Risk management

Risk management, Control environment and Internal control and Internal audit

Risk management is part of the company’s monitoring system and it aims to ensure that the risks to which the company’s business is exposed are identified, evaluated and monitored. It aims to help forecast the threats and opportunities for business operations and ensure the continuity of business. The objective of internal control and risk management related to Componenta’s financial reporting is to ensure that the reporting is reliable and that all applicable laws and regulations have been complied with.

Componenta compiles its financial reporting in accordance with the International Financial Reporting Standards (IFRS), the Finnish Securities Markets Act, the Finnish Accounting Act and the guidelines and statements of the Finnish Accounting Board, while also complying with the regulations and guidelines of the Finnish Financial Supervisory Authority and the Code of Nasdaq Helsinki Ltd.

Risk management

The Board of Directors confirms the principles for risk management and those responsible for this. The Board of Directors monitors the effectiveness of risk management systems. The President and CEO supervises the implementation of the risk management program to ensure that it focuses on matters that are essential for local and operational activities. The Corporate Executive Team participates in identifying and evaluating risks, allocating responsibilities and monitoring the risks.

The CFO is responsible for development of Componenta’s risk management.

Then management of business operations is responsible for identifying and managing risks in their own business areas as part of their operational activities.

All employees are responsible for identifying and evaluating the risks that are related to their work or that are otherwise under their control and for reporting on them to their supervisors. The financial risks related to the Componenta Group’s business operations are managed in accordance with the Treasury Policy approved by the Board of Directors. The Group’s treasury department manages financial risks and ensures, for their own part, the availability of equity and debt finance to the Group on competitive terms. The Group’s treasury department is also responsible for managing financial assets and hedging them as needed.

The Corporate Executive Team conducts the Enterprise Risk Management (ERM) process annually and monitors the major risks to operations regularly. The main risks are identified and evaluated in the ERM process and corrective action is decided on.

Componenta’s most significant business environment risks, operational risks and financial risks are presented on below at Description of risks.

Control environment

The purpose of Componenta’s internal control is to ensure that the Group operates in line with its strategy profitably and effectively, that risk management is arranged appropriately and adequately and that the financial and operational reporting is reliable. Control is based on Componenta’s values, operating principles, policies and guidelines. Internal control is part of management, governance and daily operations.

Financial reporting and the monitoring of its accuracy are based on annually prepared and adopted budgets and monthly forecasts, and on performance reporting, through which the actual outcomes are compared with the budget and forecasts. The Group’s financial organisation and the management of its units are responsible for the financial reporting process and the related consistent and regularly updated guidelines.

Open and adequate communications ensure an effective and functional control environment. Information about reporting tools and the financial reporting guidelines and principles have been reviewed with all those involved in financial reporting in accordance with their responsibilities. The financial reporting guidelines and principles are available from the Group’s financial organisation and the Group’s intranet to the extent that the guidelines concern the Group’s other functions. New reporting requirements and similar information are provided regularly within the financial organisation in accordance with each employee’s responsibilities. The Group’s CFO reports to the Board of Directors regularly on matters pertaining to internal control.

The Board of Directors supervises the Group’s financial reporting process and monitors the effectiveness of internal control, internal audit and risk management systems.

Internal monitoring

The profitability and efficiency of Componenta’s operations and the achievement of financial objectives are monitored regularly by means of Groupwide financial reporting. The effectiveness of measures in internal control related to financial reporting is monitored by the Board of Directors, the President and CEO, the Corporate Executive Team and operative management teams.

The consistent Group-wide practices also cover reporting. Guidelines related to reporting are communicated regularly to those involved in the reporting process in accordance with their responsibilities. The Group Controller monitors the implementation of measures based on the Group-wide reporting process guidelines, together with the CFO.

The unit controllers are responsible for the financial reporting of operational business units in cooperation with the management of each unit. The management team for each business unit and business area analyses its own financial reports, including volumes,

profits, costs, profitability and working capital, every month before the reporting meeting of the Corporate Executive Team.

The Board of Directors is responsible for the final evaluation of the Group’s result.

Internal audit

The Componenta Group’s internal audit is conducted in accordance with the operating principles approved by the Board of Directors. These principles are based on the Group’s internal reporting and the annual audit plan approved by the Board.

The Componenta Group’s financial management is responsible for strengthening the internal control environments of the Group’s various functions within the framework of the annual plan. Componenta uses external experts in internal auditing when needed. Currently, however, the development of the internal control environment is seen as a more effective way to strengthen internal control. In accordance with Recommendation 26 of the 2020 Corporate Governance Code, “it is not always expedient for the company to organise internal audit as a separate function”. Componenta has opted for this approach after assessing the scope of its business operations and the fact that their locations are concentrated in Finland.

Financial reporting that covers the whole Group regularly monitors how well financial targets are being met. The reports include information about the actual outcomes, as well as budgets and up-to-date forecasts, for the current year.

Description of risks

Business environment risks

Competition and price risks

The Group’s business sector is capital intensive, cyclical and fragmented. If the economic downturn is prolonged, overcapacity may increase competition and market pressure on prices. Componenta aims to price its products competitively in line with the prevailing market conditions.

Commodity risks

In terms of the group’s business, the availability of certain raw materials, such as recycled steel and pig iron, structural steel, aluminum and energy at competitive prices, as well as uninterrupted availability of energy, is essential. Price fluctuations of Componenta Group’s main raw materials affect the margins of the Group’s products. Price increases are transferred to the products delivered to customers with a delay, and therefore price increases reduce margins. As prices fall, the group’s margins will correspondingly improve.

Cost risks relating to raw materials and electricity are mainly managed with price agreements. Componenta has price agreements with its customers and under these agreements the prices of products are adjusted in line with the changes in the raw material prices and electricity.

The electricity consumption at the Group’s foundries and machine shops creates a spot price risk for the purchased electricity. Componenta uses the services of an external consultant in the procurement of electricity, within a framework set by Componenta and in accordance with Componenta’s procurement and risk policies. The price of electricity can be fixed for the rolling 36 months forward at the most with the emphasis on the short end. No derivative instruments are used for the hedging. The difference between the forecast and actual electricity consumption may affect the company’s profit. Componenta aims to pass on the changes in the price of electricity to customers with a separate electricity surcharge.

Environmental risks

Componenta complies with environmental legislation in all its operations and with the ISO 14001 standard in developing its products and operations. Changes in environmental legislation and regulations may give rise to additional costs for Componenta in connection with observing the terms of a permit or for cleaning up the environment, and these costs may affect the Group’s financial results.

All of Componenta’s units have effective ISO 14001 environmental management systems, for developing and improving environmental matters. The Group strives to prevent risk situations through preventive maintenance, guidelines and structural measures.

Continuity risks

There are uncertainties and risks associated with the continuity of operations, but they have decreased from previous years and can be mitigated. In terms of the continuity of operations, the company’s most important estimates, assumptions and uncertainty factors are related to the possible risks caused by the Russian war of aggression in increasing sales volumes, the uninterrupted availability of electricity and the short-term management of fluctuations in the price of electricity, as well as the continuity of factoring arrangements and credit lines.

When analyzing the companies’ cash flow forecasts and the future liquidity situation, the management has made estimates of the companies’ future sales volumes and turnovers, operating margins, investments and working capital needs.

Operational risks

Customer risks

Componenta has major customers that are of great importance for the Group. It is rare to lose a customer, since the costs in changing a supplier are high, mainly because of the costs and quality risks related to ramping up products and the making of tools and patterns.

The potential risks of Componenta in respect of liquidity and access to working capital may weaken the volume of future trading and reduce the number of orders that will be placed on new products by customers in the future. Volumes may also shrink because of customers lost for commercial reasons.

Supplier risks

A vital factor for Componenta’s business operations is the availability of certain commodities, such as recycled metal, pig iron and energy, at competitive prices. To manage the cost risk relating to raw materials and electricity, Componenta has price agreements with its customers and under these agreements the prices of products are adjusted in line with the changes in the commodity prices. Rising raw material prices and electricity may result in more money being tied to working capital than estimated. To reduce the supplier risk, critical raw materials are usually purchased from at least two suppliers.

Productivity, production and process risks

Componenta strives to identify, measure and monitor different risks with well planned and systematically implemented procedures. Componenta cooperates with insurance companies in dealing with matters relating to production stoppages and has taken appropriate insurance against the risk of stoppages.

Labour market disruptions

Labour market disruptions are a risk factor, as they can disrupt production and thus affect the punctuality of deliveries and the Group’s business operations.

Contract and product liability risks

The Group is liable for any damage or injury caused by products it has manufactured, supplied and represented. The Group has taken appropriate insurances against these risks, and these insurances should cover the risks related to the aforementioned damage.

Componenta also has contracts under which the company is liable for indirect damage or injury caused by its products. As a rule, these contracts contain a limit on liability, and within these limits the company strives to cover indirect damage or injury with appropriate insurance. The company manages product liability risks with sales contract terms.

Personnel risks

Successful business operations and maintaining Componenta’s competitive position are dependent on skilled personnel remaining in the service of the company. Componenta’s goal is to create a work environment in which employees can develop and to which they can commit, and to offer competitive benefits to personnel. Social and ethical responsibility and human rights are taken into account in Componenta’s personnel policy.

Data security risks

To support Componenta’s decision-making and business processes, information must be reliable and easily available. In addition, information systems must be sufficiently protected and secured to prevent information leaks. Standardising business applications, IT infrastructures and IT processes forms an important foundation for managing IT risks. Carrying out these measures successfully reduces risks related to internal control and financial reporting.

Financial risks

The financial risks relating to Componenta Group’s business operations are managed in accordance with the treasury policy approved by the Board of Directors. The objective is to protect the Group against unfavourable changes in the financial markets and to secure the performance and financial position of the Group. The policy aims to limit the amount of financial risks to an acceptable level by using conventional financial instruments available on the market. Management of financial risks takes place in the Group Treasury.

Financing and liquidity risks

The financing of the company’s business is based on income financing of the business, binding and withdrawn financial institution loans, credit lines and factoring financing of trade receivables. Credit limit agreements must be renewed annually, and factoring financing arrangements are renewed annually, unless they are terminated. Credit limit agreements and factoring financing arrangements agreements include conditions on the basis of which they can also be terminated during the contract period. In the company’s opinion, these conditions are usual and their violation is not likely. Termination of factoring arrangements or credit lines or their non-renewal could cause uncertainties and risks to Componenta’s liquidity, but the uncertainties and risks can be mitigated.

Currency risk

According to Componenta’s treasury policy, approved by the Board of Directors, the currency risk is divided into the transaction risk resulting from foreign currency denominated income and expenses and the translation risk resulting from foreign currency denominated equity investments and the profit or loss on these.

The transaction position includes foreign currency denominated trade receivables and payables in the balance sheet, as well as foreign currency cash flows that are expected to be highly probable in the future. The time horizon for the future is normally 1–6 months but can be extended to 12 months if needed. These form a share of the transaction position, the changes of which affect the operating profit. Separate from this position are those items of the transaction position whose exchange rate changes are recognised in financial income and expenses such as foreign currency denominated cash and cash equivalents, as well as intra-group and external foreign currency loans and loan receivables.

The translation position is determined from the shareholder’s equity and retained earnings of subsidiaries and associated companies for whom the operating currency is other than the euro. Currently, the company has no translation risk, because the operating currency of all group companies is the euro.

Exchange rate fluctuations can be hedged using foreign currency loans and deposits, as well as other natural hedging relationships. In addition, conventional derivative instruments can be used, such as currency forwards and options with reliable market pricing. Currency derivatives have a maturity of less than one year.

Interest rate risk

The interest rate risk to which fair values and the cash flow are exposed arises mainly from the Group’s loan portfolio and leases. Interest rate risk arises when changes in market rates and interest margins affect financial expenses and income. Interest rate risk is managed by adjusting the ratio between the fixed and floating rate loans and investments and their renewal period. Interest rate derivatives, such as interest rate swaps, may also be used.

Credit risk

Each Group company is primarily liable for the credit risks attached to its own trade receivables. The Group’s treasury function prepares guidelines, monitors credit risk management and assesses customers’ creditworthiness and their ability to meet their payment obligations. Debt collection of customer receivables is implemented in accordance with the Group’s debt collection policy.