3. Risk Management

Group Risk Management

Group risk management supports the Board of Directors, the Executive Committee and the management teams of the Countries in analyzing the overall risk exposure. Group risk management aims to systematically identify, monitor and manage 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. Mitigating actions 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 risk management.

The Group’s risk profile is established by strategic, operational and functional risk assessments which are combined to a 360 degree risk analysis. Besides the countries, 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 mitigating actions taken.

Country risk

LafargeHolcim’s major presence in developing markets exposes the Group to risks such as political, financial and social uncertainties and turmoil, terrorism, civil war and unrest.

Financial Risk Management

The Group’s activities expose it to a variety of financial risks, including liquidity, interest rate, foreign exchange, commodity and credit risk. 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, commodity and interest rate swaps to hedge certain exposures. The Group does not enter into derivative or other financial transactions which are unrelated to its operating business.

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, credit risk, use of derivative financial instruments and 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, readily realizable marketable securities and unused committed credit lines 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.

Contractual maturity analysis

 

Contractual undiscounted cash flows

 

Million CHF

Within 1 year

Within 2 years

Within 3 years

Within 4 years

Within 5 years

Thereafter

Total

Carrying amount

2015

 

 

 

 

 

 

 

 

1

The contractual cash flows include both cash in- and outflows. Additional information is disclosed in note 27.

2

Restated due to changes in accounting policies, see note 2.

Trade accounts payable

3,693

 

 

 

 

 

3,693

3,693

Loans from financial institutions

2,833

897

396

359

235

152

4,872

4,886

Bonds, private placements and commercial paper notes

3,974

2,336

1,881

1,865

2,169

3,748

15,973

16,705

Interest payments

934

688

522

418

262

1,649

4,473

 

Finance leases

19

30

10

9

5

48

122

91

Derivative financial instruments net1

(67)

2

2

2

82

0

21

(23)

Financial guarantees

76

 

29

 

 

 

105

 

Total

11,462

3,953

2,840

2,653

2,754

5,597

29,259

 

 

 

 

 

 

 

 

 

 

20142

 

 

 

 

 

 

 

 

Trade accounts payable

2,124

 

 

 

 

 

2,124

2,124

Loans from financial institutions

1,382

334

643

145

96

98

2,698

2,709

Bonds, private placements and commercial paper notes

1,128

926

1,313

1,038

1,018

3,416

8,840

8,861

Interest payments

464

417

355

247

191

1,086

2,760

 

Finance leases

22

18

16

12

12

62

143

96

Derivative financial instruments net1

(14)

(17)

(6)

(3)

(3)

17

(26)

(47)

Total

5,105

1,680

2,321

1,439

1,314

4,679

16,539

 

The maturity profile is based on contractual undiscounted amounts including both interest and principal cash flows and based on the earliest date on which LafargeHolcim 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

LafargeHolcim is exposed to market risk, primarily relating to interest rate, foreign exchange and commodity prices. To manage the volatility relating to these exposures, LafargeHolcim 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 interest rates, foreign exchange rates and commodity prices.

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 mainly 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.

At December 31, 2015, a 1 percentage point shift in interest rates, with all other assumptions held constant, would result in approximately CHF 74 million (2014: CHF 38 million) of annual additional/lower financial expenses before tax on a post hedge basis.

The Group’s sensitivity to interest rates is higher than last year mainly due to the merger related increase of current financial liabilities as well as the increase of the ratio of financial liabilities at variable rates to total financial liabilities from 42 percent to 50 percent.

Impacts on equity due to derivative instruments are considered as not material based on the shareholders’ equity of the Group.

Foreign exchange risk

The Group operates internationally in around 90 countries and is therefore exposed to foreign exchange 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, the Group may enter into derivative contracts which are designated as either cash flow hedges or fair value hedges, as appropriate and also include the hedging of forecasted transactions.

Foreign exchange 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 the Group.

Commodity risk

The Group is subject to commodity risk with respect to price changes mainly in the electricity, natural gas, petcoke, coal, oil refined products and sea freight markets. The Group uses derivative instruments to hedge part of its exposure to these risks. Derivative instruments are generally limited to swaps and standard options.

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 of customers and counterparties.

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, LafargeHolcim 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.

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 notes to 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, as well as derivative assets as shown in note 27.
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.

Million CHF

2015

20141

1

Restated due to changes in accounting policies, see note 2.

2

Derivative assets were not considered in the net financial debt calculation for the year 2014.

Net (loss)/income

(1,361)

1,619

Depreciation, amortization and impairment (note 9)

4,574

1,406

Funds from operations

3,213

3,026

Financial liabilities (note 25)

21,791

11,669

Cash and cash equivalents (note 15)

(4,393)

(2,148)

Derivative assets (note 27)

(132)

2

Net financial debt

17,266

9,520

Funds from operations/net financial debt

+18.6%

+31.8%

Million CHF

2015

20141

1

Restated due to changes in accounting policies, see note 2.

2

Derivative assets were not considered in the net financial debt calculation for the year 2014.

Net financial debt

17,266

9,520

EBITDA

4,761

4,114

Net financial debt/EBITDA2

3.6

2.3

Fair value estimation

The fair value of publicly traded financial instruments is generally based on quoted market prices at the end of the reporting period.

For non-publicly traded financial instruments, the fair value is determined by using a variety of methods, such as the discounted cash flow method and option pricing models. The valuation methods seek to maximize the use of observable market data existing at the end of the reporting period.

The fair value of current financial assets and liabilities at amortized cost are assumed to approximate their carrying amounts due to the short-term nature of these financial instruments.

Fair values as of December 31, 2015

 

 

Carrying amount (by measurement basis)

 

Million CHF

IAS 39 Category

Amortized cost

Fair value level 1

Fair value level 2

Total

Comparison Fair value

Current financial assets

 

 

 

 

 

 

1

The comparison fair value for long-term receivables consists of CHF 46 million level 1 and CHF 457 million level 2 fair value measurements.

2

The comparison fair value for long-term financial liabilities consists of CHF 13,032 million level 1 and CHF 2,507 million level 2 fair value measurements.

Cash and cash equivalents

Financial assets

4,393

 

 

4,393

 

Trade accounts receivable

Loans and receivables at amortized cost

3,408

 

 

3,408

 

Other receivables

Loans and receivables at amortized cost

209

 

 

209

 

Other current assets

Available-for-sale financial assets

 

1

 

1

 

Derivative assets

Held for hedging at fair value

 

 

10

10

 

Derivative assets

Held for trading at fair value

 

 

71

71

 

 

 

 

 

 

 

 

Long-term financial assets

 

 

 

 

 

 

Long-term receivables

Loans and receivables at amortized cost

512

 

 

512

5031

Financial investments third parties

Financial investments at cost

90

 

 

90

 

Financial investments third parties

Available-for-sale financial assets

 

3

114

117

 

Derivative assets

Held for hedging at fair value

 

 

42

42

 

Derivative assets

Held for trading at fair value

 

 

9

9

 

 

 

 

 

 

 

 

Current financial liabilities

 

 

 

 

 

 

Trade accounts payable

Financial liabilities at amortized cost

3,693

 

 

3,693

 

Current financial liabilities

Financial liabilities at amortized cost

6,823

 

 

6,823

 

Derivative liabilities

Held for hedging at fair value

 

 

17

17

 

Derivative liabilities

Held for trading at fair value

 

 

26

26

 

 

 

 

 

 

 

 

Long-term financial liabilities

 

 

 

 

 

 

Long-term financial liabilities

Financial liabilities at amortized cost

14,859

 

 

14,859

15,5392

Derivative liabilities

Held for hedging at fair value

 

 

66

66

 

Fair values as of December 31, 20141

 

 

Carrying amount (by measurement basis)

 

Million CHF

IAS 39 Category

Amortized cost

Fair value level 1

Fair value level 2

Total

Comparison Fair value

Current financial assets

 

 

 

 

 

 

1

Restated due to changes in accounting policies, see note 2.

2

The comparison fair value for long-term receivables consists of CHF 6 million level 1 and CHF 362 million level 2 fair value measurements.

3

The comparison fair value for long-term financial liabilities consists of CHF 8,191 million level 1 and CHF 2,061 million level 2 fair value measurements.

Cash and cash equivalents

Financial assets

2,148

 

 

2,148

 

Trade accounts receivable

Loans and receivables at amortized cost

2,180

 

 

2,180

 

Other receivables

Loans and receivables at amortized cost

211

 

 

211

 

Other current assets

Available-for-sale financial assets

 

1

 

1

 

 

 

 

 

 

 

 

Long-term financial assets

 

 

 

 

 

 

Long-term receivables

Loans and receivables at amortized cost

363

 

 

363

3682

Financial investments third parties

Financial investments at cost

28

 

 

28

 

Financial investments third parties

Available-for-sale financial assets

 

2

85

87

 

Derivative assets

Held for hedging at fair value

 

 

50

50

 

 

 

 

 

 

 

 

Current financial liabilities

 

 

 

 

 

 

Trade accounts payable

Financial liabilities at amortized cost

2,124

 

 

2,124

 

Current financial liabilities

Financial liabilities at amortized cost

2,469

 

 

2,469

 

Derivative liabilities

Held for hedging at fair value

 

 

3

3

 

 

 

 

 

 

 

 

Long-term financial liabilities

 

 

 

 

 

 

Long-term financial liabilities

Financial liabilities at amortized cost

9,197

 

 

9,197

10,2523

The table above shows the carrying amounts and fair values of financial assets and liabilities.

The levels of fair value hierarchy used are defined as follows:

  • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. The types of assets carried at level 1 fair value are equity and debt securities listed in active markets;
  • Level 2 fair value measurements are those derived from valuation techniques using inputs for the asset or liability that are observable market data, either directly or indirectly. Such valuation techniques include the discounted cash flow method and option pricing models. For example, the fair value of interest rate and currency swaps is determined by discounting estimated future cash flows, and the fair value of forward foreign exchange contracts is determined using the forward exchange market at the end of the reporting period;
  • Level 3 fair value measurements are those derived from valuation techniques using inputs for the asset or liability that are not based on observable market data. In 2015 and 2014, there were no financial assets and liabilities allocated to level 3.

There have been no transfers between the different hierarchy levels in 2015 and 2014.