The objective of the Group's financial risk management is to decrease the negative effects of market and counterparty risks on the Group's profit and cash flow and to ensure sufficient liquidity. The Group’s most important financial risks are foreign exchange risk and counterparty risk.
The main principles for financial risk management are described in the Group Treasury Policy approved by the Company’s Board of Directors. The treasury management team is responsible for implementation of the Treasury Policy. Treasury activities are centralised in the Group's treasury department.
Market risk includes foreign exchange risk, interest rate risk and electricity price risk. At the end of the reporting period, the Group had no investments in equities or equity funds.
The Group's foreign exchange risk consists of transaction risk and translation risk.
Transaction risk arises from operational items (such as sales and purchases) and financial items (such as loans, deposits and interests) in foreign currency in the statement of financial position, and from forecast cash flows over the upcoming 12 months. Transaction risk is monitored and hedged actively. The largest risk in terms of value is posed by sales based on US dollars. Other significant currencies are the Japanese yen, the Swedish krona, the Norwegian krona, the British pound and the Polish zloty. As regards other currencies, no individual currency has a significant effect on the Group’s overall position.
In accordance with the Treasury Policy, items based on significant currencies in the statement of financial position are hedged 90–105% and the forecast cash flows over the upcoming 12 months are hedged 0–50%. Foreign currency derivatives with maturities up to 12 months are used as hedging instruments. The positions of operational items are presented below.
|USD||Other significant currencies|
|EUR million, 31 Dec||2012||2011||2012||2011|
|Net position in statement of financial position||14.4||10.0||13.8||12.0|
|Forecast net position (12 months)||88.1||97.2||70.4||60.6|
|Net position, total||102.5||107.1||84.2||72.5|
|Foreign currency derivatives||-28.3||-28.1||-21.2||-25.2|
|Net open position total||74.2||79.0||63.0||47.3|
The Group has an external loan of GBP 8.2 million for which the capital and interest cash flows are fully hedged against foreign exchange risk with a cross currency swap. More details are presented in 24.1.3.
The Group’s internal loans and deposits are denominated in the local currency of the subsidiary and the most significant ones are fully hedged with currency swaps.
The fair value changes of the foreign currency derivatives are recognised through profit or loss in either other operating income and expenses or finance income and expenses depending on whether, from an operational perspective, sales revenue or financial assets and liabilities has been hedged.
Translation risk arises from the equity of subsidiaries that have a functional currency other than the euro. At 31 December 2012, the equity in these subsidiaries totalled EUR 50.1 (2011: 40.6) million. The most significant translation risk arises from the British pound. This translation position has not been hedged.
The effect of changes in foreign exchange rates on the Group’s profit (before taxes) and equity at the reporting date is presented below for EUR/USD exchange rates. The assumption used in the sensitivity analysis is a +/- 10% change in the exchange rate (USD depreciates/appreciates by 10%) while other factors remain unchanged. In accordance with IFRS 7, the sensitivity analysis includes only the financial assets and liabilities in the statement of financial position and so the analysis does not take into account the forecast upcoming 12-month foreign currency cash flow included in the position. The potential translation position is not taken into account in the sensitivity analysis.
|Impact on profit||Impact on equity|
|EUR million, 31 Dec||2012||2011||2012||2011|
|USD +/- 10%||1.3/-1.5||1.7/-2.0||0||0|
The price risk refers to the risk resulting from changes in electricity market prices. The market price of electricity fluctuates greatly due to weather conditions, hydrology and emissions trading, for example. The Orion Group obtains its electricity through deliveries that are partly fixed-price contracts and partly tied to the spot price of the price area of Finland, and in the latter case is therefore exposed to electricity price fluctuation.
The electricity portfolio is managed so that it is possible to hedge the cash flow risk resulting from fluctuations in the market price of electricity. The hedging instruments used are standard electricity derivative instruments that are quoted on Nord Pool. Nord Pool’s closing prices are used as levels for valuation.
Hedge accounting under IAS 39 is applied to hedging electricity price risk. In applying hedge accounting to the cash flow, the amount recognised for the hedging instrument in the fair value reserve in equity is adjusted according to IAS 39.96 so that it is the lower (in absolute figures) of the following two figures:
● the cumulative gain or loss accrued by the hedging instrument from its inception
● the cumulative change in the fair value of expected future cash flows of the item hedged from the inception of the hedge
The remaining portion of the profit or loss accrued by the hedging instrument represents the ineffective portion of the hedge and it is recognised through profit or loss.
A fair value valuation of EUR 0.0 (2011: -0.2) million (before taxes) for electricity derivatives was recognised in the equity at 31 December 2012. The EUR 0.6 (2011: 0.2) million ineffective portion of derivatives has been recognised in the expenses of the functions. The nominal values of the derivatives totalled EUR 5.0 (2011: 6.7) million.
Changes in interest rates affect the Group's cash flow and results. At 31 December 2012, the Group’s interest-bearing liabilities totalled EUR 136.7 (2011: 88.7) million. The Group is exposed to interest rate risk associated with long-term loans raised from the European Investment Bank. At 31 December 2012, the capital of these loans with interest rates tied to the Euribor rate totalled EUR 124.4 (2011: 66.1) million. EUR 22.3 million of these loans has been hedged with an interest rate swap for which Orion pays fixed-rate interest. In addition, the interest cash flow of a GBP 8.2 million floating-rate loan is hedged against rising interest rates with a cross currency swap, due to which fixed-rate euro-denominated interest is paid by the Group.
If interest rates rose in 2013 in parallel by one percentage point (1%) compared with market interest rates at the end of the reporting period, and other factors remained unchanged, the estimated interest expenses of the Group would rise by EUR 1.0 million in 2013 (before taxes).
The Group’s exposure to risks related to changes in market rates is somewhat reduced by the fact that the Group’s money market investments, which at 31 December 2012 totalled EUR 15.0 (2011: 70.3) million, are invested in floating interest rate instruments. If these investments were taken into account in the above sensitivity analysis, the forecast net finance expenses would increase by EUR 0.9 million in 2013.
Cash flow hedge accounting under IAS 39 is applied to the aforesaid loans hedged with interest rate derivatives. At 31 December 2012 a fair value valuation of EUR -0.3 (2011: 0.2) million (before taxes) for interest rate derivatives was recognised in the equity. The nominal values of these derivatives totalled EUR 31.9 (2011: 19.1) million.
Counterparty risk is materialised when a counterparty to the Group does not fulfil its contractual obligations, resulting in non-payment of funds to the Group. The maximum credit risk exposure at 31 December 2012 is the total of financial assets less carrying amounts of derivatives in financial liabilities, which totals EUR 315.0 (2011: 289.8) million. The main risks relate to trade receivables and cash and cash equivalents.
The Group Treasury Policy defines the requirements for the creditworthiness of the counterparties to investments and derivative contracts. Limits have been set for counterparties on the basis of creditworthiness and solidity, and they are regularly monitored and updated. Investments are made mainly in interest-bearing instruments with duration up to three months that are tradable in secondary markets.
The Group Customer Credit Policy defines the requirements for the creditworthiness of the customers. In the pharmaceutical industry trade receivables are typically generated by distributors representing different geographical areas. In certain countries, products are also sold directly to local hospitals. The Group’s 25 largest customers generated about 71% of the trade receivables. The most significant individual customers are Novartis, a marketing partner in pharmaceutical sales, and Oriola-KD Corporation, a pharmaceuticals distributor. The trade receivables are not considered to involve significant risk. In Southern Europe the receivables from individual counterparties are not significant for the Group. Credit losses for the period recognised through profit or loss were EUR 0.3 million.
The Group seeks to maintain a good liquidity position in all conditions. In addition to cash flows from operating activities and cash and cash equivalents, the liquidity is ensured by EUR 100 million of binding undrawn bilateral credit facilities that will mature in 2019, and bank overdraft limits and an unconfirmed commercial paper programme of EUR 100 million. No issued commercial paper is included in the financial statements.
Forecast cash flows of financial liabilities and interest payments are in the table below. Forward rates or the average reference rate per contract have been used for forecasts of interest payments on floating-rate loans. The cash flows have not been discounted.
|Repayments of loans from financial institutions||28.0||23.0||23.0||15.9||44.1||134.0|
|Repayments of finance lease loans||0.9||0.6||0.3||0.3||0.2||2.4|
|Repayments of other liabilities||0.3||0.3|
|Cash flow total, interest-bearing financial liabilities||30.8||24.9||24.5||17.2||45.9||143.3|
|Other non-interest-bearing financial liabilities||10.1||0.1||0.0||10.2|
|Cash flow total, non-interest-bearing financial liabilities||69.4||0.1||0.0||69.5|
|Cash flow total, derivative contracts||0.4||0.4||0.3||1.1|
|Cash flow total, all||100.6||25.4||24.8||17.2||46.0||214.0|
|The Group's interest-bearing liabilities at 31 December 2012 were EUR 136.7 (2011: 88.7) million. The average maturity for loans from financial institutions is three years and two months. The Group’s cash and cash equivalents and other money market investments at 31 December 2012 totalled EUR 145.2 (2011: 123.0) million, thus exceeding the Group’s interest-bearing net debt. To ensure the Group’s liquidity, surplus cash is invested mainly in current euro-denominated interest-bearing instruments with good creditworthiness that are tradable in secondary markets.|
The financial objectives of the Group include a capital structure related goal to maintain the equity ratio, i.e. equity in proportion to total assets, at a level of at least 50%. This equity ratio is not the Company’s opinion of an optimal capital structure, but rather part of an aggregate consideration of the Company’s growth and profitability targets and dividend policy.
The terms of the Company’s loans include financial covenants according to which the lender is entitled to demand early repayment of the loan, if the covenants are breached.
|Group equity ratio||>32%|
|Group interest-bearing liabilities / EBITDA||<2.0:1|
|Group EBITDA / net interest expenses||>8:1|
|Equity, EUR million||511.3||500.0|
|Equity and liabilities total, EUR million||836.9||779.1|
|Equity ratio, (including advance payments) %||61.1%||64.2%|
|EUR million, 31 Dec||2012||2011|
|Interest-bearing liabilities / EBITDA||0.4||0.3|
|EUR million, 31 Dec||2012||2011|
|Net interest expenses||1.7||1.0|
|EBITDA / net interest expenses||183||329|