Descriptions of operational risks, management of them and comments on activities 2016 in the following areas; demand and prices, commodity prices, facilities, forest, customer credits, health and safety, environment, personnel, business ethics, suppliers, IT systems and political decisions.


Risk Risk management Comment
Demand and prices. Changes in demand and prices affect opportunities to achieve profitability targets. Changes in prices and deliveries largely depend on the development of the European market. This in turn is influenced by several factors, such as demand, production among European producers and changes in imports into Europe, as well as the opportunities for exporting profitably from Europe. Holmen has limited opportunities for making rapid significant changes to its range of products, but the company adapts its product focus, steering it towards the products and markets deemed to have the best longterm potential. Holmen aims to have a broad customer base and an offering that spans several product areas. This aim, combined with long-term customer relationships, reduces vulnerability to changes in the market. The continual development of the product offering is important in meeting changes in demand. In 2016, Holmen successfully increased sales of its new Holmen UNIQ product from Braviken Paper Mill. The decision was also taken in 2016 to invest in a treatment plant at Braviken Sawmill. This facility provides the opportunity to offer treated wood products to the Swedish construction market.
Commodity prices. Wood, electricity and chemicals are the most significant inputs for the industry and price changes affect the industry’s profitability. The size of the timber harvest from the company’s forests is essentially the same as consumption at the company’s saw mills, while pulpwood from own forests corresponds to approximately 40 per cent of industry consumption. The industry uses pulpwood to produce pulp, which is then turned into paperboard or paper. The Group is largely in balance in terms of pulp as a result of the integrated production process. The paperboard business generates almost all the electricity required at its own mills, while electricity for paper manufacturing is supplied from external purchases. The Group also sells electricity from its hydro power and wind power assets to the electricity grid. In net terms, the Group’s own electricity generation corresponds to around 50 per cent of its electricity consumption. The price risk in this consumption is managed through physical fixed price contracts and financial hedging. There is a significant need for thermal energy, but this is produced locally at each mill from residual products. Chemicals are a significant input, particularly in paperboard production, but the need is reduced by recycling used chemicals at the mill. Raw material prices have been stable in recent years. The price of net electricity consumption is 80–90 per cent hedged for 2017–2020 and 60 per cent hedged for 2021.
Facilities. Production equipment can be seriously damaged for example in the event of a fire, machine breakdown or power outage. This can lead to supply problems, unexpected costs and reduced customer confidence. Damage prevention measures, regular maintenance and continual upgrades can minimise the risk of damage to facilities. Training of employees promotes participation, knowledge and awareness about these risks and how they can be countered. Holmen insures its facilities to their replacement value against property damage and consequential loss. The excess varies from one facility to another, but the maximum is SEK 30 million for any one claim. The Group has liability insurance that also covers sudden and unforeseen environmental damage affecting ‘third parties’. No event causing significant damage occurred in 2016. The pulp mill in Hallsta was rebuilt following the major fire that occurred at the end of 2015. The loss of revenue during the shutdown and reconstruction costs are covered by insurance, with the exception of SEK 30 million excess.
Forest. Forest fires, grazing by wild animals and insect pests are risks in growing forests. The Group’s forest holdings are not insured. They are widely dispersed over large parts of Sweden and the risk of extensive damage being incurred simultaneously is deemed to be low. Insect pests such as pine weevils are countered by waxing seedlings. No event causing significant damage occurred in Holmen’s forests during 2016.
Customer credits. The risk of the Group’s customers being unable to fulfil their payment obligations gives rise to credit risk. The risk that the Group’s customers will not fulfil their payment obligations is limited by means of creditworthiness checks, internal credit limits per customer and, in some cases, by insuring trade receivables against credit losses. Credit limits are continually monitored. Exposure to individual customers is limited. At 31 December 2016 the Group’s trade receivables totalled SEK 2 174 million, of which 46 per cent (42) were insured against credit losses. During the year, credit losses on trade receivables had a SEK -5 million (-27) impact on earnings. Sales to the five largest customers accounted for 14 per cent of the Group’s total sales in 2016.
Health and safety. Incidents and accidents at the workplace pose a risk to human life and health. This could lead to production disruptions and increased costs. Good health and safety is a priority at all levels of management in the Group. The health and safety policy was revised in 2016. Certified management systems, Group-wide targets relating to work accidents, continual training of personnel to increase risk awareness, procedures for incident and accident reporting, and risk assessment of work by contractors are examples of activities to maintain a high level of safety in the workplace. The figure in 2016 was 8.8 industrial accidents per 1 million hours worked (2015: 8.8). The overwhelming cause of these were slips and trips.
Environment. Production disruptions can cause breaches of emissions conditions set for the business by environmental authorities. This could have an environmental impact. Environmental measures are organised and conducted in accordance with an environmental and energy policy. In the event of process disruptions, the environment takes precedence over production. Risks are prevented and managed through regular own checks, checks by authorities and environmental risk analyses, as well as through the use of certified environmental and energy management systems and environmental and chain-of-custody certification. Holmen represents best practice in regard to advanced environmental stewardship, with active efforts to mitigate climate-related risks and capitalise on climate-related opportunities. This was a finding of the annual survey conducted by CDP.
Personnel. Holmen needs to attract and retain skilled and motivated employees so it can conduct long-term business operations with good profitability. Issues regarding management by objectives, responsibility, participation, safety and skills development are prioritised in dayto- day work and personnel training. Holmen’s Code of Conduct and core values provide a basis for how employees should operate and how leadership should be formed. The Group works systematically to give employees opportunities to influence and develop the business through ongoing feedback and dialogue between managers and workers. Employee representatives have seats on Holmen’s Board. A whistleblower function is in place if employees and other stakeholders wish to report improper conduct within Holmen. No cases regarding breaches of the Code of Conduct were reported in 2016.
Business ethics. Both nationally and internationally, customers and partners place requirements on Holmen as a stable and reliable supplier that has good business practices and clear sustainability principles. Deviations from principles and policies could have a negative impact on reputation and business relationships. Holmen’s business ethics policy and associated guidelines provide clear guidance on how to maintain good business practices when dealing with external contacts in various markets. Training on business ethics is provided for management groups and for employees deemed to encounter issues covered by the business ethics policy, such as marketing and sales departments and purchasers. A preliminary investigation is currently underway regarding hunting events arranged by Holmen. In January 2017, the prosecutor in the case communicated that he believes there is reasonable suspicion of bribery in connection with some of these hunting events. Holmen’s understanding is that the applicable rules have not been breached in any of the cases in question.
Suppliers. Deficiencies in the supply chain for inputs in terms of security of supply and quality can lead to production disruptions. Suppliers that do not meet Holmen’s sustainability requirements can also have a negative effect on operations. Holmen endeavours to have at least two approved suppliers per area of use. In addition, Holmen’s Code of Conduct for suppliers is included in all new contracts. It contains requirements on sustainable development, including by respecting internationally recognised principles on anti-corruption measures, human rights, health and safety and the environment. In 2017, a third party will be used for risk classification and supplier assessment work. No cases regarding breaches of the Code of Conduct for suppliers were reported in 2016. By the end of 2016, suppliers accounting for around 75 per cent of the Group’s purchasing volumes had signed up to the Code of Conduct for suppliers. Holmen is subject to the UK Modern Slavery Act and a report relating to this is available at holmen.com.
IT systems. Sales and purchasing require efficient IT support in order to manage and plan production. Disruptions in IT support and unauthorised access to information can have significant negative effects on the business. Operating disruptions and unauthorised access are prevented by security measures and preventive measures in the form of appropriate physical protection, reliable server operation and secure networks. Measures and procedures are in place to minimise the risk of interruption and to manage situations if interruptions occur. Operations have not been affected by IT incidents in 2016.
Political decisions. Laws and rules in countries in which the Group operates affect how business activities can be conducted. Rules on how forests may be managed could affect future growth and harvests. Stimulus measures to use bio-based products can affect demand for paperboard and wood products, as well as wood from our forests. Rules on the use of fresh fibre versus recovered fibre also have an impact. Holmen participates in national and international industry organisations whose purpose is to handle the monitoring of social trends, advocacy and political lobbying. Contact is established with local representatives in areas where the Group has operations. Political decisions are influenced by public opinion. Contact with the general public offers opportunities to contribute knowledge and facts. This takes place, for example, through consultation and information meetings and through debate in the media. The right to manage forests and conditions for hydro power were focal issues in 2016. During the year, the Swedish government announced a reduction in the property tax on hydro power plants.

 

 

Debt/equity ratio
19%

Net turnover (Msek)
15 513

Holmen AB, P.O. Box 5407, SE-114 84 Stockholm, Sweden.

Tel: +46 8 666 21 00  E-mail: info@holmen.com

  

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