All values as of December 31, 2016 (December 31, 2015)
Amer Sports is exposed to customary financial risks relating to its global businesses such as funding and liquidity risks, foreign exchange and interest rate risks, counterparty and credit risks.
Financial risk management is centralized within Amer Sports Treasury, which is acting as an in-house bank providing financial services for subsidiaries within the Group.
Risk management is governed by the Treasury Policy approved by the Board of Directors. The Policy includes principles and risk limits relating to debt structure, counterparties, bank relations and interest rate and foreign exchange risk management. Written guidelines have been set to manage operational risks. Amer Sports Treasury follows and monitors risks constantly and does not allow any material deviations from the Treasury Policy. The Board of Directors reviews the financial risks annually.
Amer Sports aims to use different sources of funding. The focus has been in debt transactions takendirectly from domestic and/or international debt capital markets. With its core relationship banks Amer Sports is upholding long and trustworthy relations by acquiring advisory and other services from those banks. During year 2015 and 2016 Amer Sports finalized the following financial transactions:
In March 2016 Amer Sports issued Schuldschein (certificate of indebtedness) loan agreements with a total value of EUR 100 million. The loans have both fixed and floating rate tranches and the loan periods are five (5) and seven (7) years. In April, Amer Sports issued a term loan with a value of EUR 50 million. The floating rate loan has a maturity of five (5) years, but it has an extension option. In September, Amer Sports issued Schuldschein agreements with a total value of EUR 60 million. The loan period is seven (7) yearsand the loans have a fixed interest rate.
In January 2015 Amer Sports issued Schuldschein (certificate of indebtedness) loan agreements with a total value of EUR 100 million. The loan period is five (5) years and the loans have both fixed (EUR 15 million) and floating (EUR 85 million) rate tranches.
In April 2015 Amer Sports issued Schuldschein agreements with a total value of EUR 40 million and USD 85 million. The loan periods are five (5) and seven (7) years and the loans have both fixed and floating rate tranches. In August, 2015 Amer Sports issued Schuldschein agreements with a total value of USD 55 million. The loan periods are five (5) and five and half (5.5) years and the loans have floating rate tranches.
In September 2015 Amer Sports issued a private placement bond with a total value of EUR 100 million.The fixed rate bond has a maturity of seven years. The proceeds of the Schuldschein loans, the term loan and the private placement bond have been used for repayment of debt and general corporate purposes.
Amer Sports has a cyclical need for working capital that also defines the level of liquidity for the Group. Typically, the highest level of working capital has been reached in the third quarter when the short-term debt is tied up in inventories and accounts receivable.
Amer Sports Treasury has established several cash pooling structures with Group’s relationship banks in order to control the liquidity of the Group. Treasury Policy sets guidelines for the management of the liquidity that is outside cash pooling structures.
Short term shortages of liquidity are covered by issuance of corporate papers through Finnish commercial paper program with total size of EUR 500 million.
Amer Sports uses sale of receivables with purpose to balance liquidity swings of the Group. In December 2016 EUR 87.2 (77.8) million receivables in total were sold within two different receivable sale programs that are in place for certain approved US and Europe based obligors. Other discounting programs are used within the group, but the volumes are less significant. Depending on the projections of short term and long term liquidity forecasts, excess liquidity is placed on the money market within limits and instruments defined in the Treasury Policy. Amer Sport’s EUR 150 million syndicated committed revolving credit facility is a back-up for exceptional liquidity needs.
The credit facility follows LMA’s (Loan Market Association) documentation, including typical representations and warranties, general undertakings, events of default and covenants. At the end of 2016 Amer Sports had no drawings from the facility.
Transaction risk arises from foreign currency denominated receivables and liabilities, cash flow estimates in foreign currencies and derivatives. Translation risk relates to the foreign currency denominated earnings when they are translated into euro. Amer Sports has operations in most of the major currency areas, and its sales are diversified in 20 currencies at least.
On the business unit level, transaction risk arises when the unit sells in its home currency but the cost base is in foreign currencies or sells or buys goods in foreign currencies. Amer Sports’ risk management is aiming to eliminate material uncertainties relating to foreign exchange rates.
At the end of the year, Amer Sports’ currency position, in accordance with IFRS 7, consisted of inter-company and external interest-free and interest-bearing currency denominated receivables and liabilities and foreign exchange derivatives. Foreign exchange derivatives include both balance sheet and cash flow hedges.
The geography of Amer Sports businesses has led to the most significant currencies being US dollar, Canadian dollar, British pound, Swiss franc and Japanese yen. The significance of US dollar is emphasized by its dominant role in the global procurement and the growth in Apparel and Footwear. In funding,
Amer Sports has diversified its funding sources, which is reflected in diverse currency denomination of the external debt.
Balance sheet risks have been managed by financing subsidiaries in their home currencies. The risks have been concentrated on the centralized distribution and purchasing units that invoice the subsidiaries in their respective home currencies. The parent company’s balance sheet risk arises from internal and external liabilities in foreign currencies.
Earnings sensitivity before taxes is influenced by changes in the fair value of derivative instruments not used in hedge accounting and on-balance sheet hedging derivative instruments as well as changes in the value of on-balance sheet currency-denominated loans and receivables.
Shareholders’ equity is affected by changes in the fair value of derivative instruments used in hedge accounting recognized under the hedge reserve.
The following table sets out Amer Sports’ cash flows that are under hedging policy for the next 24 months (EUR million):
The following table sets out the hedging of Amer Sports’ cash flows as at December 31, 2016 (EUR million):
The strengthening of the euro against the USD typically improves Amer Sports’ result of operations. The strengthening of the euro against the other foreign currencies typically weakens Amer Sports’ result of operations. A significant share of the US dollar denominated procurement cost risk is eliminated against the US dollar denominated operating result. Due to the growth of the business that is dependent on sourcing from Asia, the US dollar procurement exceeded the US dollar denominated operating result significantly.
According to the hedging policy, the transaction risk arising from subsidiaries’ business operations is hedged up to 12–24 months. In practice, the hedge ratios are higher for closer months than for later months. The hedge ratio is maintained between 55% and 95% of 24 months cash flow, except in currencies with high interest rate where the hedge horizon is 12–18 months. The hedged cash flow is expected to be realized during the following 12–24 months. Amer Sports hedges only annual cash flows or other exposures with a value of over EUR 3.0 million.
The company applies hedge accounting for annual cash flows with a counter value of over EUR 10 million per currency pair in the entity. It monitors hedge ratios daily and tests effectiveness at three-month intervals. Foreign exchange differences of foreign exchange derivatives are recognized as hedging reserve while interest rate differentials related to the foreign exchange derivates are recorded through financial profit and loss.
According to its Treasury Policy, Amer Sports may hedge 0 to 50% of subsidiaries’ equity. At the end of 2016, there were no outstanding equity hedges or net investment hedges.
Amer Sports is exposed to interest rate risk when it funds its operations with euro or currency denominated debt. The risk arises from the repricing of floating rate debt and with the raising of new floating rate debt. A fixed rate debt is subject to “fair value risk”. The purpose of interest rate risk management is to bring predictability for interest expenses by keeping the duration within the agreed limits with an optimal mix of fixed and floating rate debt. Treasury is constantly hedging current outstanding interest rate position of the Group and from time to time may hedge forthcoming position of the Group, up to 7 years. The interest rate derivatives that can be used in the risk management are defined in the Treasury Policy.
The neutral target for duration of interest rate position is 12 months, but it is allowed to vary between 6 and 18 months.
As of December 31, 2016, the duration was 17 months. 79% of the debt portfolio was at fixed rate as of December, 2016. The company has set EUR 3.0 million sensitivity limits to 1% raise in the market rate for the following 12 months interest expenses and negative mark-to-market valuation of non-hedge accounting transactions.
Cash and cash equivalents are excluded from the interest rate risk portfolio of the company due to their short term nature.
The sensitivity of the income statement contains changes in interest expenses for the next 12 months due to an increase/decrease of 1% in market interest rates, provided that other factors remain unchanged.
Shareholders’ equity is effected by a change in the market value of the hedge accounting interest rate swaps. The change is booked to the hedge reserve.
The company is exposed to customary credit risk through its accounts receivable. The Group has a global customer base, and there are no significant risk concentrations. The largest single customer accounts for 3% of total accounts receivable and the largest 20 combined total about 21%. At the end of year 2016 the actual payment time for the outstanding sales was 76 days.
Amer Sports uses a global credit insurance program to support sales activities. Major part of European and Asian customers risks are covered by the credit insurance.
The company assumes limited repurchase obligations through its fitness related financial leasing agreements. Excess liquidity is placed either in bank deposits within banks that Amer Sports has outstanding debt or committed facilities, or on money market instruments or funds that are selected according to Treasury Policy’s criteria and limits.
The credit risk arising from derivatives is negligible. The risk is minimized by limiting the number of counterparties, their shares of the total portfolio and by monitoring the credit standings and their outstanding liability to Amer Sports.
The Group’s capital management aims at the optimal capital structure that ensures the normal short-term and long-term operational requirements of business.
Amer Sports financial targets are net sales at least EUR 3.5 billion with minimum mid-single digit organic currency neutral annual growth, annual EBIT growth (excl. items affecting comparability) ahead of net sales growth and in cash flow conversion free cash flow to net profit at least 80%. The balance sheet target is to have a year-end Net Debt/EBITDA ratio 3 in maximum.
Net Debt/EBITDA illustrates how Amer Sports can generate operational cash flow to serve its debt. Also, it shows required profitability level against the outstanding debt and therefore makes it possible to link business specific targets to Group’s balance sheet structure. It creates a dynamic key performance indicator combining balance sheet structure and profitability target setting.
Amer Sports’ bank facilities include a financial covenant where Amer Sports’ consolidated gearing cannot exceed 100 percent, excluding the impact of any goodwill or intangible rights impairment. The bank facilities include also typical representations and warranties and events of default.
Amer Sports does not foresee any risks to a breach in the financial covenant in the next financial year given the current business environment.