NWG Annual Report 2019 - EN NWG Annual Report 2019 - EN | Page 94

NWG // FINANCIAL INFORMATION // THE GROUP Financial risk management New Wave Group is continually exposed to various financial risks. Financial risks comprise interest risks, currency risks and liquidity and credit risks. To minimize the impact on the income statement from these risks, the Group has a financial risk policy which describes how the Group seeks to limit the impact of financial risks on the income statement. The goal is to ensure that the central finance function exploits available economies of scale in the Group and assists the subsidiaries by providing professional service in order to minimize the risks. Interest risk New Wave Group believes that the use of short-term fixed interest rates leads to lower borrowing costs over time while short-term interest rates follow the economy cycles and therefore offset fluctuations in the Group’s earnings. The breakdown by currency of the Group’s net debt at year-end is shown in the table below. An increase in interest rates over the course of the year by one percentage point would have a negative impact on earnings of SEK 16.6 (10.7) million, based on the reported net debt at 31 December 2019. Net debt breakdown is shown in note 20. SEK million Breakdown by currency SEK EUR GBP USD CHF DKK NOK CAD CNY Other Total 2019 Net debt 2018 Net debt -1 596.0 -587.2 -23.0 -434.0 97.7 -0.2 -273.2 -189.9 8.6 32.4 -2 964.8 -1 349.4 -309.1 -18.3 -197.7 79.8 19.4 -120.3 -26.0 19.2 71.3 -1 831.1 Currency risk A significant portion of New Wave Group’s sales are made in foreign currency (77 %). The Group is exposed to changes in exchange rates in the future flows of payments related to firm commitments and to loans and investments in foreign currencies, i.e. transaction exposure. The Group’s financial statements are also affected by translating the results and net assets of foreign subsidiaries into SEK, i.e. translation exposure. 094 // ANNUAL REPORT Transaction exposure and hedge accounting Transaction exposure mainly arises as a result of intra-Group transactions between the Group's purchasing companies and sales companies, situated in other countries and selling the products to their customers normally in local currency on their local market. In some countries, transaction exposure may arise from sales to external customers in a currency different from the local currency. The Group’s most important purchasing currency is USD. Changes in exchange rates between USD, EUR and SEK constitute the single largest transaction exposures in the Group. Managing the currency exposure related to purchases differs between the Group's both sales channels. In the promo sales channel, New Wave Group is the stock keeper and orders from resellers are therefore not placed until the the reseller has received an order from the end customer. The order backlog for future deliveries is therefore small, as deliveries are made imme- diately. Currency hedging is not used for this sales channel since price adjustments towards the customer are made continuously as the purchase price changes. In the retail sales channel, sales are mostly made through advance orders and, at this point, the prices towards the customers are fixed. An advance order means, for example, that customers place orders in the spring for delivery in the autumn. In order to limit the currency risk in these advance orders, derivatives are purchased to guarantee that the value of incoming deliveries to the warehouses match the prices towards the customers. In these cases hedge accounting according to IFRS 9 is applied, which means that changes in the value of the deriva- tives that are part of an effective cash flow hedge are recognized in other comprehensive income. In the Corporate operating segment, 97 (97) % of the sales occur in the promo sales channel and adjustments for changes in purchase prices are made continuously. In Sports & Leisure about 74 (73) % of sales are made through the retail sales channel which means that the majority of purchases in the operating segment are hedged against fluctuations in exchange rates. For Gifts & Home Furnishings, 87 (85) % of the sales are to retail and most of the production takes place in Sweden. Where purchases are made from another country, 50-80 % of the purchases in a foreign currency are hedged against fluctuations in exchange rates. The Group’s principal commercial flows of foreign currencies mainly pertain to imports from Asia to Europe and intra-Group flows within Europe. Currency rates and payment conditions to be applied to the internal trade between the Group companies are set centrally. Currency exposure and risk is primarily, and to a large extent, reduced by netting internal transactions. Therefore, through netting, the Group's main transaction exposure can be reduced and, together with the use of currency hedges and