The Board of Directors of the company decides on the company’s risk management policy and defines the framework for the level of risk management in the company. Robit’s operative management is responsible for actual measures related to risk management in accordance with the risk management policy.
The objective of managing financial risks is to protect the operating profits and cash flows of the business, and to efficiently manage fundraising and liquidity. Robit aims to develop the predictability of results, future cash flows and capital structure, and to adapt business operations to the on-going changes in the operating environment.
Robit faces certain generic financial risks while conducting its operations. Such risks include, amongst others, foreign currency exchange risk, interest rate risk, liquidity risk, refinancing risk and counterparty risk (credit risk). Below is a description of the company’s main financial risks and the most important risk management methods.
Foreign currency exchange risk
Robit operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the United States dollar, Australian dollar, Great Britain pound and South Korean won. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. Foreign exchange risk arises when commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity’s functional currency.
Group companies initiate sale and purchase transactions mainly in group companies’ functional currencies. The management aims at balancing incomes and expenses that are carried with other than functional currency. The company does not use actively derivative financial instruments to hedge foreign exchange risk. However, occasionally it may use forward foreign exchange contracts to hedge significant foreign currency transactions. The company entered in to a currency forward agreement during May 2016, based on which it purchased 19,800 thousand Australian dollars with fixed rate. This amount corresponds to the deferred consideration related to the acquisition of DTA. This arrangement was settled during December 2016 and the company recognized a gain amounting to EUR 1,156 thousand.
At 31 December 2016, if the EUR had weakened/strengthened by 10 per cent against the Australian dollar with all other variables held constant, the recalculated post-tax profit for the year would have been EUR 2,126 thousand higher/lower, mainly as a result of foreign exchange gains/losses on translation of Australian dollar-denominated loan amounted to EUR 23,798 thousand granted by the parent company to the Australian subsidiary.
As 31 December 2016, if the EUR has weakened/strengthened by 10 per cent against the United States dollar with all other variables held constant, the recalculated post-tax profit for the year would have been EUR 598 thousand higher/lower, mainly as a result of foreign exchange gains/losses on translation of United States dollar-denominated account receivables amounted to EUR 6,289 thousand and United States dollar denominated loans from group companies amounting to EUR 577 thousand (2015: EUR 443 thousand higher/lower).
The company has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. The company is exposed to translation risk mainly due to changes in Australian dollar, Great Britain pound and South Korean won.
Interest rate risk
The company’s interest rate risk arises from long-term borrowings. Majority of the company’s loans are tied to variable interest rates, which exposes the company to cash flow interest rate risk. Only one loan of the subsidiary in South Korea is with fixed rate and amounts to EUR 394 thousand as at 31 December 2016 (31 December 2015: EUR 390 thousand and 1 January 2015: EUR 374 thousand). Therefore, the company’s exposure to a fair value interest rate risk is limited. During the presented periods, the company’s borrowings at variable rate were denominated in euro, South Korean Won and Great Britain pound.
At 31 December 2016, if interest rates had been 50 basis points higher with all other variables held constant, post-tax profit for the year would have been EUR 188 thousand (2015: EUR 45 thousand) lower as a result of higher interest expense on floating rate interest-bearing liabilities. Interest rate sensitivity has been calculated by shifting the interest curve by 50 basis points (due to low market interest environment the lower scenario have not been presented). The interest position includes all external variable rate interest-bearing liabilities.
The management of the company has assessed that cash flow interest rate risk is low in current market situation and therefore does not actively use derivatives to manage its cash flow interest rate risk. Currently floating-to-fixed interest rate swaps covers only minor portion of the company’s borrowings. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates.
Cash flow forecasting is performed in the company’s finance function. The company finance function monitors the company’s liquidity requirements weekly to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its undrawn committed facilities at all times. Cash and cash equivalents amounted to EUR 10,519 thousand as at 31 December 2016 (31 December 2015: EUR 33,310 thousand and 1 January 2015 EUR 1,516 thousand). In addition, the company has undrawn interest-bearing facilities amounting to EUR 1,415 thousand as at 31 December 2016 (31 December 2015: EUR 51 thousand and 1 January 2015: EUR 1,279 thousand). Operating cash flows and liquid funds are the main source of financing for the future payments together with possible new debt or equity financing.
Covenants on the company’s interest-bearing financial liability drawn-down in 2016 are monitored monthly. The financial covenants are the equity ratio and the net debt in relation to EBITDA.
The company’s equity ratio was 44% at 31 December 2016 (31.12.2015: 71%). The company does not invest actively surplus cash held. The company’s target is to achieve both organic and structural growth and cash balances are directed to those purposes.
The company manages refinancing risks by anticipating the financing needs, having sufficient overdraft facilities at its disposal, maintaining a sufficiently wide funding base, managing the payment schedules of loans, extending the average maturity of loans and overdrafts and by maintaining the company’s reputation as a reliable debtor. Some of the company’s financial agreements include customary covenants related to the company’s business activities, financial key figures and use of security. The most important covenants are related to gearing and equity ratio.
Credit risk arises mainly from cash and cash equivalents and credit exposures to customers from outstanding receivables. Credit risk on cash and cash equivalents is managed at group level. Cash and cash equivalents are held in reputable mainly Nordic banks. Each local entity is responsible for managing the credit risk for their accounts receivable balances. The local entities have the responsibility to analyze the credit standing of each of their new clients before standard payment and delivery terms and conditions are offered.
Before accepting a customer, the customer’s ability to pay the purchase transactions is carefully estimated through analyzing customer’s financial statements and current market position. Credit risk countering payment methods such as letter of credit and advance payments are used in high risk regions. Historically, credit losses have been insignificant. The company has been able to collect also significantly overdue receivables eventually.
The maximum exposure to the credit risk at the reporting dates is the carrying values of each class of financial assets.