METSÄ BOARD Annual review 2024
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% 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 and providing necessary financial services. Foreign currency risk Metsä Board’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 company’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 trade receivables and trade payables and 50% share of the annual contracted or estimated net currency cash flow. The main currencies of the Metsä Board’s foreign currency transaction exposure are the US dollar, the Swedish krona and the British pound. The share of dollar is 54% (2023: 54), share of Swedish krona is 36% (35) and share of pound is 8% (9). 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 company. From other currencies Metsä Board has currency risk in Canadian dollar. The hedging policy is to keep the balance sheet exposure and 50% of annual cash flow of contracted or estimated currency flows consistently hedged. The amount of hedging may deviate from the normal level by 40% 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 company. 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 7.9 months on average (7.6) being 132% of the hedging norm (126). During the financial period, the hedging level has varied between 7 and 8 months (7-8) being between 120 and 132% of the norm (117-131). The dollar’s hedging level was 7.8 months (7.4) being 130% of the norm (124). The Swedish krona’s hedging level was 8.4 months (8.5) being 139% of the norm (141). The pound’s hedging level was 7.2 months (6.0) being 120% of the norm (100). 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. 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 company’s 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 company 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 19.8 months at the end of the year (30.6). During the reporting period duration has varied between 20 and 29 months (31–36). Duration is lengthened by the bond of EUR 250 million. Of interest-bearing liabilities 41% (15) is subjected to variable rates and the rest to fixed rates and the average interest rate at the end of 2024 is 2.7% (2.6). At the end of 2024, an increase of 1% in interest rates would decrease net interest rate costs of the next 12 months by 0.5 million euros (decrease 1.8). Company 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 (50.0) and the interest rate swap matures in April 2025. Commodity risk IIn the hedging of commodity risks company 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% 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% in either direction. The Metsä Board Board of Directors makes signifi- cant strategic decisions. Metsä Board 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 marine 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% of the Group’s liquidity requirement for the first 12 months and 50–100% of the following 12–24 months liquidity requirement. The objective is that at the most 20% of the company’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 liquidity 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 company’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 emphasised in financial decisions. Metsä Board is using short-term working capital financing related to trade receivables and trade payables. At the end of the financial period, available liquidity was EUR 382.6 million (491.6), consisting of following items: liquid assets and investments of EUR 182.6 million (291.6), a syndicated credit facility (revolving credit facility) of EUR 200.0 million (200.0), and other committed credit facilities of EUR 0.0 million (0.0). Of the liquid assets, EUR 179.2 million consisted of short-term deposits with Metsä Group Treasury (278.4), and EUR 3.4 million were cash funds and investments (13.2). Other interest-bearing receivables amounted to EUR 0.0 million (2.5). In addition, Metsä Board’s liquidity reserve is complemented by Metsä Board commercial paper program of EUR 200 million, Metsä Group’s internal undrawn short-term credit facility of EUR 150.0 million (150.0). 16% (3) of long-term loans and committed facilities fall due in a 12 month period and 3% (5) have a maturity of over four years. The average maturity of long-term loans is 2.2 years (3.1). The share of short-term financing of the company’s interest bearing liabilities is 21.7% (4.0). Counterparty risk Financial instruments carry the risk that the company may incur losses should the counterparty be unable to meet its commitments. Company 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. Company
has applied expected credit loss model to calculate the impairment of financial assets. Company’s trade receivables carry a counterparty risk that the company may incur losses should the counterparty be unable to meet its commitments. Credit risk attached to trade receivables is managed on the basis of the credit risk management policies approved by operative management. Trade receivable performance is followed by company Credit Risk Management Team and reported monthly to Customer Credit & Compliance Committee and operative management. Credit quality of cus- tomers 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 company. 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. The geographical structure of the trade receivable is diversified and is reflecting the external sales structure presented in the Segment infor- mation. The main sources of credit risk are in USA, Italy, United Kingdom, Sweden Turkey, Poland, Spain, Germany, Netherlands and Australia. The top ten countries represent around 71% of total external trade receivables (70). At the end of 2024 the credit risk exposure of Metsä Board’s largest individual customer (an individual companies or groups of companies under common ownership) was 7% (9) of total external trade receivables. The ten largest customer group’s (individual companies or groups of companies under common ownership) accounted for 41% (36) of trade receivables. At the end of 2024 there was around 1.0% (1.0) shortfall of credit insurance limits beyond usual policy deductibles and exclusions. Expected credit losses on trade receivables and the age distribution of trade receivables are presented in note 4.5. Managing the capital Terms capital and capital structure are used to describe investments made in the company by its owners and retained earnings (together equity) and debt capital (liabilities) as well as the relation between them. In managing its capital structure, Metsä Board aims at maintaining an efficient capital structure that ensures the company’s operational conditions in financial and capital markets in all circumstances despite the fluctuations typical to the sector. The company has a credit rating for its long-term financing (from Moody’s Investor Service ja S&P Global). Certain central target values, which correspond to standard requirements set by financing and capital markets, have been defined for the capital structure. No target level has been defined for the credit rating. Metsä Board’s capital structure is regularly assessed by the company’s Board of Directors and its Audit Committee. Metsä Board´s long-term financial target for the comparable return on capital employed is minimum 12%. According to the company’s target, the ratio of interest-bearing net liabilities to comparable EBITDA (last 12 months) is a maximum of 2.5. In 2024 the long-term financial targets have been kept constant. The key ratios describing the capital structure and the capital amounts used for the calculation of the key ratio were on the following.
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 20 37 70 89 96
• Sustainability statement
General information
E – Environment
S – Social responsibility
G – Governance
Annexes to the Sustainability statement
98 Consolidated financial statements 102 Notes to the consolidated financial statements 150 Parent company financial statements 153 Notes to the parent company financial statements 166 The Board’s proposal to the Annual General Meeting for the distribution of funds 167 Auditor’s Report 171 Sustainability statement assurance report 173 Shares and shareholders 177 Ten years in figures 178 Taxes 179 Production capacities 181 Calculation of key ratios and comparable performance measures Corporate governance 183 Corporate governance statement 190 • Board of Directors of Metsä Board 194 • Corporate Management Team of Metsä Board
196 Remuneration report 201 Investor relations and investor information
132
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Consolidated financial statements | METSÄ BOARD ANNUAL REVIEW 2024
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