In the course of its business, the Group is exposed to a number of financial risks: liquidity risk, market risk (including currency risk, commodity risk and interest rate risk) and credit risk. This note presents the Group’s objectives, policies and processes for managing its exposure to these financial risks. Note 33 includes an overview of the derivative financial instruments that the Group has entered into to mitigate its market risk exposure.

Exposure to liquidity, market and credit risks arises in the normal course of the Group’s business. Management and the Board of Directors have the overall responsibility for the establishment and oversight of the Group’s financial risk management framework. Management has established a treasury policy that identifies risks faced by the Group and sets out policies and procedures to mitigate those risks. Financial risk management is primarily carried out by the Treasury function of the Group. Management has delegated authority levels and authorised the use of various financial instruments to a restricted number of personnel within the Treasury function.

Liquidity risk

Liquidity risk is the risk that the Group will not meet contractual obligations as they fall due. The Group evaluates its liquidity requirements on an ongoing basis using various cash and financial planning analyses and ensures that it has sufficient cash to meet expected operating expenses, repayments of and interest payments on its debt and future lease payments.

The Group generates sufficient cash flows from its operating activities to meet obligations arising from its financial liabilities. It has a revolving credit facility in place to cover potential shortfalls and access to local working capital facilities in various jurisdictions, which are available if needed to support the cash management of local operations. The Group had unrestricted cash and cash equivalents in the amount of €254.9 million (€154.5 million as of 31 December 2018) and access to an additional €297.4 million under its revolving credit facility as of 31 December 2019 (€292.5 million as of 31 December 2018).

The following table includes information about the remaining contractual maturities for the Group’s non-derivative financial liabilities as of 31 December 2019. The table includes both interest and principal cash flows. Balances due within one year equal their carrying amounts as the impact of discounting is not significant.

 

 

 

 

Contractual cash flows

(in € million)

 

Carrying amount

 

Total

 

Up to 1 year

 

1-2 years

 

2-5 years

 

More than 5 years

As of 31 December 2019

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other payables

 

(493.2)

 

(493.2)

 

(482.8)

 

(2.3)

 

(4.9)

 

(3.2)

Loans and borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

- Senior secured credit facilities

 

(1,539.2)

 

(1,703.5)

 

(73.9)

 

(96.3)

 

(1,176.6)

 

(356.7)

- Lease liabilities

 

(53.5)

 

(72.2)

 

(13.8)

 

(13.0)

 

(19.1)

 

(26.3)

Total non-derivative
financial liabilities

 

(2,085.9)

 

(2,268.9)

 

(570.5)

 

(111.6)

 

(1,200.6)

 

(386.2)

See note 5.2 for the impact on the Group’s lease liabilities of the adoption of IFRS 16 Leases on 1 January 2019.

The Group’s senior secured credit facilities contain covenants and certain clauses that may require earlier repayments than indicated in the table above. The Group monitors the covenants as well as the aforementioned clauses on a regular basis to ensure that it is in compliance with the credit agreement at all times.

The interest payments on the senior secured credit facilities are variable, thus the interest rate amounts included in the table above will change if the market interest rate changes. The Group uses interest-rate swaps that fix the variable rate on a portion of its term loans (see section “Interest rate risk” in this note).

The Group enters into derivative contracts as part of operating and financing the business. The commodity derivative contracts are net cash settled. Other derivative contracts are net or gross cash settled. The derivative asset or liability recognised as of 31 December 2019 and 31 December 2018 represents the liquidity exposure to the Group as of that date (see note 33). The cash flows resulting from a settlement of the derivative contracts may change as commodity prices, interest rates and exchange rates change. However, the overall impact on the Group’s liquidity from the derivative contracts is not deemed to be significant.

The following table includes information about the remaining contractual maturities for the Group’s non-derivative financial liabilities as of 31 December 2018.

 

 

 

 

Contractual cash flows

(in € million)

 

Carrying amount

 

Total

 

Up to 1 year

 

1-2 years

 

2-5 years

 

More than 5 years

As of 31 December 2018

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other payables

 

(442.3)

 

(442.3)

 

(434.7)

 

(0.9)

 

(4.5)

 

(2.2)

Loans and borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

- Senior secured credit facilities

 

(1,564.9)

 

(1,770.8)

 

(66.8)

 

(74.1)

 

(1,264.3)

 

(365.6)

- Finance lease liabilities

 

(26.5)

 

(45.1)

 

(5.1)

 

(5.3)

 

(12.7)

 

(22.0)

Total non-derivative
financial liabilities

 

(2,033.7)

 

(2,258.2)

 

(506.6)

 

(80.3)

 

(1,281.5)

 

(389.8)

Market risks

Market risk is the risk that changes in market prices, such as foreign currency exchange rates, commodity prices and interest rates, will affect the cash flows or the fair value of the Group’s holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters.

The Group buys and sells derivatives in the ordinary course of business to manage market risks. The Group does not enter into derivative contracts for speculative purposes. Hedge accounting under IFRS 9 is not applied.

Currency risk

As a result of the Group’s international operations, foreign currency exchange risk exposures exist on sales, purchases, borrowings and dividend payments that are denominated in currencies that are not the functional currency of the entity involved in the transaction. The Group is also exposed to translation currency risk arising from the translation of the assets, liabilities and results of its foreign entities into Euro, the Group’s presentation currency, from their respective functional currencies. The functional currencies of the subsidiaries are mainly Euro, US Dollar, Swiss Franc, Chinese Renminbi, Thai Baht, Brazilian Real, Mexican Peso, Australian Dollar and New Zealand Dollar.

In accordance with the Group’s Treasury policy, the Group seeks to minimise transaction currency risk via natural offsets to the extent possible. Therefore, when commercially feasible, the Group incurs costs in the same currencies in which cash flows are generated. In addition, the Group uses foreign currency exchange derivatives to hedge additional transaction currency risks.

The Group does not hedge its exposure to translation gains or losses related to the financial results of its non-Euro functional currency entities.

As previously noted, the Group manages operational transaction currency risk via natural offsets and by entering into foreign currency exchange derivative contracts. The following table provides an overview of the outstanding foreign currency exchange derivative contracts entered into as part of the operating business as of 31 December 2019.

Type

 

Contract type

 

Currency

 

Contracted volume

 

Counter-currency

 

Contracted conversion range

 

Contracted date of maturity

Non-deliverable forwards

 

Buy

 

 

23,880,000

 

BRL

 

4.4065 - 4.8779

 

Jan. 2020 - Dec. 2020

Non-deliverable forwards

 

Buy

 

$

 

745,000

 

BRL

 

3.8485 - 4.0652

 

Jan. 2020 - Apr. 2020

Non-deliverable forwards

 

Sell

 

$

 

745,000

 

BRL

 

3.9605 - 3.9900

 

Jan. 2020 - Apr. 2020

Currency forwards

 

Buy

 

 

21,445,000

 

THB

 

33.8158 - 36.8500

 

Jan. 2020 - Dec. 2020

Currency forwards

 

Sell

 

$

 

23,757,000

 

THB

 

29.8909 - 31.5849

 

Jan. 2020 - Dec. 2020

Currency forwards

 

Buy

 

 

20,645,000

 

CNY

 

7.8033 - 8.1287

 

Jan. 2020 - Dec. 2020

Currency forwards

 

Buy

 

$

 

6,555,000

 

CNY

 

6.7446 - 7.2216

 

Jan. 2020 - Dec. 2020

Currency forwards

 

Sell

 

 

13,110,000

 

NZD

 

1.6927 - 1.7221

 

Jan. 2020 - Dec. 2020

Currency forwards

 

Buy

 

$

 

5,000,000

 

NZD

 

0.6652

 

Jun. 2020

Currency forwards

 

Sell

 

$

 

24,055,000

 

NZD

 

0.6327 - 0.6960

 

Jan. 2020 - Dec. 2020

Currency forwards

 

Buy

 

 

37,045,000

 

$

 

1.1051 - 1.1777

 

Jan. 2020 - Dec. 2020

Currency swap

 

Sell

 

 

1,150,000

 

$

 

1.1178

 

Apr. 2020

Currency forwards

 

Buy

 

$

 

31,745,000

 

MXN

 

19.4047 - 21.1259

 

Jan. 2020 - Dec. 2020

Currency swap

 

Sell

 

$

 

400,000

 

MXN

 

19.7828

 

Apr. 2020

The following table provides an overview of the outstanding foreign currency exchange derivative contracts as of 31 December 2018.

Type

 

Contract type

 

Currency

 

Contracted volume

 

Counter-currency

 

Contracted conversion range

 

Contracted date of maturity

Non-deliverable forwards

 

Buy

 

$

 

6,188,700

 

BRL

 

3.4266 - 4.0455

 

Jan. 2019 - Jan. 2020

Non-deliverable forwards

 

Buy

 

 

26,945,000

 

BRL

 

4.4996 - 4.7842

 

Jan. 2019 - Jan. 2020

Currency forwards

 

Buy

 

 

28,163,000

 

THB

 

37.332 - 37.992

 

Jan. 2019 - Dec. 2019

Currency forwards

 

Sell

 

$

 

14,187,000

 

THB

 

32.104 - 32.521

 

Jan. 2019 - Dec. 2019

Currency forwards

 

Buy

 

 

15,844,000

 

CNY

 

7.9286 - 8.1504

 

Jan. 2019 - Dec. 2019

Currency forwards

 

Buy

 

$

 

7,953,000

 

CNY

 

6.9161 - 6.9344

 

Jan. 2019 - Dec. 2019

Currency forwards

 

Sell

 

$

 

12,154,000

 

NZD

 

0.6801 - 0.6833

 

Feb. 2019 - Nov. 2019

Currency swap

 

Sell

 

 

20,000,000

 

$

 

1.14170

 

Jan. 2019

Currency forwards

 

Buy

 

 

27,074,000

 

$

 

1.1521 - 1.1863

 

Jan. 2019 - Dec. 2019

Currency forwards

 

Buy

 

 

9,174,000

 

MXN

 

22.946 - 24.990

 

Jan. 2019 - Dec. 2019

The Group’s primary transaction currency exposure as of 31 December 2019 relates to an intra-group Euro denominated loan held by a Swiss functional currency entity. A 5% weakening of the Euro against the Swiss Franc as of 31 December 2019 would have resulted in an additional unrealised foreign currency exchange loss of €8.2 million as of 31 December 2019.

The Group’s primary transaction currency exposure as of 31 December 2018 related to Euro net balances held by US Dollar functional currency entities and to US Dollar net balances held by Euro functional currency entities. A 5% strengthening of the Euro against the US Dollar as of 31 December 2018 would have resulted in an additional unrealised foreign currency exchange loss of €4.4 million as of 31 December 2018.

Commodity price risk

Commodity price risk is the risk that changes in the price of commodities purchased by the Group and used as inputs in the production process may impact the Group, as such price changes cannot always be passed on to the customers.

The Group’s exposure to commodity price risk arises principally from the purchase of polymers and aluminium. The Group’s objective is to ensure that the commodity price risk exposure is kept at an acceptable level. The Group generally purchases commodities at spot market prices and uses derivatives to hedge the exposure in relation to the cost of polymers (and their components) and aluminium. Due to this strategy, the Group is able to fix the raw material prices for the coming year for approximately 80% of the polymers and aluminium purchases, which substantially reduces the exposure to raw material price fluctuations over that period.

The realised gain or loss arising from derivative commodity contracts is recognised in cost of sales, while the unrealised gain or loss associated with derivative commodity contracts is recognised in other income or expenses.

The Group recognised an unrealised gain of €10.6 million in the year ended 31 December 2019 and an unrealised loss of €22.0 million in the year ended 31 December 2018 relating to its derivative commodity contracts as a component of other income or expenses. The Group recognised a realised loss of €21.5 million in the year ended 31 December 2019 and a realised loss of €1.4 million in the year ended 31 December 2018 relating to its derivative commodity contracts as a component of cost of sales.

The following table provides an overview of the outstanding commodity derivative contracts as of 31 December 2019.

Type

 

Unit of measure

 

Contracted volume

 

Contracted price range

 

Contracted date of maturity

Aluminium swaps

 

metric tonne

 

23,040

 

$1,750.00 - $1,979.00

 

Jan. 2020 - Dec. 2020

Aluminium premium swaps

 

metric tonne

 

8,280

 

$159 - $171

 

Jan. 2020 - Dec. 2020

Resin swaps

 

metric tonne

 

36,060

 

€1,344 - €1,410

 

Jan. 2020 - Dec. 2020

Resin swaps

 

metric tonne

 

29,400

 

$980.00 - $1,175.00

 

Jan. 2020 - Dec. 2020

Ethylene swaps

 

metric tonne

 

22,920

 

€975 - €993.50

 

Jan. 2020 - Dec. 2020

Propylene swaps

 

metric tonne

 

8,100

 

€1,339 - €1,420

 

Jan. 2020 - Dec. 2020

There would have been an impact of €14.4 million on profit or loss from a remeasurement of commodity derivative contracts as of 31 December 2019 (an impact of €14.9 million on profit or loss as of 31 December 2018), assuming a 10% parallel upward or downward movement in the price curve used to value the contracts assuming all other variables remain constant.

The following table provides an overview of the outstanding commodity derivative contracts as of 31 December 2018.

Type

 

Unit of measure

 

Contracted volume

 

Contracted price range

 

Contracted date of maturity

Aluminium swaps

 

metric tonne

 

20,760

 

$2,020.00 - $2,200.00

 

Jan. 2019 - Dec. 2019

Aluminium premium swaps

 

metric tonne

 

8,400

 

$166 - $185

 

Jan. 2019 - Dec. 2019

Resin swaps

 

metric tonne

 

47,748

 

€1,450 - €1,490

 

Jan. 2019 - Dec. 2019

Resin swaps

 

metric tonne

 

28,680

 

$1,245.00 - $1,320.00

 

Jan. 2019 - Dec. 2019

Ethylene swaps

 

metric tonne

 

9,240

 

€1,085 - €1,108

 

Jan. 2019 - Dec. 2019

Propylene swaps

 

metric tonne

 

8,040

 

€1,430 - €1,495

 

Jan. 2019 - Dec. 2019

Electricity swaps

 

megawatt hour

 

43,824

 

NZD 73.00 - NZD 101.50

 

Jan. 2019 - Dec. 2019

Interest rate risk

The Group’s interest rate risk arises primarily from its Euro denominated term loans at variable interest. The interest rate profile of the Group’s significant interest-bearing financial instruments as of 31 December 2019 and 31 December 2018 is presented in the following table.

(in € million)

 

As of
31 Dec. 2019

 

As of
31 Dec. 2018

Fixed rate instruments

 

 

 

 

Financial assets

 

5.1

 

Financial liabilities

 

(53.5)

 

(26.5)

 

 

(48.4)

 

(26.5)

Effect of interest rate swaps

 

(800.0)

 

(800.0)

 

 

(848.4)

 

(826.5)

Variable rate instruments

 

 

 

 

Financial assets

 

261.0

 

157.1

Financial liabilities

 

(1,560.9)

 

(1,592.2)

 

 

(1,299.9)

 

(1,435.1)

Effect of interest rate swaps

 

800.0

 

800.0

 

 

(499.9)

 

(635.1)

The Group has entered into interest rate swaps to hedge a portion of the cash flow exposure arising on its term loans at variable interest rates. The swaps are presented as part of other non-current liabilities in the statement of financial position. The fair value changes are recognised in profit or loss.

A 100 basis point increase in the variable component (three month Euribor) of the interest rate on the term loans would increase the annual interest expense by €4.6 million as of 31 December 2019 (€5.5 million as of 31 December 2018).

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. This risk arises principally from the Group’s receivables from its customers. The carrying amount of financial assets represents the maximum credit exposure. Historically, there has been a low level of losses resulting from default by customers.

The credit risk relating to trade receivables is influenced mainly by the individual characteristics of each customer. Given the diverse global operations and customers across the Group, credit control procedures are jointly managed by the Group’s Treasury function and each of the operating businesses within the Group. These joint responsibilities include, but are not limited to, reviewing the individual characteristics of new customers for creditworthiness before accepting the customer and agreeing upon purchase limits and terms of trade as well as regularly reviewing the creditworthiness of existing customers and previously agreed purchase limits and terms of trade.

The Group limits its exposure to credit risk by executing a credit limit policy, requiring advance payments in certain instances, taking out insurance for specific debtors as well as utilising securitisation and non-recourse factoring programmes. These programmes are further described in note 16.

In addition, concentration of credit risk is limited due to the customers comprising a diversified mix of international companies, large national and regional companies as well as small local companies, of which most have been customers of the Group for many years.

Management believes that the recognised loss allowance sufficiently covers the risk of default based on historical payment behaviour and assessments of future expectations of credit losses, including regular analysis of customer credit risk.

In line with its Treasury policy, the Group generally enters into transactions only with banks and financial institutions having a credit rating of at least investment grade (long term: A rating and short term: A1 or P1 rating, as per Standard & Poor’s or Moody’s). However, the Group may also enter into transactions with banks and financial institutions with a currently lower investment grade (long term: BBB rating and short term: A2 or P2 rating).