Risk management, including sensitivity analysis

Risk management, including sensitivity analysis

Operating and financial risks

Risk factors and risk management
Just as in any other business, Byggmax Group’s business activities are associated with risks. The management of risks is of fundamental importance for the Group’s success. Some of the risk factors and significant relationships, that are assessed as being of significance for Byggmax Group’s business activities, financial position and performance are shown below.

1. Market risks

• Changes in turnover in the housing market
• Changes in households’ disposable income
• Consumer demand for building supplies. The Group’s business is very seasonal. (see below)
• Changes in prices of raw materials
• The competition’s pricing
• The trend in the low-price segment in the DIY market

Seasonal variations

Byggmax Group's business activities are strongly affected by seasonal variations steered by consumer demand for standard building materials. Due to the weather’s effect on demand, Byggmax’s sales and cash flow are normally higher during the second and third quarters when approximately two-thirds of Byggmax’s sales are generated and subsequently decline in the fourth and first quarters. Although seasonal variations do not normally affect Byggmax’s earnings and cash flow from year to year, earnings and cash flow may be impacted during the year by unusually harsh or mild weather conditions, or by excessive or insufficient precipitation. Byggmax strives to balance the seasonal effects by, for example, launching new products throughout the year that are not as susceptible to seasonal variations.

Management of market risk
The most significant market risks are monitored and measured on a monthly basis, these include price surveys and customer surveys, which are performed monthly. In addition, price trends for the underlying raw materials per product category are monitored monthly. This information is utilized by the management in decision-making.

2. Operation risks

• Expansion of the chain of stores is greatly dependent on the ability to locate plots and properties that are suitable for Byggmax
• Interference or faults in the IT-system
• Changes in the rental market and in the terms and conditions of existing lease agreements for stores
• The ability to identify and develop relations with qualified suppliers
• The ability to renew and develop the concept

Sensitivity analysis operational risks 2018

  Change (%-unit), all other factors unchanged Effect on result Mkr after taxes 2018
Purchase price  +1%  -27.6
Costs for personal +1%  -4.7

Management of operative risk
The most considerable operational risks are monitored on a monthly basis
including the state of affairs with suppliers and the “Pipeline” for new
stores. This information is utilized by the management in decision-making.

3. Financial risks

• Meeting the need for working capital
• Obligations in credit agreements
• Currency risk
• Interest risk
• Legal risks such as those related to customs handling

Management of financial risk
The Group’s overriding financial policy is intended to identify and minimize the effects of financial risk. Practical risk management is handled by Byggmax’s central finance department according to the financial policy established each year by the Board of Directors. The financial hedging relations established by the Group as part of its risk management do not qualify for hedge accounting according to the rules in IAS 39. The Board of Directors continuously receives reports in respect of cash flows, debt levels and fulfillment of the terms of financial agreements, together with comparisons with budgets and forecasts.

a) Market risk
Currency risk

The Byggmax Group’s consolidated accounts are stated in SEK, but apart from Sweden the Group also has operations in Norway and Finland and a large portion of the purchases in these countries are made in currencies other than the functional currency for the Group. This means that the Group is exposed to currency risk in that unfavorable changes in exchange rates can have a negative effect on EBIT, shareholders’ equity and cash flow.

Transaction exposure in commercial flows
Payment flows in the form of accounts receivable and accounts payable in foreign currency result in currency exposure for the Group. Byggmax has currency exposure in SEK and NOK, and some exposure resulting from the purchase of goods in USD and in EUR (for which there is a natural hedge in sales in EUR in the Finnish market).

Sensitivity analysis currency risk for 2018

  Change (%-unit), all other factors unchanged  Effect on result (Mkr) 2018  Effect on result (Mkr) 2017
NOK  +/- 10%  +/- 2.4  +/- 2.4
EUR   +/- 10%  +/- 0.4  +/- 0.6

Byggmax hedges currency positions greater than SEK 100 M on an annual basis each quarter by hedging 50 percent for the coming six months and 25 percent for the coming quarter, meaning that 75 percent is hedged.

Transaction exposure in consolidation of units outside Sweden
The Group’s EBIT is also affected by currency effects arising due to exchange-rate trends in the local currencies of the various foreign subsidiaries and branches against SEK. Translation effects thus arise for the shareholders’ equity of the Group in consolidation of the balance sheets of foreign companies and branches. This risk is not hedged.

Interest risk
The Group’s interest risk arises primarily through long-term borrowing. The Group’s borrowing carries floating-rate, thus resulting in exposure. Borrowing that is subject to floating-rate exposes the Group to interest risk with respect to cash flow. To reduce the interest risk, the Group has as its policy that interest shall be fixed for 50 percent of the remaining bank loans for at least two years. If interest on the Group’s borrowing in SEK had been 1 percentage point higher/lower during 2018 with all other variables constant and consideration taken to interest swaps, the consolidated profit after tax for the fiscal year would have been SEK 8.7 M lower/higher, primarily as an effect of higher interest costs for borrowing with floating-rate interest. Byggmax continuously monitors the interest risk by examining the effect of loans with floating-rate on EBIT for the year. Byggmax conducts interest-rate hedging in the form of an interest-rate cap.

Sensitivity analysis interest risk for 2018

  Change (%-unit), all other factors unchanged  Effect on result (Mkr) 2018 Effect on result (Mkr) 2017 
Interest   1%  8.7 6.7

b) Credit risk
Byggmax has very low credit risk in relation to the Group’s customers in that the majority of sales are in cash and since the Group invoices external customers to a lesser extentsince the Group does not invoice external customers. Credit exposure primarily comprises accrued but as yet unpaid bonuses from suppliers except for Skånska Byggvaror, which has a larger share of receivables exposed to credit risk. Normally, Skånska Byggvaror has had customer losses under one percent.  Approximately 95 percent of accounts receivable in Skånska Byggvaror come from private individuals.

c) Liquidity risk
Byggmax’s policy in respect of liquidity risk is to ensure the Group has sufficient cash and cash equivalents to finance  its operating activities. The Board of Directors manages the liquidity risk exposure through ensuring that Byggmax has sufficient credit facilities in place to satisfy the future needs of the business. The need is established through continuous follow up of forecast and actual cash flows with consideration taken to the tenors of financial assets and liabilities in the balance sheet. Byggmax’s primary credit facility is provided by Svenska Handelsbanken by way of a credit agreement. The agreement with Svenska Handelsbanken extends until December 21, 2020. Byggmax has fulfilled covenant requirements under the banking agreement during the year.

The size of the credit facility available is reviewed regularly and designed to cover forecast peaks in the gross debt level with a healthy margin. On December 31, 2018, the Group had cash and cash equivalents totaling SEK 52.5 M (40.1) and an unutilized credit facility of SEK 275.2 M (327.3).

Management of financing/capital risk
The Byggmax Group works to reduce its capital/financing risk by:
• Establishing adequate credit facilities well in advance of forseeable needs.
• Monitoring due dates for the total debt in order to match amortization to anticipated cash flow.
• Satisfying key ratios according to financing contracts. The key ratios are the interest-coverage ratio, debt/equity ratio and the equity ratio/ risk bearing capital.
• Optimizing working capital within the Group.

Byggmax has no specified goal for the equity ratio, however there is a dividend goal.

Selected risks based on probability and impact

The above diagram displays the identified risks and their likelihood as well as the size of the long-term impact.

The above diagram displays the identified sustainability risks and their likelihood as well as the size of the impact.