25. Financial risk management

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 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. These policies and procedures are now also followed by Scholle IPN and Evergreen Asia. Financial risk management is primarily carried out by the Group’s Treasury function. 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 its 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 lease payments.

The Group generates sufficient cash flows from its operating activities to meet obligations arising from its financial liabilities. It has a multi-currency 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 of €490.0 million as of 31 December 2022 (€300.2 million as of 31 December 2021). Furthermore, as of 31 December 2022, it had access to an additional €295.1 million under its committed multi-currency revolving credit facility (€294.2 million as of 31 December 2021).

The following table includes information about the remaining contractual maturities for the Group’s non-derivative financial liabilities as of 31 December 2022. The table includes both interest and principal cash flows. Balances due within one year are equal to their carrying amounts as the impact of discounting is not significant.

The agreements with the Group’s note holders and other lenders 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 agreements at all times.

The interest payments on the two term loans and three of the SSD tranches are variable. The interest rate amounts included in the table above that relate to those borrowings will therefore change if the market interest rates (Euribor or SOFR) change. The interest rate amounts are also subject to change depending on the Group’s net leverage and/or the achievement of sustainability-linked targets. See note 22.

The Group has entered into an interest rate swap that fixes the variable interest rate on its US Dollar term loan for three years, which is not considered in the table above (see section “Interest rate risk” in this note). As of 31 December 2022, the interest rate swap is estimated to reduce the interest payments on the US Dollar term loan by approximately €5 million in 2023, €3 million in 2024 and €1 million in 2025.

Significant judgement is involved in assessing the future cash flows relating to the contingent consideration for Scholle IPN (see notes 27 and 33), and the final payments may be different from the amounts in the table above. The contingent consideration is included in other non-current liabilities.

The Group enters into derivative contracts as part of operating the business and may, from time to time, also enter into financing-related derivatives. Commodity derivative contracts are net cash-settled. Foreign currency derivative contracts and financing-related derivative contracts are net or gross cash-settled. The related derivative assets and liabilities recognised as of 31 December 2022 and 31 December 2021 represent the Group’s liquidity exposure as of that date (see note 33). The cash flows resulting from a settlement of the derivative contracts may change as commodity prices, exchange rates and interest rates change. However, the overall impact on the Group’s liquidity from the derivative contracts is not deemed to be significant. The expected impact of the Group’s interest rate swap is described above. See sections “Currency risk” and “Commodity price risk” in this note for additional details about the Group’s outstanding foreign currency and commodity derivative contracts.

The following table includes information about the remaining contractual maturities for the Group’s non-derivative financial liabilities as of 31 December 2021.

Market risk

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. However, see the section “Currency risk” below and note 27 for an exception to this policy in the year ended 31 December 2022.

Currency risk

As a result of the Group’s international operations, it is exposed to foreign currency risk 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 from their respective functional currencies into Euro, the Group’s presentation currency. The functional currencies of the subsidiaries are mainly Euro, US Dollar, Swiss Franc, Chinese Renminbi, Thai Baht, Brazilian Real and Mexican Peso.

In accordance with the Group’s Treasury policy, the Group seeks to minimise transaction currency risk via natural offsets wherever possible. Therefore, when commercially feasible, the Group incurs costs in the same currencies in which cash flows are generated. In addition, the Group systematically hedges its major transactional currency exposures (by entering into foreign currency derivative contracts), using a twelve-month rolling layered approach. See also note 8. The Group does not hedge its exposure to translation gains or losses related to the financial results of its entities with a functional currency other than the Euro.

To manage the foreign currency exposure arising from the US Dollar payments relating to the acquisitions of Scholle IPN and Evergreen Asia, the Group entered into deal-contingent foreign currency derivatives in the year ended 31 December 2022. These derivatives were designated as hedging instruments. See note 27 for further details.

The following table provides an overview of the outstanding foreign currency derivative contracts entered into as part of the operating business as of 31 December 2022.

The following table provides an overview of the outstanding foreign currency derivative contracts entered into as part of the operating business as of 31 December 2021.

The Group’s primary transaction currency exposure as of 31 December 2022 relates to intra-group Euro-denominated loan receivables of entities with the Swiss Franc as their functional currency and to US Dollar-denominated loan payables of entities with the Euro as their functional currency. A 5% weakening of the Euro against the Swiss Franc as of 31 December 2022 would have resulted in an additional unrealised foreign currency exchange loss of €18.4 million as of 31 December 2022. A 5% weakening of the Euro against the US Dollar as of 31 December 2022 would have resulted in an additional unrealised foreign currency exchange loss of €19.6 million as of 31 December 2022.

The Group’s primary transaction currency exposure as of 31 December 2021 related to intra-group Euro-denominated loan receivables of entities with the Swiss Franc as their functional currency and to intra-group US Dollar-denominated loan payables of entities with the Euro as their functional currency. A 5% weakening of the Euro against the Swiss Franc as of 31 December 2021 would have resulted in an additional unrealised foreign currency exchange loss of €5.6 million as of 31 December 2021. A 5% weakening of the Euro against the US Dollar as of 31 December 2021 would have resulted in an additional unrealised foreign currency exchange loss of €3.2 million as of 31 December 2021.

Commodity price risk

Commodity price risk is the risk that changes in the prices 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 on a timely basis (see also note 5.4). The majority of the Scholle IPN customer contracts include clauses that enable commodity price fluctuations to be passed on to the customers. As this is not the case for the customer contracts in the carton business, there is generally a time lag between increased commodity prices and the implementation of higher customer prices.

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 in the current year 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 feedstocks) and aluminium. This strategy means that the Group is able to fix the raw material prices for the majority of its anticipated polymer 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 loss of €46.0 million in the year ended 31 December 2022 and an unrealised gain of €12.7 million in the year ended 31 December 2021 relating to its derivative commodity contracts as a component of other income. The Group recognised a realised gain of €33.5 million in the year ended 31 December 2022 and a realised gain of €63.2 million in the year ended 31 December 2021 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 2022.

The following table provides an overview of the outstanding commodity derivative contracts as of 31 December 2021.

Assuming a 10% parallel upward or downward movement in the price curve used to value the commodity derivative contracts with all other variables remaining constant, a remeasurement of commodity derivative contracts as of 31 December 2022 would have had an impact of €15.9 million on the Group’s profit before income tax (an impact of €19.7 million on the profit before income tax as of 31 December 2021).

Interest rate risk

The Group’s interest rate risk arises primarily from variable interest rates on its Euro and US Dollar term loans, three of the tranches of its SSD and on potential drawings on its revolving credit facility but also from cash and cash equivalents. The Group pays a fixed interest rate on its notes and on three of the tranches of its SSD.

The Group has entered into a three-year interest rate swap to hedge the cash flow exposure arising on its US Dollar term loan at variable interest rate. The swap is presented as a financing-related derivative as part of other non-current assets. The fair value changes are recognised in finance income or finance expenses. See section “Liquidity risk” and note 33 for additional details.

The interest rate profile of the Group’s significant interest-bearing financial instruments as of 31 December 2022 and 31 December 2021 is presented in the following table.

A 100 basis point increase in the variable component (six-month Euribor) of the interest rate on the Euro term loan and the three SSD tranches at variable interest rates would increase the annual interest expense by €11.1 million as of 31 December 2022. The US Dollar term loan is not included in this analysis as the interest rate of this loan has been fixed for three years with an interest rate swap. A 100 basis point increase in the variable component (six-month Euribor) of the interest rate on the Euro term loan would have increased the annual interest expense by €2.5 million as of 31 December 2021.

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. The carrying amount of financial assets represents the maximum credit exposure.

Credit risk arises principally from the Group’s receivables from its customers. Historically, there has been a low level of losses resulting from default by customers. This also applies for the customers of Scholle IPN and Evergreen Asia. As the Group’s customers are in the food and beverage industry, management has not experienced any material changes to the Group’s exposure to credit risk due to the COVID-19 pandemic (see note 5.4).

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. See further 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, most of which 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: BBB or Baa rating or higher and short term: A-2 or P-2 rating or higher as per Standard & Poor’s or Moody’s).