4.4 Financial risk management
Financial risks include raw material price risk,
foreign currency risk, customer credit risk,
interest rate risk and liquidity risk managed by
the Group Treasury according to policy.
Raw material price risk
Raw material risk is the risk of fluctuating raw
material prices affecting costs of goods sold,
which represent more than 50 per cent of total
costs. The main raw materials purchased by
the Group are described in Note 2.1. Currently,
The Group does not hedge this type of risk as
availability of effective hedging instruments
is limited. As increases in raw material prices
cannot be compensated for immediately
through increased product prices, profits will be
negatively impacted for a period of time. The
time horizon for Group-wide implementation of
price increases is generally 9-12 months.
Costs of goods sold was NOK 10 billion in 2019
of which NOK 5 billion were costs for the top
five raw materials. A ten per cent increase in
commodity prices will result in an increase in cost
of goods sold by NOK 1 billion.
Foreign currency risk
The Group’s consolidated financial statement is
exposed to a currency risk related to translation
of local currencies to NOK. In 2019, sales and
operating profit outside Norway was NOK 16.3
billion and NOK 2.2 billion respectively. A ten
per cent appreciation in NOK will result in a
reduction in sales of NOK 1 633 million and
profit of NOK 222 million.
In addition to share capital, Jotun A/S finances
the majority of its subsidiaries with intercompany
loans in local currencies. Intercompany loans for
which settlement is neither planned nor likely to
occur in the foreseeable future are accounted
for as part of the net investment in foreign
operations. Exchange differences are recognised
initially in other comprehensive income and
reclassified from equity to profit or loss on
disposal of the net investment.
Jotun A/S has a USD 83.3 million loan which
serves as a natural hedge of net investment
in foreign operations. Gains or losses on the
hedging instrument related to the effective
portion of the hedge are recognised in other
comprehensive income while any gains or losses
relating to the ineffective portion are recognised
in the income statement.
A gain of NOK 35.3 million on hedge of
net investments was recognised in other
comprehensive income in 2019 (2018: loss
NOK 27 million).
Credit risk
The management of customer credit risk related
to accounts receivable and other operating
receivables is handled as part of the business risk.
The 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
controls.
Outstanding customer receivables are regularly
monitored based on defined credit limits, and
credit risk assessments are performed.
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.
The need for bad debt allowances is analysed
on an individual customer basis. The maximum
exposure to credit risk at the reporting date is
the carrying value of each aging class of accounts
receivable disclosed in Note 3.6. Customer
receivables are unsecured, which means that
customers are not required to post collateral.
Given the geographical distribution of customers
with few large single accounts, credit risk in the
Group is viewed as low and well diversified. The
Group’s customers are spread across several
jurisdictions and industries and operate in largely
independent markets.
Interest rate risk
The Group’s exposure to the risk of changes
in market interest rates relates to the Group’s
long-term debt with floating interest rates. Jotun
manages its interest rate risk by monitoring the
impact on net profit. The Group has a relatively
low leverage ratio. Consequently, the majority of
the debt is with floating interest rate apart from
lease liability and a NOK 400 million bond issued
in 2014 (ref. Note 4.1).
The Group has long-term interest-bearing debt
of NOK 2 627 million with floating interest rate.
A three per centage point increase in interest rate
will affect the financial items by NOK 79 million.
Funding and liquidity risk
It is the Group’s policy that long-term debt and
credit facilities shall have a minimum average
time to maturity of two years. In addition,
the target is to maintain a strategic financing
reserve equivalent to five per cent of the Group’s
operating revenue.
Back to Notes for the Group
The Group estimates its future cash flow by
forecasting. Cash flow from operations has
seasonal cycles, especially due to the sales
of exterior decorative paints in Scandinavia.
Through the first months of the year, the Group
has substantial build-up of working capital in
preparation for sales during spring and summer
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.
Jotun A/S repatriates’ cash through both ordinary
and interim dividends based on target equity
ratios for its subsidiaries.
JOTUN GROUP
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