The Group's business sector is capital intensive, cyclical and fragmented. If the economic downturn is prolonged, overcapacity may increase competition and market pressure on prices. Componenta aims to price its products competitively in line with the prevailing market conditions.
Fluctuations in the prices of recycled metal, which is Componenta Group’s main raw material, affect the margins on the Group’s products. Increases in the price of recycled scrap metal are passed on to the sales prices of products after a certain delay, thus a rise in the price of recycled metal will temporarily reduce the profit margin. Conversely, when the price of recycled scrap metal goes down, the Group’s margins improve temporarily.
Cost risks relating to raw materials are mainly managed with price agreements. Componenta has price agreements with its customers and under these agreements the prices of products are adjusted in line with the changes in the raw material prices.
The electricity consumption at the Group’s foundries and machine shops creates a spot price risk for the purchased electricity. Componenta uses the services of an external consultant in the procurement of electricity, within a framework set by Componenta and in accordance with Componenta’s procurement and risk policies. From the beginning of 2018, a significant part of the price of electricity will be fixed for the next 12 months. No derivative instruments are used for the hedging. The difference between the forecast and actual electricity consumption may affect the company’s profit. Componenta aims to pass on the changes in the price of electricity to customers with a separate electricity surcharge.
Componenta complies with environmental legislation in all its operations and with the ISO 14001 standard in developing its products and operations. Changes in environmental legislation and regulations may give rise to additional costs for Componenta in connection with observing the terms of a permit or for cleaning up the environment, and these costs may affect the Group’s financial results.
All of Componenta’s units have effective ISO 14001 environmental management systems, for developing and improving environmental matters. The Group strives to prevent risk situations through preventive maintenance, guidelines and structural measures.
The uncertainties assumed by the company and management in terms of continuity of operations are related to the ability of the Group companies to make the restructuring debt payments under the restructuring program. When analyzing cash flow and liquidity forecasts for the companies, the management has estimated the companies’ future sales volumes, net sales, operating margins, capital expenditure and working capital needs. These estimates are subject to uncertainty. Due to limitations arising from the restructuring programs, Componenta’s assessment is that it has only a limited opportunity to influence how it can transfer cash funds and bank receivables between Group companies (such as the subsidiaries’ ability to distribute funds in the form of dividends, Group contributions or intra-Group loans) and the nature of new financing the Group can acquire.
Componenta has major customers that are of great importance for the Group. It is rare to lose a customer, since the costs in changing a supplier are high, mainly because of the costs and quality risks related to ramping up products and the making of tools and patterns.
The potential risks of Componenta in respect of liquidity and access to working capital may weaken the volume of future trading and reduce the number of orders that will be placed on new products by customers in the future. Volumes may also shrink because of customers lost for commercial reasons.
A vital factor for Componenta’s business operations is the availability of certain commodities, such as recycled metal, pig iron and energy, at competitive prices. To manage the cost risk relating to raw materials, Componenta has price agreements with its customers and under these agreements the prices of products are adjusted in line with the changes in the commodity prices. Rising raw material prices may result in more money being tied to working capital than estimated. To reduce the supplier risk, critical raw materials are usually purchased from at least two suppliers.
Componenta strives to identify, measure and monitor different risks with well planned and systematically implemented procedures. Componenta cooperates with insurance companies in dealing with matters relating to production stoppages and has taken appropriate insurance against the risk of stoppages.
Labour market disruptions are a risk factor, as they can disrupt production and thus affect the punctuality of deliveries and the Group’s business operations.
The Group is liable for any damage or injury caused by products it has manufactured, supplied and represented. The Group has taken appropriate insurances against these risks, and these insurances should cover the risks related to the aforementioned damage.
Componenta also has contracts under which the company is liable for indirect damage or injury caused by its products. As a rule, these contracts contain a limit on liability, and within these limits the company strives to cover indirect damage or injury with appropriate insurance. The company manages product liability risks with sales contract terms.
Successful business operations and maintaining Componenta’s competitive position are dependent on skilled personnel remaining in the service of the company. Componenta’s goal is to create a work environment in which employees can develop and to which they can commit, and to offer competitive benefits to personnel. Social and ethical responsibility and human rights are taken into account in Componenta’s personnel policy.
To support Componenta’s decision-making and business processes, information must be reliable and easily available. In addition, information systems must be sufficiently protected and secured to prevent information leaks. Standardising business applications, IT infrastructures and IT processes forms an important foundation for managing IT risks. Carrying out these measures successfully reduces risks related to internal control and financial reporting.
The financial risks relating to Componenta Group’s business operations are managed in accordance with the treasury policy approved by the Board of Directors. The objective is to protect the Group against unfavourable changes in the financial markets and to secure the performance and financial position of the Group. The policy aims to limit the amount of financial risks to an acceptable level by using conventional financial instruments available on the market. Management of financial risks takes place in the Group Treasury. Due to restructuring programs, it may also be possible to locally agree on the hedging of financial or currency risks in subsidiaries on terms approved by the Group.
In the near future, Componenta Group’s financing and liquidity risks will be related to the implementation of ongoing corporate restructuring programs. The Group’s ability to continue its operations depends on the Group companies in Finland and Sweden being able to make the payments under the approved restructuring programs. The sufficiency of working capital is an essential risk to the implementation of the restructuring programs, as the Group companies currently have limited access to external funding.
According to Componenta’s treasury policy, approved by the Board of Directors, the currency risk is divided into the transaction risk resulting from foreign currency denominated income and expenses and the translation risk resulting from foreign currency denominated equity investments and the profit or loss on these.
The transaction position includes foreign currency denominated trade receivables and payables in the balance sheet, as well as foreign currency cash flows that are expected to be highly probable in the future. The time horizon for the future is normally 1–6 months but can be extended to 12 months if needed. These form a share of the transaction position, the changes of which affect the operating profit. Separate from this position are those items of the transaction position whose exchange rate changes are recognised in financial income and expenses such as foreign currency denominated cash and cash equivalents, as well as intra-group and external foreign currency loans and loan receivables.
The translation position is determined from the shareholder’s equity and retained earnings of subsidiaries and associated companies for whom the operating currency is other than the euro. Regarding the translation risk, the Group’s equity risk is related to the Swedish and Russian subsidiaries when their equity in local currency is converted to euros.
Exchange rate fluctuations are hedged using foreign currency loans and deposits, as well as other natural hedging relationships. In addition, conventional derivative instruments can be used, such as currency forwards and options with reliable market pricing. Currency derivatives have a maturity of less than one year. Due to the restructuring procedures, the company does not currently achieve the necessary limits for hedging derivative contracts.
The most significant currency in terms of the currency risk is the Swedish krona.
The interest rate risk to which fair values and the cash flow are exposed arises mainly from the Group’s loan portfolio and finance leases. Interest rate risk arises when changes in market rates and interest margins affect financial expenses and income. Interest rate risk is managed by adjusting the ratio between the fixed and floating rate loans and investments and their renewal period. Interest rate derivatives, such as interest rate swaps, may also be used.
Each Group company is primarily liable for the credit risks attached to its own trade receivables. The Group's credit monitoring function prepares guidelines, monitors credit risk management and assesses customers’ creditworthiness and their ability to meet their payment obligations. Debt collection and credit control have grown in importance since the restructuring procedure started, as the Group lost the sales limits of customer receivables once the procedure began. On the other hand, shortening the payment terms of customers has reduced the credit risk on the receivables. Componenta aims to gain new sales limits for receivables in 2018.