METSÄ BOARD Annual review 2023
■ 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 54 per cent (2022: 60), share of Swedish krona is 35 per cent (32) and share of pound is 9 per cent (6). 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 financial period, the foreign exchange transaction exposure had been hedged 8.6 months on average (8.9) being 123 per cent of the hedging norm (122). During the financial period, the hedging level has varied between 8 and 10 months (8–9) being between 114 and 127 per cent of the norm (113–128). The dollar’s hedging level was 8.3 months (8.4) being 121 per cent of the norm (119). The Swedish krona’s hedging level was 9.4 months (10.4) being 135 per cent of the norm (135). The pound’s hedging level was 7.8 months (7.7) being 100 per cent of the norm (100).
Counterparty risk Financial instruments carry the risk that the Group may incur losses should the counterparty be unable to meet its commitments. The Group is managing this risk by entering into financial transactions only with most creditworthy counterparties and within pre-determined limits. Cash and cash equivalents, and other investments have been spread to several banks, commercial papers of several institutions and money market funds. During the reporting period, credit risks of financial instruments did not result in any losses. Counterparty limits have been revised during the year by taking into account the needs of the company and the view on the finan- cial position of the used counterparties. Derivatives trading is regulated by the standardised ISDA contracts made with the counterparties. The Group has applied expected credit loss model to calculate the impairment of financial assets. The Group’s accounts receivable carry a counterparty risk that the Group may incur losses should the counterparty be unable to meet its commitments. Credit risk attached to accounts receivable is managed on the basis of the credit risk management policies approved by operative management. Accounts receivable performance is followed by Group Credit Risk Management Team and reported monthly to Customer Credit & Compliance Committee and operative management. Credit quality of customers is assessed at regular intervals based on the customers’ financial statements, payment behaviour and credit ratings agencies. Credit limits are approved according to credit risk management policy with approval limits of varying values across the Group. Individual credit limits are reviewed at least annually. Letters of Credits, bank and parent company guarantees, and Credit insurance are used to mitigate credit risk according to management decisions. The Customer Credit & Compliance Committee reviews and sets all major credit limits which are not supported by credit insurance and / or other security. Metsä Board implements regular impairment tests for customer accounts receivables. Credit loss impairment is booked when a customer enters legal bankruptcy or becomes past due for more than 6 months (180 days) without a valid payment plan or other acceptable reasons. New net credit loss provisions for the year were 22 thousand euros (2022: 239). The portion of overdue client receivables of all accounts receivable is at the time of financial statements 19.0 per cent (7.4), of which 0.2 per cent (0.0) is overdue between 90 - 180 days and 1.2 per cent (0.4) over 180 days. The specification of doubtful receivables is in the Notes. Expected credit losses on accounts receivables are calculated by using a provision matrix. Expected credit loss expense is recognized by applying expected credit loss percentages based on five-year historic losses on accounts receivables from external debtors, net of credit insurance outstanding at period end. The expected credit loss percentage is 0.2 per cent of receivables (0.2). The geographical structure of the accounts receivable is diversified and is reflecting the external sales structure presented in the Segment information. The top ten largest sources of credit risk exist in USA, Italy, United Kingdom, Poland, Turkey, Germany, Spain, Sweden, Netherlands and Hungary (around 70 per cent of total external receivables (67)). The share of largest individual customer (individual companies or groups of companies under common ownership) credit risk exposure of Metsä Board at the end of 2023 represented 9 per cent (7) of total external accounts receivable. 36 per cent (32) of accounts receivable was owed by ten largest customer groups (individual companies or groups of companies under
Hedge accounting 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 outside the euro area into euros in the consolidated financial statements. Hedging of equity has been discontinued. Metsä Board applies the average deviation vs. hedging norm key figure to assess the risk of its open foreign currency positions. The Metsä Board Group average deviation vs. hedging norm was 23.7 percentage (1.6 months) at the end of financial period and has been on average 19.6 (1.4 months) percentage during year 2023 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 Swed- ish krona and British pound. 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 30.6 months at the end of the year (36.1). During the reporting period duration has varied between 31 and 36 months (36–44). Duration is lengthened by the bond of EUR 250 million. Of interest-bearing liabilities 15 per cent (14) is subjected to variable rates and the rest to fixed rates and the average interest rate at the end of 2023 is 2.6 per cent (2.2). At the end of 2023, an increase of one per cent in interest rates would decrease net interest rate costs of the next 12 months by 1.8 million euros (decrease 2.3). The Group has applied cash flow hedge accounting to interest rate swaps by which floating-rate financing has been converted to fixed-rate financing. The gross nominal volume of interest rate derivative at the time of financial statements is EUR 50.0 million (100.0) and the interest rate swap matures in April 2025. Commodity risk In the hedging of commodity risks the Group applies risk management policies defined separately for each selected commodity. According to the policy, the management of commodity risks with regard to financial hedges is accomplished centralized by Metsä Group Treasury based on the strategy approved by Board of Directors of Metsä Board. The commodity hedging policy is applied to the management of the natural gas, light and heavy fuel oil and also transactions related to Emission allowances are managed by Metsä Group Treasury. Hedge accounting has been applied to
all commodity hedging. According to the commodity hedging policy an 80 per cent hedge level of the estimated net position during the first 12 month period has been set as a hedging norm and the hedge ratio can vary by 20 per cent in either direction. The Group Board of Directors makes significant strategic decisions. Part of Metsä Board’s mills’ purchase of fuel is based on natural gas and the company is hedging the price risk of natural gas purchases by using financial hedges. Metsä Board is hedging also the gas oil, heavy fuel oil and 0.5% fuel oil price risk related to logistics costs (sea freights) based on commodity risk policy by using financial hedges. Metsä Board is not hedging its pulp price risk. Liquidity risk Liquidity risk is defined as the risk that funds and available funding become insufficient to meet business needs, or costs that are incurred in arranging the necessary financing are unreasonable high. Liquidity risk is monitored by estimating the need for liquidity needs 12 – 24 months ahead and ensuring that the total liquidity available will cover a main part of this need. According to the financial policy, the liquidity reserve must at all times cover 100 per cent of the Group’s liquidity requirement for the first 12 months and 50 – 100 per cent of the following 12 – 24 months liquidity requirement. The objective is that at the most 20 per cent of the Group’s loans, including committed credit facilities, are allowed to mature within the next 12 months and at least 25 per cent of the total debt must have a maturity in excess of four years. The target is to avoid keeping extra liquid- ity as liquid funds and instead maintain a liquidity reserve as committed credit facilities outside the balance sheet. The cornerstone of liquidity risk management is to manage the Group’s operative decisions in such a way that targets concerning indebtedness and sufficient liquidity reserve can be secured in all economic conditions. Liquidity risk is also managed by diversifying the use of capital and money markets to decrease dependency on any single financing source and the optimisation of the maturity structure of loans is also emphasized in finan- cial decisions. Metsä Board is using short-term working capital financing related to accounts receivables and accounts payables. At the end of the financial period, available liquidity was EUR 491.6 million (556.2), consisting of following items: liquid assets and investments of EUR 291.6 million (356.2), a syndicated credit facility (revolving credit facility) of EUR 200.0 million (200.0), and other committed credit facilities of EUR 0.0 million (191.8). Of the liquid assets, EUR 278.4 million consisted of short-term deposits with Metsä Group Treasury (338.6), and EUR 13.2 million were cash funds and investments (17.6). Other interest-bearing receivables amounted to EUR 2.5 million (2.3). In addition, Metsä Board’s liquidity reserve is complemented by Metsä Board commercial paper program of EUR 200 million signed in December 2023, Metsä Group’s internal undrawn short-term credit facility of EUR 150.0 million (150.0) and undrawn pension premium (TyEL) funds of EUR 229.7 million (227.6). At the end of 2023, the liquidity reserve covers the forecasted financing need of 2024–2025. 3 per cent (3) of long-term loans and committed facilities fall due in a 12 month period and 5 per cent (75) have a maturity of over four years. The average maturity of long-term loans is 3.1 years (4.0). The share of short-term financing of the Group’s interest bearing liabilities is 4.0 per cent (0.1).
Business operations and value creation 2 This is Metsä Board 4 CEO’s review 6
Strategy and financial targets
8
Value creation
Financial development 10 Key figures 12
Report of the Board of Directors
20 72
• Sustainability statement • Sustainability statement assurance report
74
Consolidated financial statements
78 Notes to the consolidated financial statements 126 Parent company financial statements 129 Notes to the parent company financial statements 142 The Board’s proposal to the Annual General Meeting for the distribution of funds 143 Auditor’s Report 147 Shares and shareholders 151 Ten years in figures 152 Taxes 153 Production capacities 155 Calculation of key ratios and comparable performance measures Corporate governance 157 Corporate governance statement 165 • Board of Directors of Metsä Board 168 • Corporate Management Team of Metsä Board
170 Remuneration report 174 Investor relations and investor information
108
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Consolidated financial statements | METSÄ BOARD ANNUAL REVIEW 2023
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