Short-term risks

Risks and business uncertainties

Componenta Corporation’s Business Review 1 January–31 March, 2024, 7 May 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. The average market prices of electricity remained at a fairly high level during the review period, and daily and hourly price fluctuations were very high. Because of the geopolitical situation, 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.

According to Componenta’s estimate, the Group 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 attack 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.

A prolonged war and unfavourable developments in the geopolitical situation may continue to 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 forecasting uncertainty.

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 employ more working capital than expected. 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 chains and the related processes and systems. Componenta also closely monitors the labour market situation. 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 Group also finances its operations through factoring arrangements for receivables. Componenta’s current committed credit facilities will need to be renewed in September 2025. Any termination or non-renewal of factoring arrangements or credit facilities could 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 also had EUR 3.0 million in unused committed credit facilities and a USD 7.5 million unused portion of its USD 8.0 million share subscription facility from GCF, an investor based in the United States. The share subscription facility is valid until June 2024. Componenta paid off the EUR 1.0 million portion of the revolving credit facility that was in use at the end of the review period in April 2024. In addition, Componenta agreed and withdrew a new working capital loan of EUR 2.0 million. 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. Unfavorable EBITDA development during a rolling 12-month period may cause the covenants to be breached.