Any investment in the shares is subject to a number of risks. Prior to investing in the shares, prospective investors should carefully consider the risk factors associated with any investment in the shares, the Group’s business and the industry in which it operates.
The Group’s financial policy for financial risk management has been formulated by the board of directors and provides a framework of guidelines and rules in the form of a risk mandate for financial activities. The overall aim of the finance function is to ensure that the financial risks are optimized to a risk level that gives the shareholders a good return, within the framework of the risk mandate provided by the board of directors. Risk management is handled by the Group’s finance department in accordance with policies approved by the board of directors. The Group’s finance department works closely with the Group’s operating units to identify and evaluate financial risks. The board of directors develops and draws up policies for overall risk management, as well as for policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.
Through its activities, the Group is exposed to a wide range of financial risks: market risk (currency risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management policy focuses on the unpredictability of financial markets and strives to minimise potential adverse effects on the Group’s financial results. The Group uses derivatives to financially hedge certain risk exposures but does not apply hedge accounting.
Risk management is handled by a central finance department in accordance with policies adopted by the Board of Directors. The accounting function identifies, evaluates and hedges financial risks in close collaboration with the Group’s operating units. The Board of Directors prepares written policies for the Group’s general risk management as well as for specific areas, such as currency risk, interest rate risk, credit risk, the use of derivatives and non-derivative financial instruments, and the investment of excess liquidity.
The Group operates internationally and is exposed to currency risks arising from various currency exposures, mainly from the US dollar (USD) and euro (EUR). Currency risk arises through future business transactions, recognised assets and liabilities, and net investments in foreign operations.
Currency risks also arise when future business transactions are expressed in a currency that is not the functional currency of the unit. The Group’s goods purchases are mainly made in USD. To manage the currency risk arising from USD outflows, the Group has chosen also to sell goods in USD when possible. For the periods covered by the consolidated financial statements, no embedded derivatives for third- party currencies have been recognised separately due to the small amounts involved.
Instead of hedging the currency exposure of cash flows, the Group’s risk management policy is, as far as possible, to price and sell goods in USD, which is also the currency used for all purchases. Approximately 85 per cent of the Group’s pricing is in USD and around 75 per cent of the Group’s billing is in USD. Goods purchases and shipping are 95 per cent denominated in USD.
The Group has a number of investments in foreign businesses whose net assets are exposed to currency risks. Currency exposure arising from the net assets in the Group’s foreign businesses is mainly managed through borrowings in the foreign currencies concerned.
If the Swedish krona had weakened/strengthened by 10 per cent against the USD, with all other variables held constant, the restated annual profit at 31 December 2017 would have been kSEK 6,300 (5,000/4,800) lower/higher, largely as a result of gains/losses on translation of trade receivables and trade payables denominated in USD, as well as foreign exchange differences on translation of USD borrowings.
If the Swedish krona had weakened/strengthened by 10 per cent against the EUR, with all other variables held constant, the restated profit after tax at 31 December 2017 would have been kSEK 2,000 (1,500/2,800) lower/higher, largely as a result of gains/losses on translation of trade receivables and trade payables denominated in EUR, as well as foreign exchange differences on translation of EUR borrowings. The majority of the Group’s purchases and billing are in USD, which means that a strengthening of the USD leads to an improved gross profit while a weakening of the USD leads to a reduced gross profit.
Cash flow interest rate risk and fair value interest rate risk
The Group’s interest rate risk arises from long-term borrowing. Variable interest rate borrowings expose the Group to cash flow interest rate risk, which is partly neutralised by cash assets bearing variable interest rates. Fixed interest rate borrowings expose the Group to fair value interest rate risk. The Group’s policy is to have variable interest rate borrowings. In 2017 as well as in 2016 and 2015, the Group’s variable interest rate borrowings consisted mainly of loans in Swedish kronor and US dollars.
The Group analyses its exposure to interest rate risk dynamically. Various scenarios are simulated, and account is taken of refinancing, the rolling-over of existing loans and alternative financing. Based on these scenarios, the Group calculates the impact on earnings of a specified change in interest rates. For each simulation, the same change in interest rates is used for all currencies. The scenarios are simulated only for those liabilities which constitute the largest interest- bearing positions.
The executed simulations show that the restated effect on earnings of a change of 1.0 per cent would be a maximum increase of kSEK 1,650 (1,400/1,500) or decrease of kSEK 1,650 (1,400/1,500), respectively. The simulation is performed on a quarterly basis to verify that the maximum possible loss is within the limits defined by management.
Based on the various scenarios, the Group manages the cash flow interest rate risk by making less use of interest rate swaps which convert variable-rate debt to fixed-rate debt. The Group normally takes out long-term loans at variable interest rates.
If interest rates on borrowings in Swedish kronor at 31 December 2017 had been 100 basis points (1.0%) higher/lower, with all other variables held constant, the estimated pro t after tax for the financial year would have been kSEK 600 (700/800) lower/higher, mainly as an effect of higher/lower interest expenses for borrowings at variable rates.
If interest rates on borrowings in USD at 31 December 2017 had been 100 basis points (1.0%) higher/lower, with all other variables held constant, the estimated pro t after tax for the financial year would have been kSEK 1,000 (500/400) lower/higher, mainly as an effect of higher/lower interest expenses for borrowings at variable rates.
Credit risk is managed at Group level, with the exception of credit risk related to outstanding trade receivables. Each Group company is responsible for monitoring and assessing the credit risk for each new customer before offering standard terms of payment and delivery. Credit risk arises from cash and cash equivalents, derivatives, and deposits with banks and financial institutions as well as credit exposures to customers. Only banks and financial institutions that have received a credit rating of “B” or higher from an independent rating agency are accepted. Individual risk limits are defined based on internal or external credit assessments in accordance with the limits set by the Board. The Group’s subsidiaries insure credit risk through a credit insurance company. The use of a credit insurance company enables us to make a better proactive selection of new customers and to monitor our existing customers effectively. The use of credit limits is monitored regularly.
No credit limits were exceeded during the reporting period and management does not expect any losses due to non-payments from these counterparties.
Cash flow forecasts are prepared by the Group’s operating companies and aggregated at Group level. Rolling forecasts for the Group’s liquidity are monitored continually to ensure that the Group has sufficient cash to meet its day-to-day operational needs while maintaining sufficient unused credit facilities to ensure that it does not breach borrowing limits or loan covenants (where applicable) on any of its loan facilities. Such forecasts take account of the Group’s plans for ensuring compliance with loan covenants and internal balance sheet- based earnings measures.
Excess liquidity in the Group’s operating companies exceeding that portion which is required to manage working capital requirements is transferred to the parent company, which invests the excess liquidity in interest-bearing current accounts, term deposits, money market instruments and marketable securities, depending on what type of instrument has an appropriate maturity or is sufficiently liquid to meet the requirements determined by the aforementioned forecasts. At the balance sheet date, the company had liquid assets of kSEK 31,206 (39,856/30,776) and an undrawn overdraft facility of kSEK 36,447 (60,379/23,514) that can quickly be converted into cash in order to manage the liquidity risk.
Due to the provisions for unforeseen costs in the tax dispute in Russia, the company was unable to meet the covenant relating to equity/assets ratio with the bank as at the closing date. In accordance with IFRS, all bank loans have therefore been classified as current liabilities as at the closing date. After the end of the reporting period, the company has received a waiver from the bank in respect of the third and fourth quarters of 2017 as well as the first and second quarters of 2018. The bank has thus waived its right to early redemption, and as of the first quarter of 2018 the bank loans will therefore again be accounted for as non-current liabilities.