Short-term risks

Componenta Corporation’s Half-Year Financial Report 1 January–30 June, 2024, 23 July 2024

The most significant risks related to Componenta’s business operations are risks associated with the operating environment (competitive situation, prices, commodities and the environment), risks related to business operations (customers, suppliers, productivity, production processes, labour market disruptions, contracts, product liability, personnel and information security) and financing risks (availability, liquidity, currency, interest rate and credit).

The availability of certain raw materials such as recycled steel, pig iron, structural steel, aluminium and energy at competitive prices, as well as the uninterrupted supply of energy, is essential for the Group’s business operations. Market prices for electricity remained at a relatively high level on average during the review period, and the price variation is very high on a daily and hourly basis.

Because of increased geopolitical tensions, the availability of raw materials and other materials continues to involve uncertainties in Componenta’s operational activities. In addition, global challenges with the availability of certain components for customers may lead to production disruptions in our end customers’ plants and thereby affect Componenta’s sales volumes in the short term.

To ensure the availability of raw materials and other materials, Componenta actively engages in discussions with its suppliers, continuously updates its needs forecast and optimises its inventory levels to meet longer-term demand, closely monitors the situation of its suppliers and market changes, and responds to these changes as necessary.

Componenta has no significant and immediate risk concentrations related to Russia or Ukraine among its customers or suppliers of goods. Componenta has no operations of its own in Russia or Ukraine. The Russian war of aggression has had an impact on the general price development and availability of raw materials such as structural steel and pig iron, and on the development of energy prices. The war has had an indirect impact on the supply chains of Componenta’s manufacturers of steel materials and wholesalers through the price development and availability of iron ore and coal, for example. The continuation of the war and an unfavourable development of the geopolitical situation can continue have a negative impact on the financial market, sales volumes, the availability and price development of raw materials and energy and the availability of foreign labour, which increases uncertainty in terms of forecasts.

The cost risk associated with raw materials is mainly managed through index-based price agreements, based on which the sales prices of products are updated in response to changes in the prices of raw materials for the next quarter. An increase in raw material prices may tie more cash than expected to working capital. In terms of commercial risks, future volumes may be weakened by customers switching to cheaper alternatives due to price competition.

Componenta’s business operations depend on the reliability of production plants, supply and delivery channels and the related processes and systems. Componenta is also closely monitoring developments in the labour market. The quality, accuracy and availability of information are extremely important, as information technology plays a significant role in the operations of Componenta and its suppliers and customers. If materialised, IT and cybersecurity risks may expose Componenta to disruptions and interruptions in operations and the loss or distortion of data, which may lead to interruptions in product availability. Componenta pays close attention to cybersecurity risks and monitors its customers’ situations and notifications.

Componenta continuously monitors the liquidity risk. The financing of the company’s business operations is based on income financing, committed and drawn-down loans from financial institutions, credit facilities in force until September 2025, the convertible bond arrangement established in May 2024, and factoring arrangements. Any termination or non-renewal of factoring arrangements or credit facilities can create uncertainties for Componenta’s liquidity. The Group’s liquidity was at a good level at the end of the review period. At the end of the review period, Componenta had EUR 4.0 million in unused committed credit facilities and a convertible bond arrangement of up to USD 3.0 million agreed with MPL, a US investor. The share subscription facility agreed with GCF, a US investor, expired in June 2024.

Componenta’s revolving credit facilities and working capital loans include the following financial covenant conditions: interest-bearing net debt / rolling 12-month EBITDA are a maximum of 3.0 and the equity ratio is at least 25%. In accordance with the agreed terms, the covenants are reviewed every six months on June 30 and December 31 and are valid for as long as the liability or amount related to the loan agreements remains unpaid or undisbursed. Due to the low rolling 12-month EBITDA, the first covenant condition was breached on 30 June 2024 and the company received waivers from the financing institutions during June 2024 to the situation on 30 June. Unfavorable EBITDA development during a rolling 12-month period may cause the covenants to be breached.

A more detailed description of the uncertainties related to the continuity of the company’s operations and other business risks is provided under “Accounting principles requiring the management’s judgement”.