57 Gross contribution for rapeseed As explained above, our policies and procedures for risk management in general imply that our profit margin is not affected by changes in raw material prices. However, AAK cannot eliminate its exposure to market price fluctuations in relation to rapeseed crushing. The crushing margin (oil plus meal value less seed price) can vary over time and can thereby directly affect profitability within the Technical Products & Feed business area. Exposure to foreign currency A significant portion of the Group’s buying and selling of raw materials is denominated in foreign currency. Moreover, most of the Group’s operational subsidiaries are located outside Sweden. Changes in exchange rates therefore affect AAK in several ways: Sales contracts and raw material contracts in foreign currency give rise to transaction risk. Profits for our foreign subsidiaries are affected by changes in currency rates, when they are translated to SEK. The Group’s equity is affected when equity in our foreign subsidiaries is translated to SEK. AAK hedges all its currency transaction risks. Payment for all sales contracts is thus hedged in the local currency of the subsidiaries that have entered into such sales contracts. Exchange rate risk related to translating equity and profit/loss in our foreign subsidiaries to SEK is not hedged. Exposure to transaction risk, December 31, 2016 SEK million Assets Liabilities Sales contracts Purchase contracts Currency contracts Net Sold Bought exposure USD 2,491 -4,274 1,012 -1,255 -1,586 3,600 -12 EUR 1,601 -1,048 876 -41 -1,887 509 10 GBP 74 -615 43 0 -445 949 6 Other 1,057 -237 333 -178 -5,979 5,051 47 Total -6,174 2,264 -1,474 10,109 (SRVXUHWRWUDQVDFWLRQULVN'HFHPEHU SEK million Assets Liabilities Sales contracts Purchase contracts Currency contracts Net Sold Bought exposure USD 1,770 -2,726 785 -235 -1,765 2,143 -28 EUR 1,087 -985 1,236 -150 -1,515 366 38 GBP 7 -507 4 0 -57 553 0 Other 819 -326 355 -19 -3,559 2,752 22 Total 32 Sensitivity analysis – Currency With all foreign currency transaction risk hedged by currency hedge contracts, leaving a very limited net exposure, changes in foreign currencies will have an insignificant effect on each subsidiary’s profit margin. However, changes in foreign currencies relative to SEK do affect Group profit when the profit of each foreign subsidiary is translated into SEK. A 10 percent change in the exchange rates of all foreign currencies relative to SEK would have an effect of ± SEK 130 million (150) on Group operating profit. Furthermore, a 10 percent change in the exchange rates of all foreign currencies relative to SEK would affect Group net sales by SEK 1,600 million (1,400) and Group net working capital by SEK 300 million (300). Interest rate risk AAK’s policy on interest rate risk management is to minimize volatility in cash flow and net profit caused by fluctuations in interest rates. However, during abnormal market conditions – e.g. a financial crisis – short-term interest rates can rise to extreme levels. In order to protect the Group’s interest costs against such abnormal scenarios, the interest rate on part of the Group’s net interest- bearing debt can be fixed or capped. At year-end 2016, the Group’s interest-bearing net debt, including pensions, amounted to SEK 2,620 million (2,083). Since October 1, 2011, AAK has applied cash flow hedging with interest rate swaps as a general principle. Effective interest rate on debt to banks and credit institutions at balance sheet date SEK DKK USD CNY TRY BRL INR 2016 0.80 0.70 1.50 4.45 11.00 13.50 6.50 1.66 0.59 1.01 5.55 13.75 14.00 8.00 Sensitivity analysis – Interest rates At the closing date, the Group had a floating-rate-based net debt of SEK 2,480 million (960). A 1 percent change in interest rates would therefore have a full-year effect of SEK 25 million (10) on the Group’s interest costs before tax.
AAK Annual Report 2016
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