FINANCIAL INFORMATION CONSOLIDATED FINANCIAL STATEMENTS. Risk management

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1 167 Risk management Group risk management Group Risk Management supports the Board of Directors, the Executive Committee and the management teams of the Group companies in their strategic decisions. Group Risk Management aims to systematically recognize major risks the company encounters. All types of risks from industry, operations, finance and legal, up to the external business environment are considered including compliance, sustainable development and reputational aspects. Risks are understood as the effect of uncertainty on business objectives which can be an opportunity or a threat. The risk horizon includes long-term strategic risks but also short- to medium-term business risks. Potential risks are identified and evaluated at an early stage and monitored. Countermeasures are proposed and implemented at the appropriate level so that risk management remains a key responsibility of the line management. Risk transfer through insurance solutions forms an integral part of Group Risk Management. The Group s risk profile is established by top-down, bottom-up and functional risk assessments which are combined to a Group 360 risk analysis. Besides the Group companies, the Board of Directors, the Executive Committee and selected Corporate Function Heads are involved in the risk assessment during the Group s management cycle. The Executive Committee reports regularly to the Board of Directors on important risk findings and provides updates on the measures taken. Financial risk management within the Group is governed by policies approved by key management personnel. It provides principles for overall risk management as well as policies covering specific areas such as interest rate risk, foreign exchange risk, counterparty risk, use of derivative financial instruments and the investing of excess cash. Liquidity risk Group companies need liquidity to meet their obligations. Individual companies are responsible for their own cash balances and the raising of internal and external credit lines to cover the liquidity needs, subject to guidance by the Group. The Group monitors its liquidity risk by using a recurring liquidity planning tool and maintains cash, unused credit lines and readily realizable marketable securities to meet its liquidity requirements. In addition, the strong creditworthiness of the Group allows it to make efficient use of international financial markets for financing purposes. In general, the Group does not hold or acquire any shares or options on shares or other equity products which are not directly related to the business of the Group. Financial risk management The Group s activities expose it to a variety of financial risks, including the effect of changes in debt structure and equity market prices, foreign currency exchange rates and interest rates. The Group s overall risk management focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain exposures. Therefore, the Group does not enter into derivative or other financial transactions which are unrelated to its operating business.

2 168 FINANCIAL INFORMATION CONSOLIDATED FINANCIAL STATEMENTS Contractual maturity analysis Million CHF Contractual undiscounted cash flows Carrying Within Within Within Within Within Thereafter Total amount 1 year 2 years 3 years 4 years 5 years 2014 Trade accounts payable 2,101 2,101 2,101 Loans from financial institutions 1, ,822 2,833 Bonds, private placements and commercial paper notes 1, ,313 1,038 1,018 3,416 8,840 8,861 Interest payments ,086 2,769 Finance leases Derivative financial instruments net 1 (14) (17) (6) (3) (3) 17 (26) (47) Total 5,114 1,780 2,322 1,440 1,314 4,679 16, Trade accounts payable 1,934 1,934 1,934 Loans from financial institutions ,949 1,952 Bonds, private placements and commercial paper notes 2, , ,658 9,648 9,652 Interest payments ,143 2,944 Finance leases Derivative financial instruments net 1 (24) (19) (21) (17) (4) (63) (149) (101) Total 5,439 1,540 1,632 1,708 1,171 4,986 16,476 1 All derivative financial instruments are held for hedging. The contractual cash flows include both cash in- and outflows. Additional information is disclosed in note 29. The maturity profile is based on contractual undiscounted amounts including both interest and principal cash flows and based on the earliest date on which Holcim can be required to pay. Contractual interest cash flows relating to a variable interest rate are calculated based on the rates prevailing as of December 31. Market risk Holcim is exposed to market risk, primarily relating to foreign exchange and interest rate risk. To manage the volatility relating to these exposures, Holcim enters into a variety of derivative financial instruments. The Group s objective is to reduce fluctuations in earnings and cash flows associated with changes in foreign exchange and interest rate risk.

3 169 Interest rate risk Interest rate risk arises from movements in interest rates which could affect the Group s financial result and market values of its financial instruments. The Group is primarily exposed to fluctuations in interest rates on its financial liabilities at floating rates which may cause variations in the Group s financial result. The exposure is addressed through the management of the fixed/floating ratio of financial liabilities. To manage this mix, the Group may enter into interest rate swap agreements, in which it exchanges periodic payments based on notional amounts and agreed-upon fixed and floating interest rates. Interest rate sensitivity The Group s sensitivity analysis has been determined based on the interest rate exposure relating to the Group s financial liabilities at a variable rate on a post hedge basis as at December 31. A 1 percentage point change is used when the interest rate risk is reported internally to key management personnel and represents management s assessment of a reasonably possible change in interest rates. Currency risk The Group operates internationally in around 70 countries and is therefore exposed to foreign currency risks. The translation of foreign operations into the Group reporting currency leads to currency translation effects. The Group may hedge certain net investments in foreign entities with foreign currency borrowings or other instruments. Hedges of net investments in foreign entities are accounted for similarly to cash flow hedges. To the extent that the net investment hedge is effective, all foreign exchange gains or losses are recognized in equity and included in currency translation adjustments. Due to the local nature of the construction materials business, transaction risk is limited. However, for many Group companies, income will be primarily in local currency, whereas debt servicing and a significant amount of capital expenditures may be in foreign currencies. As a consequence thereof, subsidiaries may enter into derivative contracts which are designated as either cash flow hedges or fair value hedges, as appropriate, but which in general do not include the hedging of forecasted transactions. At December 31, a 1 percentage point shift in interest rates, with all other assumptions held constant, would result in approximately CHF 38 million (2013: 36) of annual additional/ lower financial expenses before tax on a post hedge basis. The Group s sensitivity to interest rates is slightly higher than last year mainly due to a shift of the reset dates of floating rate liabilities towards the lower end of the one year period. This effect has even compensated the decrease of the ratio of financial liabilities at variable rates to total financial liabilities from 44 percent to 42 percent. Impacts on equity due to derivative instruments are considered as not material based on the shareholders equity of Group Holcim. Currency sensitivity The Group s sensitivity analysis has been determined based on the Group s net transaction exposure that arises on monetary financial assets and liabilities at December 31 that are denominated in a foreign currency other than the functional currency in which they are measured. The Group s net foreign currency transaction risk mainly arises from CHF, USD and EUR against the respective currencies the Group operates in. A 5 percent change is used when the net foreign currency transaction risk is reported internally to key management personnel and represents management s assessment of a reasonably possible change in foreign exchange rates. A 5 percent change in CHF, USD and EUR against the respective currencies the Group operates in would only have an immaterial impact on foreign exchange (loss) gains net on a post hedge basis in both the current and prior year. Impacts on equity due to derivative instruments are considered as not material based on the shareholders equity of Group Holcim.

4 170 FINANCIAL INFORMATION CONSOLIDATED FINANCIAL STATEMENTS Capital structure The Group s objectives when managing capital are to secure the Group s ongoing financial needs to continue as a going concern as well as to cater for its growth targets, in order to provide returns to shareholders and benefits for other stakeholders and to maintain a cost-efficient and risk-optimized capital structure. The Group manages the capital structure and makes adjustments to it in light of changes in economic conditions, its business activities, the investment and expansion program and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, increase debt or sell assets to reduce debt. The Group monitors capital, among others, on the basis of the ratio of funds from operations as a percentage of net financial debt and the ratio of net financial debt to EBITDA. Funds from operations is calculated as net income plus depreciation, amortization and impairment as shown in the consolidated statement of income. Net financial debt is calculated as financial liabilities less cash and cash equivalents as shown in the consolidated statement of financial position. The net financial debt to EBITDA ratio is used as an indicator of financial risk and shows how many years it would take the Group to pay back its debt. During 2014, the Group s target, which remained the same as in 2013, was to maintain a ratio of funds from operations as a percentage of net financial debt of at least 25 percent and a net financial debt to EBITDA ratio of less than 2.8x. Million CHF Net income 1,619 1,596 Depreciation, amortization and impairment (note 9) 1,434 1,565 Funds from operations 3,053 3,161 Financial liabilities (note 27) 11,793 11,705 Cash and cash equivalents (note 17) (2,149) (2,244) Net financial debt 9,644 9,461 Funds from operations/net financial debt 31.7% 33.4% Million CHF Net financial debt 9,644 9,461 EBITDA 4,156 4,332 Net financial debt/ebitda

5 171 Credit risk Credit risks arise, among others, from the possibility that customers may not be able to settle their obligations as agreed. To manage this risk, the Group periodically assesses the financial reliability of customers. Credit risks, or the risk of counterparties defaulting, are constantly monitored. Counterparties to financial instruments consist of a large number of major financial institutions. The Group does not expect any counterparty to be unable to fulfill their obligations under their respective financing agreements. At year end, Holcim has no significant concentration of credit risk with any single counterparty or group of counterparties. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the consolidated statement of financial position. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss is dependent on the nature of the item being hedged. On the date a derivative contract is entered into, the Group designates certain derivatives as either (a) a hedge of the fair value of a recognized asset or liability (fair value hedge) or (b) a hedge of a particular risk associated with a recognized asset or liability, such as future interest payments on floating rate debt (cash flow hedge) or (c) a hedge of a foreign currency risk of a firm commitment (cash flow hedge) or (d) a hedge of a net investment in a foreign entity. Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective are recorded in the statement of income, along with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. Accounting for derivative financial instruments and hedging activities The Group mainly uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain exposures relating to debt, as well as foreign exchange contracts to hedge firm commitments for the acquisition of certain property, plant and equipment. The fair values of various derivative instruments are disclosed in note 29. Movements in the cash flow hedging reserve are shown in the statement of changes in consolidated equity of Group Holcim. Changes in the fair value of derivatives that are designated and qualify as cash flow hedges and that are highly effective are recognized outside the statement of income. Where the firm commitment results in the recognition of an asset, for example, property, plant and equipment, or a liability, the gains or losses previously deferred in equity are transferred from equity and included in the initial measurement of the non-financial asset or liability. Otherwise, amounts deferred in equity are transferred to the statement of income and classified as revenue or expense in the same periods during which the cash flows, such as hedged firm commitments or interest payments, affect the statement of income.