms of quality, timing, or costs lead to increased product costs and a deterioration in Fincantieri’s perceived product quality by the customer. As for other local stakeholders, poor relationships can affect the Group’s ability to compete in the market. | The Group carefully oversees the coordination of shipboard systems assembly and the integration of externally produced subassemblies through dedicated teams. Fincantieri also carefully selects its "strategic suppliers," who are required to meet the highest performance standards. To this end, the Parent Company has implemented a specific supplier performance evaluation program, measuring both service quality and on-time delivery, as well as strict compliance with occupational health and safety rules, in line with the "Towards Zero Accidents" corporate plan. In general, special attention is paid to engagement with local communities interacting with the Group’s shipyards through appropriate institutional relations, supplemented by protocols on legality and/or transparency established with local authorities—agreements which led to the signing of the National Framework Protocol on Legality in 2017. The subsidiary VARD has paid particular attention to the evaluation and management process for contracts with new suppliers operating in sectors entered through the diversification strategy. |
Risks related to knowledge management
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Description of the risk
Impact Mitigating actions
The Fincantieri Group has developed significant experience, know-how, and business knowledge. However, the local labor market is not always able to meet production needs in terms of both the number and the skills of available workers. Effective business management is also linked to the ability to attract highly skilled professionals for key roles and to retain such competencies within the Group; this is achieved through effective human resource management and skills development as part of a continuous improvement process, implemented via investments in personnel training and performance evaluation.
Insufficient labor market response to the Group's needs, inability to acquire the required expertise, and failure to transfer specific knowledge within the Group—especially in technical areas—can have negative effects on product quality.
The Human Resources Department continuously monitors the labor market and frequently interacts with universities, technical schools, and training organizations. The Group also invests significantly in training personnel, both in technical-specialist areas and management-relational, safety, and quality topics. Targeted training programs are planned to ensure coverage of key and managerial positions during succession. For the subsidiary VARD, an internal reorganization program has been implemented to support the Group's diversification into new markets, with a focus on the development of new concepts and modification of production processes. At the same time, recruitment initiatives for qualified labor have been launched at Romanian shipyards with the aim of strengthening technical and quality oversight to achieve production efficiency—both in support of Fincantieri’s production plans and to ensure better management of additional projects in the portfolio.
Risks related to the regulatory framework
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Risk Description
Impact Mitigating Actions
Fincantieri Group is subject to the regulations applicable in the countries where it operates, including those concerning environmental protection, health and safety in the workplace, tax regulations and privacy protection laws. Any violations of these regulations could result in civil, tax, administrative and criminal penalties, as well as the obligation to carry out regularization activities, the costs and responsibilities of which could negatively affect the Group’s operations and results.
Any non-compliance with tax regulations, safety standards, or environmental protection laws, as well as any changes in the regulatory framework or the occurrence of unforeseeable or exceptional circumstances, could require Fincantieri Group to incur extraordinary expenses in tax, environmental or workplace safety matters. Violation of privacy regulations would result in the application of the penalty regime introduced by EU Regulation 2016/679 on the protection of personal data.
The Group promotes compliance with all applicable regulations and the preparation and updating of suitable preventive control tools to mitigate the risks associated with legal violations. In this regard, in order to prevent and manage the risk related to the occurrence of unlawful acts, the Parent Company has adopted an Organization, Management, and Control Model pursuant to Legislative Decree 8 June 2001, no. 231, which is also binding for suppliers and, in general, for third parties working with Fincantieri. Specifically, for the Parent Company, the provisions of Legislative Decree 81/2008 – “Implementation of Article 1 of Law 3 August 2007, no. 123, concerning the protection of health and safety in the workplace” (Consolidated Law on health and safety in the workplace) have been implemented. Fincantieri has implemented appropriate organizational models to prevent violations of the relevant regulations, promoting their continuous verification and updating. The commitment to pursuing and promoting the principles of environmental sustainability has been reiterated in the Parent Company’s Environmental Policy document, which binds the Company to maintaining regulatory compliance and monitoring work activities to ensure effective compliance with the rules. The subsidiary VARD has also committed to minimizing the impact of its activities on the environment, with interventions in terms of resources, policies and procedures to improve its environmental performance. Fincantieri and VARD have implemented an Environmental Management System at their sites with a view to certification according to UNI EN ISO 14001:2004 and have started the update to the 2015 standard. With regard to the mitigation of tax risks, the Group constantly monitors the evolution of current regulations. Compliance with privacy regulations is ensured through an internal system of rules adopted to ensure the protection of personal data collected and processed as part of the company’s business processes.
Risk Description
Impact Mitigating Actions
Operating in the defense and security sector, the Group is exposed to the risk that the sector’s evolutionary trend may, in the near future, lead to a restriction of the derogatory provisions to the competition principles allowed by current regulations, resulting in a limitation on the use of direct awarding, in order to ensure greater competition in the reference market.
Possible limitations on the use of direct awarding could preclude the Group from being awarded contracts through negotiated procedures, without prior publication of a call for tenders.
The Group monitors possible developments in national and EU regulations that could open up the possibility of competing in the defense and security sector in other countries as well.
Risks related to information access and IT system operation
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Risk Description
Impact Mitigating Actions
The Group’s operations could be negatively affected by:
• inadequate management of information regarding data sensitive to the Group, due to ineffective protective measures implemented, with the possibility of access to and use of confidential information by unauthorized parties external to the Group;
• improper access to information, which entails the risk of alteration or deletion, either accidentally or intentionally, by unauthorized individuals;
• an IT infrastructure (hardware, networks, software) whose security and reliability are not guaranteed, with possible interruptions of the IT or network system, or illegal attempts to gain unauthorized access or breaches of its data security system, including coordinated attacks by hacker groups.
IT system failures, possible loss or damage of data, including as a result of external attacks, IT solutions not meeting business needs, or updates to such IT solutions not aligned with user requirements could compromise the Group’s operations, causing errors in the execution of operations, inefficiencies and procedural delays, and other business interruptions, impacting the Group’s ability to compete in the market.
The Group believes it has taken all necessary measures to contain such risks, drawing inspiration from best practices in governance systems and continuously monitoring the management of infrastructure and applications. Methods of access and the ability to operate on the IT system are managed and maintained to ensure proper separation of roles, which has been further strengthened with the adoption of a new access management procedure, supported by specific software, allowing for the preventive identification and management of Segregation of Duties (SoD) risks arising from inappropriate assignment of access credentials.
Risks related to currency trends
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Risk Description
Impact Mitigating Actions
The Group is exposed to exchange rate risk arising from commercial and financial transactions denominated in a currency other than the functional currency (economic and transactional risk). In addition, exchange rate risk arises in the preparation of the Group’s financial statements, due to the translation of the Income Statement and Balance Sheet of consolidated subsidiaries operating in currencies other than the Euro (mainly NOK, USD, and BRL) (translation risk).
The absence of adequate currency risk management can increase the volatility of the Group’s financial results. In particular, a weakening of the currencies in which shipbuilding contracts are denominated may have a negative impact on the Group’s margins and cash flow.
The Group has adopted a financial risk management policy (economic and transactional) that defines instruments, responsibilities and reporting methods, through which the Group mitigates risks arising from currency market trends. With regard to translation risk, the Group constantly monitors its main exposures, which are generally not subject to hedging.
Similarly, the subsidiary VARD has developed a management policy inspired by the fundamental principles defined by the Parent Company, albeit with some distinctions due to the specific needs of the company.
Risks related to financial indebtedness
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Risk Description
Impact Mitigating Actions
Some financing agreements entered into by the Group include financial and legal covenants, commitments and restrictions (such as the occurrence of events of default, including potential ones, cross-default clauses, and covenants) applicable to the Group or certain Group companies, which could, if not complied with, result in the immediate repayment of the financing. Furthermore, future increases in interest rates could lead to higher costs and outflows depending on the level of indebtedness at any given time. The Group may not be able to access credit in an amount adequate to properly finance its activities (for example, in the case of particularly unsatisfactory performance) or may only be able to access it under particularly onerous conditions. With regard to the Offshore sector, the deterioration of the financial situation, which has led to a restructuring process by many operators in the sector, is prompting banks to reduce their credit exposure to them, with the risk of consequent repercussions on the subsidiary VARD’s ability to access construction loans, which are necessary to finance not only offshore projects but also those intended for new markets.
If the ability to access credit were limited, also due to its financial performance, or in the event of an increase in interest rates or early repayment of debts, the Group could be forced to delay capital raising or obtain financial resources on more onerous terms and conditions, with negative effects on the Group’s economic, equity and financial position.
In order to ensure access to adequate forms of financing in terms of amount and conditions, the Group constantly monitors its current and prospective economic, equity, and financial situation as well as circumstances that may negatively impact it. In particular, to mitigate liquidity risk and maintain an adequate level of financial flexibility, the Group diversifies its sources of financing in terms of duration, counterparties and technical form. Furthermore, in order to contain the impact of interest rate fluctuations on the Group’s medium- to long-term profitability, the Company may negotiate derivative contracts, usually in the form of interest rate swaps.
Emerging Risks
Emerging risks are new risks, or risks that are changing and/or developing significantly, and that can have a significant impact on organizations, economies, societies, or the environment. These risks may arise from various sources, such as technological, social, environmental, economic, or geopolitical changes. Emerging risks are often characterized by a high degree of uncertainty and complexity, making them difficult to predict and manage.
Within the Group’s Enterprise Risk Management (ERM) model, we place particular emphasis on identifying changes in the reference context to detect events or macro-trends outside the organization that could significantly influence the business of Fincantieri or the entire sector in the medium to long term (3–5 years and beyond). Therefore, it is essential to develop resilience capabilities and mitigation strategies to manage these risks proactively.
The two main emerging risks we have identified are artificial intelligence and biodiversity.
Artificial Intelligence
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Impact Description
We closely monitor the evolution of artificial intelligence (AI). However, there is a risk that competitors, by adopting AI ahead of us, may develop more advanced technologies and processes, improving operational efficiency and the quality of their products. This could attract customers seeking cutting-edge solutions, resulting in a potential loss of clientele for our Group and a consequent reduction in market share.
Mitigation Actions
We have integrated the risk associated with artificial intelligence (AI) into our Enterprise Risk Management model. This inclusion ensures a systematic and proactive approach to managing AI-related risks, which is developed as follows:
• Business impact assessment: During assessment activities, we will not only evaluate the potential impact of AI on current business operations, but also analyze how competitors’ adoption of AI could influence the company’s competitive position, including, among other possibilities, the risk of losing market share to competitors who use AI to enhance operational efficiency and innovation.
• Continuous monitoring: We will monitor AI risk constantly in the short, medium and long term. This ongoing monitoring enables us to promptly identify any changes or emerging threats related to AI, adapting business strategies accordingly.
• Verification of mitigation actions: The inclusion of AI risk in the risk management model also entails continuous verification of the mitigation measures implemented. We will review the effectiveness of the actions taken to reduce the potential negative impacts of AI, ensuring that these measures are adequate and updated in line with technological and market developments.
• Transparency and communication: Managing AI risk through the Enterprise Risk Management model promotes both internal and external transparency, facilitating communication across various company levels and with stakeholders. This integrated approach enables us to respond more promptly to AI-related challenges.
Biodiversity
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Impact Description
Shipbuilding requires the use of natural resources such as metals, wood and other materials, often sourced from natural habitats. Excessive or unsustainable use of these resources can compromise the habitats themselves and reduce biodiversity. Failure to assess biodiversity risk can damage the company’s reputation, lead to public criticism and legal action, result in fines and penalties, and cause short-term financial losses, as well as potential long-term economic losses due to the reduction of ecosystem services.
Mitigation Actions
We have integrated the risk related to biodiversity into our Enterprise Risk Management model, initiating a targeted process to monitor the evolution of this risk, which is increasingly relevant internationally due to its impact on the global ecosystem. We focus mitigation actions primarily on the conscious use of materials during the design, research and development and construction phases, promoting sustainable production technologies and practices aimed at minimizing the environmental impact of business operations.