Metsä Board Annual and sustainability report 2022





■ 5.6 Management of financial risks The financial risks associated with business operations are managed in accordance with the financial policy endorsed by the Board of Directors and the senior management of the company. The policy defines focal instructions on the management of foreign currency, interest rate, liquidity and counterparty risks, and for the use of derivative financial instruments. Correspondingly, commodity risks are managed according to the compa- ny’s commodity risk policy. The purpose is to protect the company against major financial and commodity risks, to balance the cash flow and to allow the business units time to adjust their operations to changing conditions. Metsä Group Treasury Oy is specialized in finance and functions as the Group’s internal bank. Metsäliitto Cooperative´s holding is 100 per cent of the company. Financial operations have been centralised to Metsä Group Treasury, which is in charge of managing the Group companies’ financial positions according to the strategy and financial policy, providing neces- sary financial services and acting as an advisor in financial matters. Foreign currency risk The Group’s foreign currency exposure consists of the risks associated with foreign currency flows, translation risk of net investments in foreign entities and economic currency exposure. Most of the Group’s costs are incurred in the euro zone and to some extent in Sweden, but a significant part of the sales is received or priced in other currencies. Sales may therefore vary because of changes in exchange rates, while production costs remain unchanged. The foreign currency transaction exposure is consisting of foreign currency denominated sales and costs. The exposure is including foreign currency denominated balance sheet exposure consist- ing of accounts receivable and accounts payable and 50 per cent share of the annual contracted or estimated net currency cash flow. The main currencies of the Group’s foreign currency transaction exposure are the US dollar, the Swedish krona and the British pound. The share of dollar is 60 per cent, share of Swedish krona is 32 per cent and share of pound is 6 per cent. A strengthening of the dollar and the pound has a positive impact on the financial result and a weakening a negative impact. A weakening of the Swedish krona has a positive impact on the result of the Group. From other currencies Metsä Board has currency risk in Canadian dollar. The hedging policy is to keep the balance sheet exposure and 50 per cent of annual cash flow of contracted or estimated currency flows consistently hedged. The amount of hedging may deviate from the normal level by 40 per cent in either direction. The Board of Directors of Metsä Board is deciding on hedging levels significantly deviating from the norm set out in the financial policy. The amount of currency-specific hedging depends on current exchange rates and market expectations, on the interest rate differences between the currencies and the significance of the exchange rate risk for the financial result of the Group. The transaction exposure is mainly hedged by forward transactions but also by the use of foreign currency loans and currency options. At the end of the reporting period, the foreign exchange transaction exposure had been hedged 8.9 months on average (2021: 8.1) being 122 per cent of the hedging norm (117). During the reporting period, the hedg- ing level has varied between 8 and 9 months (7–9) being between 113 and 128 per cent of the norm (108–118). The dollar’s hedging level was 8.4 months (7.7) being 119 per cent of the norm (113). The Swedish krona’s

hedging level was 10.4 months (9.3) being 135 per cent of the norm (135). The pound’s hedging level was 7.7 months (7.5) being 100 per cent of the norm (100). Hedge accounting in accordance with IFRS 9 has been applied to hedging of transaction exposure and forwards and options allocated to hedge accounting have been used to hedge the portion of highly probable forecast sales of the currency transaction exposure. The translation risk of a net investment in a foreign entity is generated from the consolidation of the equity of subsidiaries and associated companies outside the euro area into euros in the consolidated financial statements. Hedging of equity has been discontinued. Metsä Board has applied the Value-at-Risk method to assess the risk of its open foreign currency positions. Value at Risk calculation model was abandoned as a risk calculation method starting the beginning of year 2022 and VaR was recouped with the average deviation vs. hedging norm key figure. The Metsä Board Group average deviation vs. hedging norm was 23.3 percentage (1.7 months) at the end of reporting period and has been on average 23.5 (1.6 months) percentage during year 2022. Interest rate risk The interest rate risk is related in the interest bearing receivables and loans, working capital financing and currency hedging. The most signifi- cant currencies in risk management are the euro, the US dollar, the British pound and the Swedish krona. The objective of the interest rate risk policy is to minimise the negative impact of interest rate changes on the Group´s and group companies´ result and the financial position, and to optimise financing costs within the framework of risk limits. The effect of interest rate changes on financial costs depends on the average interest fixing time of interest bearing assets and liabilities, which is measured in the Group by duration. As duration is lengthening the rise of interest rates affects more slowly the interest expenses of financial liabilities. The maturity of the loan portfolio can be influenced by adjusting between floating-rate and fixed- rate loans and by using interest rate swaps. The average interest duration norm based on the Group’s financial policy is 24 months. The duration can, however, deviate between 6 to 36 months from the hedging policy norm so that the decision of a larger deviation has to be made by the Board of Directors. The average duration of loans was high 36.1 months at the end of the year (45.3). During the reporting period duration has varied between 36 and 44 months (44–53). Duration is lengthened by the bond of EUR 250 million. Of interest-bearing liabilities 14 per cent (11) is subjected to variable rates and the rest to fixed rates and the average interest rate at the end of 2022 is 2.2 per cent (2.3). At the end of 2022, an increase of one per cent in interest rates would decrease net interest rate costs of the next 12 months by 2.3 million euros (decrease 5.0). The Group has applied cash flow hedge accounting in accordance with IFRS 9 to interest rate swaps by which floating-rate financing has been converted to fixed-rate financing. The gross nominal volume of interest rate derivatives at the time of financial statements is EUR 100.0 million (100.0) and the maturity of interest rate swap contracts varies between 0–3 years (1–4). Commodity risk In the hedging of commodity risks the Group applies risk management policies defined separately for each selected commodity. According to


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