35 JOTUN GROUP B) INTEREST RATE RISK Jotun Group’s exposure to the risk of changes in market interest rates relates to the Group’s long-term debt obligations with floating interest rates. Jotun Group has bond funding of NOK 1 000 million. One of the long-term bond agreements entered into in 2014, with a carrying amount of NOK 400 million, is based on a fixed interest rate of 3.85 per cent. In addition, Jotun Group has a bilateral loan with Nordic Investment Bank (NIB) of USD 120 million. This fixed rate bond is accounted for based on amortised cost. The Jotun Group has low net interest-bearing debt, and the Group’s policy is not to hedge the interest risk exposure. This policy will be re-considered if the debt increases to a significantly higher level. C) FUNDING AND LIQUIDITY RISK The Group monitors its risk by using cash flow forecasts. The main elements of the funding strategy are the establishment of long-term loans and credit facilities with a minimum average of two years to maturity and maintaining a strategic financing reserve equivalent to five per cent of consolidated sales. See note 15 for further details on the Group’s funding. Cash flow from operations has seasonal cycles, especially following the sales of exterior decorative paints in Scandinavia, and sales of protective coatings in Eastern Europe and Central Asia. Through the first months of the year, the Group has substantial build-up of working capital as a preparation for the spring and summer sales season. This is an expected cyclical movement and is taken into account when planning the Group’s financing. Other drivers of the liquidity development are investments in new factories and changes in the working capital in the individual companies. Investments are financed mostly from Jotun A/S and the cash flows are predictable as the financing for each project is planned well in advance. D) CREDIT RISK The management of credit risk related to accounts receivable and other operating receivables is handled as part of the business risk and is continuously monitored by the operating entities. Jotun Group’s credit risk is mainly related to markets with generally high days sales outstanding (DSO). Customer credit risk is managed by each business unit subject to the Group’s established policy, procedures and control relating to customer credit risk management. Credit quality of a customer is assessed by the respective business unit and individual credit limits are defined in accordance with this assessment. Outstanding customer receivables are regularly monitored and credit risk assessments are undertaken. There is no significant concentration of credit risk in respect of single counterparts. Some groups of counterparts can be viewed as significant: Shipyards, ship owners, real estate developers and some larger retail chains in Scandinavia. In combination with a geographical distribution and few large single accounts, the credit risk in the Jotun Group is viewed to be well diversified. The requirement for impairment is analysed on an individual customer basis. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in note 12. The Group does not hold collateral as security. The Group evaluates the concentration of risk with respect to trade receivables as low, as its customers are located in several jurisdictions and industries and operate in largely independent markets. Jotun A/S has International Swap Dealers Association (ISDA) agreements with its counterparts for derivative transactions, and transactions are made only with Jotun Group’s core relationship banks with satisfactory ratings. E) COMMODITY PRICE RISK The Group is exposed to a significant price risk in respect of a number of raw materials. Raw material purchases accounts for approximately 55 per cent of total sales revenue. Volatility in raw material prices can have a significant impact on the Group’s results. Large short-term increases in the raw material prices cannot be compensated immediately in the product prices, and in the period until product prices can be increased, the profit will be negatively impacted in the short term. Currently, Jotun does not hedge this risk. F) COMMODITY PRICE SENSITIVITY In 2016, the cost of goods sold (COGS, which is mainly raw materials) was NOK 8 141 million. The effect of a ten per cent general increase in raw material prices would, all other variables constant, reduce the profit before tax by NOK 814 million.
Jotun Annual Report 2016
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