Note 33 – Financial risks

33.1 Financial risk factors

The Group’s financial operations are exposed to many different financial risks. These can be divided into currency risks, price risks regarding energy consumption and pulp purchases, interest rate risks in cash flow and interest rate risks in fair value, credit risks and liquidity risks. The finance policy focuses on contingencies on the financial markets.

Financial risk management is handled by a central finance department (Treasury) in accordance with a finance policy reviewed annually and approved by the Board of Directors. The policy includes both overall risk management and risk management for specific areas, such as currency risks, interest rate risks, the use of derivative and non-derivative financial instruments and the investment of surplus liquidity. Treasury identifies, evaluates and hedges financial risks in close cooperation with the Group’s operational units. The financial hedge relationships established by the Duni Group as an element in its risk management do not qualify for hedge accounting pursuant to the rules in IFRS 9, apart from two exceptions. Interest rate swaps have been taken out as hedging instruments. The interest rate swaps are recognized in accordance with the rules governing cash flow hedges. The other exception is that part of the assets in acquired company BioPak Pty Ltd, Australia, is hedged using currency forward contracts pursuant to the rules on net investment hedges in foreign currency.

 

33.1.1 MARKET RISKS

Currency risks

The Duni Group operates internationally and is exposed to currency risks which arise from various currency exposures. Exposure to changes in exchange rates may be described as translation exposure and transaction exposure. The Group manages its translation exposure and transaction exposure by concentrating the exposure to a small number of Group companies and through a finance policy adopted by the Board of Directors.

Transaction exposure

Transaction exposure arises when a company sells and buys in a currency other than its functional currency. The transaction exposure is minimized primarily through external commercial transactions mainly being made in the functional currencies of the subsidiaries. Purchases by subsidiaries, primarily internal, may however be made in currencies other than the subsidiary’s own functional currency, and thus these purchases are exposed to a currency risk. By also directing the internal flows as far as possible to the functional currency of the recipient subsidiary, the currency risk is concentrated to a small number of subsidiaries. The Group’s external outflows are primarily in SEK, USD and PLN, while external inflows are primarily in AUD, DKK, NOK, CHF and GBP. The acquisition of BioPak Pty increased exposure in USD and AUD. The Group’s policy is to not hedge flows in foreign currency in any way other than as is described above. There is no policy to hedge interest payments either, whether internal or external.

There is an indirect currency risk in USD via subsidiary Rexcell Tissue & Airlaid AB. Internationally, pulp is priced in USD, and thus a strengthening/weakening of the USD gives rise to increased or reduced purchasing costs for the Group.

On January 1, 2021, the UK exited the EU and the Brexit transition period ended. We now see the risk, which was identified as regarding how Brexit could impact the Group, as eliminated. The Group’s business has been impacted in the form of increased administration as well as delayed deliveries to a certain extent. New processes are in place and this is expected to stabilize in spring 2021. As a part of this, guarantee commitments to UK government agencies will increase.

Translation exposure – Consolidation

Translation exposure arises when the income statements of subsidiaries are translated to SEK.

Translation exposure refers to the Group exposure’s in connection with the consolidation and translation of subsidiaries with a different functional currency than the Group’s functional currency, SEK. The Group’s functional currency is the same as its presentation currency. Translation from each company’s functional currency to SEK has a major impact on the Group’s reported revenue and income. At unchanged exchange rates compared with 2019, net sales for the year would have been SEK 66 m higher and the underlying EBIT would have been SEK 2 m higher.

Translation exposure – Balance sheet

The Group is also exposed to another type of translation exposure, which occurs in the balance sheets of the individual Group companies due to the fact that such balance sheets include items in a currency other than such Group company’s functional currency. Revaluation of these items to the exchange rate at the balance sheet date is included in the Group’s income.

The financial borrowing and lending in the individual subsidiaries is primarily internal through the Parent Company and in the respective subsidiary’s functional currency. In this manner, currency exposure regarding these items has been centralized to the Parent Company. In the Parent Company, 100% of the financial borrowing and lending is hedged in accordance with the Group’s policy, and thus a change in exchange rates has no essential effect on income. The Parent Company’s external borrowing is matched approximately 72% by internal net lending with the same currency breakdown. The remaining 28% of internal net lending is hedged on the currency futures market in accordance with the Group’s policy. Note 29 presents the value and nominal amounts of currency forward contracts entered into regarding borrowing and lending in the Parent Company.

As described in greater detail below in the section addressing transaction exposures, the Duni Group manages its currency risks primarily by concentrating commercial transactions mainly in the functional currencies of the subsidiaries. Thus, as regards the consolidated Group, the translation exposure in the working capital of the individual subsidiaries is assessed as minor. However, there is some exposure in the Group’s working capital, and had all currencies been 1% higher/lower, due to exposure in the individual subsidiaries and the consolidated balance sheet items, the Group’s income would have been approximately +/- SEK 6 m (2019: +/- SEK 9 m). The corresponding figures for the Parent Company are approximately +/- SEK 0.1 m (2019: +/- SEK 3 m).

There is also exposure in the Group because the Group’s net assets are in subsidiaries with currencies other than SEK. Translation of these net assets results in translation effects that are recognized in other comprehensive income. The Group has a policy that governs when and to what extent this exposure is to be hedged. As of 2018, the Group hedges part of the net assets in acquired company BioPak Pty Ltd using currency forward contracts. Currency forward contracts are recognized pursuant to the rules on net investment hedges in foreign currency. The hedge is strictly for financial aims and not for speculative purposes. The derivative instrument meets the criteria for hedge accounting. The effectiveness of the hedge was assessed when the hedging arrangement was entered into. The hedged item and hedging instrument are assessed on an ongoing basis to ensure that the arrangement meets the requirements.

Price risks

Energy price risks

Through their energy-intensive operations, production and conversion units are exposed to risks associated with changes in the price of energy, particularly gas and electricity. In those cases where the energy price is not hedged, price changes on the energy market have a direct impact on the company’s income. A change of +/-5% in the price of the electricity used by all production and conversion units in Europe affects income by approximately -/+ SEK 3 m (2019: 3).

During 2020, the subsidiary Rexcell Tissue & Airlaid AB purchased approximately 71,000 MWh of electricity at a cost of approximately SEK 25 m; 3,600 metric tons of LPG for approximately SEK 15 m; and woodchips for the biofuel boiler at a cost of approximately SEK 10 m (2019: 83,000 MWh of electricity for SEK 40 m; 4,350 metric tons of LPG for SEK 21 m; and woodchips for SEK 13 m).

Rexcell Tissue & Airlaid AB has been allocated emission rights for the period 2013 to 2020, divided between Dals Långed and Skåpafors. In 2020, Rexcell Tissue & Airlaid AB had 6,529 (4,654) unused emission rights with a market value of SEK 0 m (0). In total, 10,820 metric tons were used in Skåpafors in 2020. For more information about emission rights, please see the Directors’ Report.

Pulp price risks

OTC trading in financial contracts takes place with respect to certain paper and pulp products, i.e. there is a possibility to reduce the risk of fluctuations in the paper and pulp price. Purchases of paper and pulp are made by the subsidiary, Rexcell Tissue & Airlaid AB. The Duni Group currently has not signed any such contracts. A change of +/- 5% per metric ton in the price of pulp during 2020 affects income by -/+ SEK 15 m (2019: 19).

Interest rate risks with respect to cash flows and fair value

Since all external borrowing is at variable interest rates, the Duni Group is exposed to interest rate risks regarding cash flows, primarily in EURIBOR (see Note 29 for more details). The Parent Company’s internal lending and borrowing also takes place at variable rates. Part of the interest rate risk has been hedged at a fixed rate using interest rate swaps maturing in December 2022, March 2023 and December 2025. The interest rate swaps are solely for financially hedging risks, not speculative purposes.

The impact of the hedge is assessed when the hedging arrangement is entered into. The hedged item and hedging instrument are assessed on an ongoing basis to ensure that the arrangement meets the requirements. The Group does not hedge 100% of its loans and therefore only identifies the share of outstanding loans corresponding to the nominal amounts of the interest rate swaps. The financial relationship has been 100% effective because the critical conditions have been matched.

The Group has no significant interest-bearing assets. Revenue and cash flows from operating activities are, in all essential respects, independent of changes in market interest rates. The Group’s interest rate risk with respect to cash flows arises through external borrowing at a variable interest rate. Outstanding loans are entirely in EUR.

Had interest rates on the Group’s borrowing at 12/31/2020 been 100 points higher/lower, with all other variables being constant and taking into account interest rate swaps, net financial items for 2020 would have been SEK 1 m lower/higher (2019: 10). Other components in equity would have been SEK 18 m (2019: SEK 5 m) lower/higher, primarily as a consequence of a decrease/increase in the fair value of interest rate derivatives used as hedging instruments.

Risk of liability to minority owner put option

On October 15, 2018, 75% of the shares were acquired in BioPak Pty Ltd in Australia. There is a put option and a call option both parties can opt to exercise during the period from October 2020 to April 2021 amounting to approximately SEK 24 m for an additional 5% of the shares. There is an obligation to acquire the remaining 20% of the shares within five years One of the minority shareholders of BioPak Pty Ltd thus has a put option during the period from October 2023 to April 2024, whereby the redemption price is determined by the future income.

The option was measured at SEK 329 m at year-end. The value of this option will change depending on the company’s growth and profitability in the coming five years. If the assumed growth and profitability rate increase or decrease by 10%, the value of the put option would change by approximately +/- SEK 15 m. The Group recognizes a small part as a short-term and the rest as a long-term derivative liability for this put option equivalent to the discounted expected redemption price for the option. Changes in the value of the derivative instrument are recognized in equity.

 

33.1.2 CREDIT RISKS

Credit risks are managed at the Group level. Credit risks arise through cash and cash equivalents, derivative instruments and balances held with banks and financial institutions, as well as credit exposure in relation to the Group’s customers, including outstanding receivables and agreed transactions. Only banks and financial institutions with a long-term credit rating from an independent rating agency of at least A- (minus) or better are accepted. The total amount deposited or invested in a bank or a single finance company may not exceed SEK 150 m.

The maximum credit risk consists of the book value of the exposed assets, including derivatives with positive market values.

All new large customers are subject to a credit rating assessment by an independent rating agency. In those cases where there is no independent credit rating, a risk assessment is made regarding the customer’s creditworthiness with consideration given to the customer’s financial position, previous experience and other factors. Individual risk limits are established based on internal or external credit assessments in accordance with the limits established by the Board. For more information about accounts receivable, please see Note 23

The impact of COVID-19 has prompted extraordinary focus on the performance of accounts receivable and bad debt losses with follow-up meetings held between the treasury and sales functions in each market. So far, bad debt losses and payments from customers have not deviated significantly from the norm, but uncertainty remains high as most restaurants are still subject to restrictions, and the risk of bankruptcy increases as these restrictions are prolonged.

Receivables overdue by more than 180 days accounted for 1.9% of total accounts receivable (2019: 0.9%). For the Parent Company, the corresponding figure is 0.6% (2019: 0.2%).