25. Financial risk management

The duty of Group Treasury in the HKScan Group is to ensure cost-effective funding and financial risk management for Group companies and to attend to relations with financiers. The treasury policy approved by the Board provides the principles for financial risk management in the Group. The policy is supplemented by separate guidelines and instructions, as well as approval practices.

Financial risks mean unfavourable movements taking place in the financial markets that may erode accrual of the company’s result or reduce cash flows. Financial risk management aims to use financial means to hedge the company’s intended earnings performance and equity and to safeguard the Group’s liquidity in all circumstances and market conditions.

External funding of the Group’s operations and financial risk management is centralised to Group Treasury operating under the Group Treasurer. Group Treasury identifies and assesses the risks and acquires the instruments required for hedging against the risks, in close co-operation with the operational units.

Risk management may employ various instruments, such as currency forwards and options, interest-rate or currency swaps, foreign currency loans and commodity derivatives. Derivatives are used for the sole purpose of hedging, not for speculation. Funding of the Group’s subsidiaries is managed mainly through the parent company. The subsidiaries may not accept new external funding, nor may they give guarantees or pledges without the permission of the Group Treasury in the parent company.

Foreign exchange risk

The Group’s domestic market consists of Finland, Sweden, Denmark and Baltic countries. The company produces, sells and markets pork, beef, poultry and lamb products, processed meats and convenience foods to retail, food service, industry and export sectors.

Transaction risk arises when the Group companies engage in foreign currency denominated import and export both outside and within the Group. The aim of transaction risk management is to hedge the Group’s business against foreign exchange rate movements and allow the business units time to react and adapt to fluctuations in exchange rates. Foreign exchange risk exposures, which include sales, purchases and financing related contractual cash flows (balance sheet items and committed cash flows), as well as highly probable forecasted cash flows, are hedged through forward contracts made with the parent company. The business units report their risk exposures and hedging levels to Group Treasury on a regular basis.

The subsidiaries must hedge balance sheet items in full amount and committed cash flows from 50 to 100 per cent. In addition, forecasted, highly probable cash flows are hedged 0 - 50 per cent for up to 12 months into the future. Group Treasury can use currency forwards, options and swaps as hedging instruments. Treasury targets to hedge fully its significant foreign exchange risk exposures.

Translation risk arises from the consolidation of equity into the basic currency in subsidiaries whose operational currency is not the euro. The largest foreign currency denominated equities of the Group companies are in Swedish krona and Danish krone. Fluctuations of exchange rates affect the amount of consolidated equity, and translation differences are generated in connection with the consolidation of equity in accounting. Group Treasury identifies and manages foreign exchange translation risks according to Treasury Policy. HKScan Group is not hedging translation risk currently.

The equities of the Group’s non-euro-denominated subsidiaries and associates are presented in the following table in million euros. 

2016 2015
Currency Exposure Exposure
SEK 104.6 121.7
PLN 5.1 4.3
DKK 9.5 23.8
The parent company’s functional currency is euro. Net position of assets and liabilities denominated in the most significant foreign currencies translated into euro at the exchange rates of the reporting date:
2016 2015
Net position before hedging 4.4 1.8 11.8 2.2 2.2 1.1 21.9 2.8
Hedging -2.1 -1.1 -10.4 -1.8 -1.6 -1.0 -26.6 -1.4
Open position 2.4 0.7 1.4 0.4 0.6 0.0 -4.7 1.4
The following table analyses the strengthening or weakening of the euro against the US dollar, Japanese yen, Swedish krona and British pound sterling, all other factors remaining unchanged. The movements represent average volatility over the past 12 months. Sensitivity analysis is based on assets and liabilities denominated in foreign currencies at the reporting date. The effects of currency derivatives, which offset the effects of changes in exchange rates, are also taken into account in sensitivity analysis. Net investments in foreign units and the instruments used to hedge these have been excluded from sensitivity analysis.
In respect of the foreign currencies, the effect would mainly be due to changes in the exchange rates applicable to foreign currency denominated trade receivables and payables.
2016 2015
Movement (+/-), % 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
Effect on profit before taxes 0.2 0.1 0.1 0.0 0.1 0.0 0.4 0.1
The following assumptions were used in calculating sensitivity to currency risks:
Forecast future cash flows have not been taken into account in the calculation but financial instruments such as forward contracts used to cover these positions are included in the analysis.
The calculation and estimates of reasonably possible changes in exchange rates are based on the assumption of ordinary market and business conditions.

Interest rate risk

The Group’s main exposure to interest rate risk arises through interest-bearing liabilities. The goal of interest rate risk management is to reduce the fluctuation of interest expenses in the income statement, minimize debt servicing costs and improve the predictability. The Group’s short-term money market investments expose it to cash flow interest rate risk, but the impact is not significant as these investments are targeted to keep in minimum. Group revenues and operative cash flows are mainly independent of fluctuations in market rates.

Interest rate risk is measured by the effect of interest rate movements on the total forecasted debt portfolio. The relevant measurement horizons are selected in accordance with the rolling business strategy planning and possible major investment programmes. 

To manage interest rate risks, Group borrowings are spread across fixed and variable interest instruments. The company may borrow at fixed or variable interest rates and use interest rate derivatives to achieve a result that is in line with the Treasury policy. The goal of the policy is to keep the fixed interest term of the loans between 12 and 48 months. On the balance sheet date the fixed interest term was 32 months.

The Group monitors and analyses its interest rate risk position on a regular basis. The Group has determined sensitivity limits for interest rate movements. The sensitivity of net financial expenses on the balance sheet date to an increase/decrease of one per cent in interest rates, all other things being equal, was approximately EUR 0.7 (0.7) million before taxes over the next 12 months. The sensitivity analysis was prepared based on the amounts and maturities of interest-bearing liabilities and interest rate derivatives on the balance sheet date.

Counterparty risk

Financial counterparty risk refers to the risk that counterparty may fail to fulfill its contractual obligations. The risks are mostly related to investment activities and counterparty risks in derivative contracts. Banks that finance the Group are used as counterparties whenever possible, as well as a few other specified counterparties. Cash may be invested in bank deposits, certificates of deposit, municipal papers and the commercial paper programmes of certain specified companies listed on the main list of the Nasdaq Helsinki and to certain state-owned companies. Because of the limited extent of the investment activities, the resulting counterparty and price risks are not significant.

Commodity risk

The Group is exposed to commodity risks that are related to the availability and price fluctuations of commodities. In addition to meat raw materials physical electricity consumption is one of the most significant commodity risks in the Group companies. The subsidiaries can hedge against fluctuation in market prices for electricity and other commodities by procuring fixed-price products or through derivative contracts with Group Treasury. The companies may use external parties to assist them in commodity risk management.

The Group uses electricity derivatives in Finland and Sweden to level out energy costs. The electricity price risk is evaluated for five-year periods. The value changes of derivatives hedging the price of electricity supplied during the period are included in the adjustment items of purchases. Hedge accounting is applied to contracts hedging future purchases.

A sensitivity analysis for electricity derivatives assumes that derivatives maturing in less than 12 months have an impact on profit. If the market price of electricity changed by +/-10 percentage points from the balance sheet date, the impact would be as follow, calculated before tax:

EUR million 2016 2015
Electricity – effect in income statement +/- 0.0 +/- 0.2
Electricity – effect in equity +/- 0.3 +/- 0.3

Credit risk

The Group’s Treasury Policy and related guidelines specify the credit quality requirements and investment principles applied to customers and counterparties to investment transactions and derivative contracts. The Group Treasury is responsible for defining the principles for credit management within the Group and updating the Credit Policy as well as instructing the Group’s subsidiaries in credit management.

Credit risk results from a customer’s possible failure to fulfil its payment obligations. The Group’s trade receivables are spread among a wide customer base, the most important customers being central retail organizations in the various market areas. The creditworthiness, payment behaviour and credit limits of the clients are monitored systematically. As a main principle some type of securing is needed for all credit granted. The security can be credit insurance, a bank guarantee, or a security deposit. In addition, the Group is exposed to minor credit risk in remaining financing investments of primary production contract producers.

The amount of impairment losses recognized through profit or loss in the financial period was EUR 0.0 (-0.4) million. The Group’s maximum exposure to credit risk equals the carrying amount of financial assets at year-end. The age breakdown of trade receivables is presented in Note 19.

Liquidity AND REFINANCING risk

The Group constantly assesses and monitors the amount of funding required for operations by means such as preparation and analysis of cash flow forecasts. The Group maintains adequate liquidity under all circumstances to cover its business and financing needs in the foreseeable future.

The availability of funding is ensured by spreading the maturity of the borrowing portfolio, financing sources and instruments. In general, cash and cash equivalents are targeted to keep in minimum. The Group also has revolving credit facilities with banks, bank borrowings, current accounts with overdraft facilities and the short-term EUR 200 million Finnish commercial paper programme. Liquidity risk is managed by retaining long-term liquidity reserves and by exceeding short-term liquidity requirements. The Group’s liquidity reserve includes cash and cash equivalents, money market investments and long-term unused committed credit facilities. Short-term liquidity requirements include the repayments of short- and long-term debt within the next 12 months, expected dividends as well as a specifically defined strategic liquidity requirement, which covers the operative funding needs.

The Group’s liquidity remained good in 2016. Undrawn committed credit facilities on 31 December 2016 stood at EUR 100.0 (100.0) million. In addition, the Group had other undrawn overdraft and other facilities of EUR 20.1 (20.4) million. The overdraft facility agreements are in force until further notice. At year end, the company’s EUR 200 million commercial paper programme had been drawn in the amount of EUR 7.0 (27.0) million. The credit available from the loan facilities is subject to variable rates and the related interest rate risk is managed through derivative instruments.

The average rate of interest (including commitment fees) paid by the Group was 3.5 (3.1) per cent at the balance sheet date.

The company’s current loan agreements are subject to the net gearing ratio financial covenant. Financiers are provided with quarterly reports on the observance of the financial loan covenant. If the Group is in breach of the covenant, the creditor may demand accelerated loan repayment. Management monitors the fulfillment of the loan covenant on a regular basis. On 31 December, the financial covenant was well below the covenant level.

Group management has identified no significant concentrations of liquidity risk in financial assets or sources of funding.

The number of the Group's commitments on the balance sheet date by type of credit
Credit type Size In use Available
Overdraft facility 20.2 0.1 20.1
Credit limit 100.0 0.0 100.0
Total 120.2 0.1 120.1
Credit type Size In use Available
Overdraft facility 20.4 0.0 20.4
Credit limit 100.0 0.0 100.0
Total 120.4 0.0 120.4
The following table analyses the Group’s financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the remaining period on the balance sheet date to the contractual maturity date. Derivative financial liabilities are included in the analysis if their contractual maturities are essential for an understanding of the timing of the cash flows. Except for interest rate derivatives, the amounts disclosed in the table are the contractual undiscounted cash flows.
Maturity analysis only applies to financial instruments and statutory liabilities are therefore excluded. The amounts also include interest on financial liabilities and margin on loan.
31 Dec. 2016
Maturity of financial liabilities
Credit type Balance sheet
31 Dec. 2016
2017 2018 2019 2020 2021 >2021
Bond 99.7 111.0 3.7 3.7 103.7 - - -
Bank loans 15.7 16.5 0.3 0.3 0.3 15.7 - -
Pension loans 15.0 15.9 7.6 5.3 3.0 0.0 - -
Commercial paper programme 7.0 7.7 7.7 - - - - -
Other borrowing 6.7 6.8 5.4 0.7 0.7 - - -
Trade and other payables 245.3 245.3 245.3 - - - - -
Total 389.4 403.2 269.9 9.9 107.6 15.8 0.0 0.0
31 Dec. 2015
Maturity of financial liabilities
Credit type Balance sheet
31 Dec. 2015
2016 2017 2018 2019 2020 >2020
Bond 99.5 114.7 3.7 3.7 3.7 103.7 - -
Bank loans 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.1
Pension loans 22.1 23.7 7.8 7.6 5.3 3.0 - -
Commercial paper programme 27.0 27.0 27.0 - - - - -
Other borrowing 4.9 4.9 4.9 0.0 0.0 0.0 0.0 0.0
Trade and other payables 199.3 199.3 199.3 - - - - -
Total 353.1 369.9 242.8 11.3 9.0 106.7 0.0 0.1
The following table presents the nominal value and fair values (EUR million) of derivative instruments. The derivatives mature within the next 12 months except for interest rate derivatives and commodity derivatives, the maturity of which is presented separately.
2016 2016 2016 2015 2016 2015
fair value
fair value
value net
value net
Interest rate derivatives - -13.4 -13.4 -14.0 126.9 128.5
matured in 2016 - -
matures in 2017 - -0.3 -0.3 -0.4 5.2 5.4
matures in 2018 - -0.8 -0.8 -1.1 15.7 16.3
matuers in 2019 - -1.6 -1.6 -1.6 25.2 25.4
matures in 2020 - -2.7 -2.7 -2.9 25.5 25.9
matures in >2020 - -8.0 -8.0 -8.1 55.2 55.4
of which defined as cash flow hedging instruments - -13.4 -13.4 -14.0 126.9 128.5
Foreign exhange derivatives 0.1 -0.3 -0.2 -0.2 43.6 57.7
of which defined as net investment hedging instruments - - - - - -
Commodity derivatives 0.6 -0.5 0.1 -2.9 7.2 8.1
matured in 2016 -1.6 3.6
matures in 2017 0.3 -0.3 -0.0 -0.9 3.8 2.8
matures in 2018 0.2 -0.1 0.1 -0.3 1.9 1.2
matuers in 2019 0.1 -0.1 0.1 -0.1 1.1 0.5
matures in 2020 0.0 0.0 0.0 - 0.4 -
of which defined as cash flow hedging instruments 0.6 -0.5 0.1 -2.9 7.2 8.1

Derivatives to which hedge accounting applies

Changes in the fair values after taxes of interest rate swaps designated as hedges of cash flow amounting to EUR 0.5 (1.2) million are recognized under other comprehensive income. All interest rate derivatives are designated as hedging instruments of cash flow to which hedging accounting is applied.

Changes in the fair values of the effective portions after taxes of commodity derivatives designated as hedges of cash flow amounting to EUR 2.0 (-0.9) million are recognized under other comprehensive income. The hedged highly probable transactions are estimated to occur at various dates during the next 60 months. Gains and losses accumulated in the hedging instruments reserve are included as reclassification adjustments in the income statement when the hedged transaction affects profit or loss. The ineffective portion of commodity risk hedge amounting to EUR 0.5 (-0.1) million are recognized under other operating expenses in the income statement.

Capital management

The purpose of capital management in the Group is to support business through an optimal capital structure by safeguarding a normal operating environment and enabling organic and structural growth. An optimal capital structure also generates lower costs of capital.

Capital structure is influenced by controlling the amount of working capital tied up in the business and through reported profit/loss, distribution of dividend and share issues. The Group may also decide on the disposal of assets to reduce liabilities.

The tools to monitor the development of the Group’s capital structure are the equity ratio and net gearing ratio. Equity ratio refers to the ratio of equity to total assets. Net gearing ratio is measured as net liabilities divided by equity. Net liabilities include interest-bearing liabilities less interest-bearing short term receivables and cash and cash equivalents.

On the balance sheet date the equity ratio is 47.9 per cent. The target in respect of net gearing ratio is below 100 per cent. On the balance sheet date, the net gearing ratio was 33.5 per cent.

Net gearing ratio
2016 2015
Interest-bearing liabilities 144.1 153.8
Interest-bearing short-term receivables 0.2 0.2
Cash and bank 6.6 9.5
Interest-bearing net liabilities 137.2 144.0
Equity 409.7 425.8
Net gearing ratio 33.5 % 33.8 %