(13.) Risk management and derivative financial instruments

RISK MANAGEMENT PRINCIPLES Due to the international nature of its business activities, the assets, liabilities and planned transactions of the Wilo Group are subject to market risks from changes in exchange rates, interest rates and commodity prices in particular. The objective of financial risk management is to mitigate this risk from operating and financial activities. This is achieved using derivative and primary hedging instruments selected according to estimated risk. Derivative financial instruments are solely used to hedge risk. They are not used for trading or other speculative purposes. The general credit risk on these derivative financial instruments is low because they are only entered into with banks of excellent credit standing. The Group is also subject to credit and default risk and liquidity risk. 

The basic principles of financial policy and strategy are determined by the Executive Board and monitored by the Supervisory Board. Responsibility for implementing financial policy and strategy lies with Group Treasury. Further information on risks and risk management can be found in the opportunities and risk report section of the Group management report.

CURRENCY RISK The Wilo Group faces currency risk primarily in its financing and operating activities. Currency risk in financing activities relates to foreign-currency borrowing from external lenders and foreign-currency lending to finance Group companies. Currency risk in operating activities mainly relates to the supply of goods and provision of services to Group companies. Currency risk exposure on such transactions is countered by the use of same-currency offsetting transactions and derivative financial instruments. The currency risk on operating business between Group companies and external customers and suppliers is estimated to be low as most of such business is transacted in the functional currency of the Group companies.

The following table shows the foreign-currency risk position of the Wilo Group as at 31 December 2016 and 2015 in the respective foreign currency. This consists of foreign-currency transactions in operating activities and foreign-currency financing activities up to 31 December 2016 and 2015, as well as expected foreign-currency transactions in operating activities in 2017 and 2016. This analysis does not take into account the effects of the translation of the financial statements of subsidiaries into reporting currency (translation risk).


Foreign currency risk position as at 31 December 2016

in million EUR USD GBP PLN RON RUB SEK
Cash 7.4 2.6 1.3 0.1 0.0 0.0 3.7
Trade and other receivables 9.8 5.8 0.0 0.0 0.0 0.1 0.0
Receivables from affiliated
companies

2.5

13.9

0.8

6.4

10.1

75.6

17.8
Trade and other payables -1.9 -3.9 0.0 0.0 0.0 0.0 0.0
Liabilities due to affiliated
companies

-15.5

-6.5

-0.6

-0.1

0.0

-2.7


0.0

Financial liabilities -2.7 -1.4 0.0 0.0 0.0 -2.7 0.0
Currency risk from assets
and liabilities (gross)


Expected sales in 2017

-0.4

64.5

10.5

50.2

1.5

15.5

6.4

85.8

10.1

43.3

70.3

3,320.0

21.5

71.0
Expected acquisitions in 2017 -100.4 -66.2 -0.1 0.0 0.0 -17.2 0.0
Currency risk from expected
transactions in operating
activities in 2017 (gross)


Hedging


-35.9

0.0


-16.0

0.6


15.4

-7.0


85.8

-3.0


43.3

-3.0


3,302.8

-30.0


71.0

-24.0
Currency risk (net) -36.3 -4.9 9.9 89.2 50.4 3,343.1 68.5


Foreign currency risk position as at 31 December 2015

in million EUR USD GBP PLN RON RUB SEK
Cash 4.9 5.7 1.6 0.0 0.0 0.0 5.9
Trade and other receivables 9.7 5.7 0.0 0.0 0.0 0.0 0.0
Receivables from affiliated
companies

3.3

21.5

1.2

7.2

16.6

51.6

32.8
Trade and other payables -2.5 -4.5 -0.1 0.0 0.0 0.0 0.0
Liabilities due to affiliated
companies

-21.1

-19.8

-0.1

-0.1

0.0

-1.3

0.0
Financial liabilities 0.0 -41.3 0.0 0.0 0.0 0.0 0.0
Currency risk from assets
and liabilities (gross)


Expected sales in 2016

-5.7

70.6

-32.7

65.2

2.6

14.8

7.1

96.0

16.6

49.9

50.3

3,045.3

38.7

70.0
Expected acquisitions in 2016 -102.9 -80.1 -0.5 -0.1 0.0 -20.6 0.0
Currency risk from expected
transactions
in operating
activities in 2016 (gross)


Hedging


-32.3

0.0


-14.9

42.2


14.3

-5.0


95.9

-1.0


49.9

-3.0


3,024.7

0.0


70.0

-12.0
Currency risk (net) -38.0 -5.4 11.9 102.0 63.5 3,075.0 96.7

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The foreign-currency receivables and liabilities, expected foreign-currency transactions and derivative financial instruments in the form of cross-currency interest rate swaps and forward exchange contracts have certain sensitivities to currency fluctuations. A 10.0 percent appreciation or depreciation in the respective currency compared with the other currencies as at 31 December would have the following hypothetical impact on earnings.


Sensitivity analysis

  2016 2015
EUR million +10 % -10 % +10 % -10 %
EUR -4.2 3.4 -4.2 3.5
USD -0.8 0.6 -0.6 0.5
GBP 1.3 -1.0 1.8 -1.5
PLN 2.2 -1.8 2.7 -2.2
RON 1.2 -1.0 1.6 -1.3
RUB 5.7 -4.7 4.2 -3.5
SEK 0.8 -0.7 1.2 -1.0

The sensitivity analysis assumes that all other factors influencing value remain constant and that the figures at the reporting date are representative for the year as a whole. There would be no impact on other comprehensive income as the Wilo Group does not use hedge accounting.

INTEREST RATE RISK The Wilo Group faces interest rate risk mainly on floating rate financial liabilities and on invested cash. Both a rise and a fall in the yield curve result in interest rate exposure. The Wilo Group mitigates adverse changes in value from unexpected interest rate movements by using derivative financial instruments. Interest rate risk as defined in IFRS 7 is considered to be low as most financial liabilities have long-term fixed interest rates.

An increase of the interest level by 100 basis points would improve net interest costs from the investment of cash by approximately EUR 250 thousand (previous year: EUR 250 thousand). If interest rates declined with the consequence of negative interest rates on deposits, Wilo would align its investment strategy accordingly in order to minimise the negative impact on net interest costs.

COMMODITY PRICE RISK The Wilo Group is subject to commodity price risk primarily from price fluctuations on the global markets for copper and aluminium and their alloys. The Wilo Group uses commodity derivatives in a targeted manner to control this risk. The prices for most of the copper procurement volume for the 2017 financial year have already been fixed. Currently, the Wilo Group’s result of operations would be influenced by price fluctuations on the global markets for copper and aluminium and their alloys from the 2018 financial year onwards.

In accordance with IFRS 7, commodity price risks are shown using sensitivity analyses to present the effects of changes in commodity prices. A 10 percent increase (decrease) in the price of copper and aluminium as at 31 December would have the following hypothetical impact on earnings.


Sensitivity analysis

  Copper Aluminium Total
EUR thousand 2016 2015 2016 2015 2016 2015
Price increase (10%)            
   Impact on earnings -536 -521 -455 -467 -991 -988

Price decrease (10%)
           
   Impact on earnings 536 521 455 467 991 988

The calculation takes into account all copper and aluminium derivatives at the reporting date and the planned procurement volume for the next year in each case. There would be no impact on other comprehensive income as the Wilo Group does not use hedge accounting.

CREDIT RISK Customer credit risk is countered with a uniform and effective Group-wide system for systematic receivables management and the monitoring of payment behaviour. Dependency on individual customers is limited because Wilo does not generate more than 10.0 percent of its total revenues with any one customer.

The maximum credit risk is equal to the carrying amount of financial instruments. The table below shows the maximum credit risk on and the age structure of financial assets classified as loans and receivables as at 31 December 2016 and 2015. Current and non-current items have been combined.


Credit risk

     



of which past due in stated time band (days),
but not yet impaired


EUR thousand

Carrying
amount
of which
neither past due
nor impaired

up to 30

31 – 60

61 – 90

91 – 180

over 180
31 Dec. 2016

Trade receivables


266,770


211,206


26,060


5,856


2,753


3,399


3,707
Other financial assets* 6,636 6,636 0 0 0 0 0
      of which past due in stated time band (days),
but not yet impaired


EUR thousand

Carrying
amount
of which
neither past due
nor impaired

up to 30

31 – 60

61 – 90

1 – 180

over 180
31 Dec. 2015

Trade receivables


264,190


221,638


23,798


6,053


1,559


2,096


2,336
Other financial assets* 9,249 9,249 0 0 0 0 0
* The other financial assets are shown without receivables from derivative financial instruments and without available-for-sale financial assets.

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Trade receivables are secured with retentions of title. The fair value of these retentions of title is equal to the carrying amount of trade receivables. The carrying amount of trade receivables before write-downs is EUR 287,491 thousand (previous year: EUR 281,208 thousand). As at 31 December 2015, EUR 17,457 thousand (previous year: EUR 13,759 thousand) in specific write-downs was recognised on past due trade receivables of EUR 34,594 thousand (previous year: EUR 23,728 thousand). A further EUR 3,263 thousand (previous year: EUR 3,259 thousand) in general write-downs on trade receivables was recognised as at the end of the reporting period for country-specific credit risk. The write-downs were recognised for various, standard reasons.

In addition, there is a maximum credit risk of EUR 218 thousand (previous year: EUR 266 thousand) on available-for-sale financial assets and of EUR 2,110 thousand (previous year: EUR 3,630 thousand) on financial assets held for trading, which consist exclusively of derivative financial instruments. With regard to other financial assets that are neither impaired nor past due, there are no indications as at the end of the reporting period that debtors will fail to make payment.

As in the previous year, no impairment was recognised on other financial assets as at 31 December 2016.

Master agreements for financial futures have been concluded with various globally operating banks. Among other things, these agreements state that amounts in the same currency payable between parties on the same date are offset and therefore only the remaining net amount is paid by one party to the other. They also stipulate that, under certain circumstances, such as a party’s default, all transactions still outstanding are cancelled. In the event of this happening, all transactions still outstanding will be offset. 

These agreements do not satisfy the criteria for the netting of the corresponding assets and liabilities in the statement of financial position as they did not give rise to a legal right to offset the respective assets and liabilities at the current time. This right will only exist on the occurrence of future events, such as the default of one of the two parties.

 

The following financial assets and liabilities were reported in the statement of financial position without netting as the criteria of IAS 32.42 required to offset them were not met. However, they are subject to the agreements described above that allow offsetting given certain future events.

 


Offsetting financial assets and liabilities

EUR thousand




31 Dec. 2016
Carrying
amount




Assets/liabilities with a right of
set-off that do not however meet
the criteria for offsetting in the
statement of financial position


Net values





Receivables from derivative financial instruments 2,110 -80 2,030
Liabilities from derivative financial instruments -141 80 -61


31 Dec. 2015



 


Receivables from derivative financial instruments 3,630 -33 3,597
Liabilities from derivative financial instruments -1,314 33 -1,281

LIQUIDITY RISK The Wilo Group strives to cover its financial requirements for the operating business of its Group companies at all times and at low cost. Various instruments available on the financial market are used for these purposes. These instruments include committed and non-committed credit facilities from various national and international reputable banks with maturities of up to five years. The credit facilities of more than EUR 200 million had been utilised in the amount of EUR 15.3 million as at 31 December 2016 (previous year: EUR 6.1 million). In addition, WILO SE has secured its long-term financial requirements by issuing promissory note loans, which were also placed with financially sound, reputable financial partners (see note (9.12)). 

As a result of existing short- and medium-term credit facilities with various prominent banks, the long-term coverage of financial requirements with the promissory note loans and other refinancing options, the Wilo Group is not currently exposed to material credit, concentration or liquidity risk. There are also cash pooling and financing arrangements with Group companies where appropriate and permitted under local commercial and tax law.

The following table shows the remaining contractual maturities and corresponding cash outflows, including estimated interest payments, for financial liabilities as at 31 December 2016 and 2015:


Cash outflows for financial liabilities as at 31 Dec. 2016

 
Maturities

31 Dec. 2016
Carrying
amount
Agreed
payments
Less than
1 year
Between
1 and 5 years
More than
5 years
Financial liabilities          
   Non-current
119,222 -141,250 -4,915 -97,939 -38,396
   Current 18,116 -18,116 -18,116 0 0
Trade payables 142,408 -142,408 -142,180 -228 0
Finance lease liabilities 4,981 -5,363 -2,196 -3,167 0
Other financial liabilities 37,140 -37,140 -33,669 -3,471 0
Derivative financial instruments 141 -141 -141 0 0
Total 322,008 -344,418 -201,217 -104,805 -38,396
 
 


Cash outflows for financial liabilities as at 31 Dec. 2015
  Maturities

31 Dec. 2015
Carrying
amount
Agreed
payments
Less than
1 year
Between
1 and 5 years
More than
5 years
Financial liabilities          
   Non-current
121,514 -147,108 -5,322 -27,575 -114,211
   Current
45,753 -45,753 -45,753 0 0
Trade payables 141,034 -141,034 -139,783 -1,251 0
Finance lease liabilities 4,946 -5,326 -2,189 -3,137 0
Other financial liabilities 36,618 -36,618 -32,992 -3,626 0
Derivative financial instruments 1,314 -1,200 -1,200 0 0
Total 351,179 -377,039 -227,239 -35,589 -114,211

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Order report

WILO SE
Corporate Communications
Nortkirchenstraße 100
44263 Dortmund
T +49 231 4102-0
F +49 231 4102-7363

Contact

WILO SE
Corporate Communications
Nortkirchenstraße 100
44263 Dortmund
T +49 231 4102-0
F +49 231 4102-7363