Risk management and monitoring

Economic and financial strategies and risks

From Integrated Finance Organisation to Integrated Business Planning

Over the last few years, based on international best practices, the Group has launched a process for the integration and standardisation of its administrative/accounting and financial procedures and uses a unique, integrated ERP SAP management program at all Group companies.

The model underlying the Group’s strategy is better known in international circles as the Integrated Finance Organisation (IFO). The proper functioning of the IFO is a requisite for the implementation of the “Integrated Business Planning” (IBP) framework. The latter is based on the idea of viewing the company (or group of companies) as a whole and not as a sum of individual elements. On a practical level, this means translating strategic Group planning into operating objectives based on the achievement of predefined levels of economic/ financial performance.

In a nutshell, the functioning of the model is based on the following steps:

  • the strategic planning sets the guidelines;
  • the operational planning represents the tool for implementing the strategic planning;
  • the economic and financial planning is the result of the strategic plan.

Economic and financial sustainability is therefore pursued through the implementation and optimisation of IBP, as a framework for business planning, management and control.

THE RISKS: PROTECTION OF ECONOMIC AND FINANCIAL ASSETS
TYPE OF RISK RISK DESCRIPTION RISK MANAGEMENT POLICY
Credit risk Credit risk represents the exposure to potential losses deriving from non-fulfilment of the obligations assumed by business and financial counterparts. This risk mainly relates to the possibility that the economic or financial situation of a counterpart deteriorates, or, at worst, that the latter defaults. The Group protects itself vis-à-vis commercial counterparties by:
  1. taking out insurance policies with leading international insurance companies;
  2. diversifying on a country to country, company to company and sales channel basis;
  3. observing insurance thresholds;
  4. requiring advance payments where there is no insurance coverage;
  5. a policy to minimise concentrations of credit;
  6. quantifying the risk under analysis at budget level using the IFO model and subsequently sharing the budget data with insurance companies;
  7. using the Grade issued and updated by the insurance companies as an indicator of short-term solvency for customers requesting credit lines;
  8. compliance with payment terms by suspension of orders for customers in arrears for more than ten days;
  9. compliance with extra credit ceilings assigned by Line of Business Region to monitor and mitigate uninsured credit risk.
As regards financial aspects, the Group is exposed to credit risk owing to relations in place with financial institutions. These risks are represented by:
  1. partial or total revocation of uncommitted credit lines, which the Group manages:
    • by having potential access to a wide range of sources of financing offered by a large number of financial institutions, which allow the Group to reduce the risk of exposure on a pro-rata basis;
    • by developing the use of committed RCF lines with a duration exceeding one year which, thanks to their flexibility, can be used to stabilise the coverage of current requirements.
      The Group continues to systematically monitor developments in the European banking system, highlighting that, as of today, those taking place (concentrations, mergers and acquisitions) have had no direct impact on Group operations;
  2. forced withdrawals of bank funds (Bail-in operational from 1 January 2016), whose risk is mitigated by the policy of minimising deposits by using credit lines for current account overdrafts.

Further information is given in the notes to the 2018 Consolidated Financial Statements.
Price risk and cash flow risk This is the risk that the fair value of a financial instrument or the future cash flows associated with it may fluctuate following variations in the market price (other than variations caused by interest rate or exchange rate risk), both for variations caused by factors specific to the individual financial instrument or its issuer and for those due to factors that affect all similar financial instruments traded on the market. The risk of price variations in the commodities purchased (cellulose and energy) can have a significant impact on the Group’s operating and financial results.
Accordingly, for the purchasing of cellulose, the Group implements a procurement plan which takes into account both production requirements and the trend in the market price of cellulose.
To mitigate the change in electricity and gas prices, the Group:
  • selects highly reliable suppliers able to offer flexible energy supply services (indexed contracts with hedging options);
  • constantly searches for suppliers able to offer the best price based on the same guarantees of continuity of supply;
  • obtains energy certificates for the individual plants in order to minimise the effects of unfavourable trends in energy prices;
  • constantly monitors the energy markets and adopts hedging strategies for gas and electricity volumes;
  • monitors and participates in all possible opportunities for subsidies and reductions in energy costs.
Exchange rate risk Exchange rate risk derives from the fact that the activities of the Group, which operates in an international context, are also conducted in currencies other than Euro. The purpose of the Group is to minimise the risk in question by stipulating financial instruments for hedging purposes and centralising the management of exchange rate risk, which it deals with by entering into currency forward contracts as a matter of priority.
The items hedged in 2018 mainly concerned the procurement of raw materials (cellulose), assets (plant and machinery) and securities (US Treasury Bills and Notes), which matured naturally during the year.
FX-All is also adopted as the single electronic third-party trading platform through which almost all the transactions of the various Group companies flow fully automatically.
Further information is given in the notes to the 2018 Consolidated Financial Statements.
Interest rate risk Interest rate fluctuations in each country, as well as the different value of the rates in each currency in which the Group operates, affect the company’s cash flows and the level of consolidated net financial expenses. The Group adopts an active policy of monitoring of the interest rate risk and regularly assesses its exposure to the risk of variation in interest rates.
As regards medium/long-term transactions, the risk is mitigated by taking out new fixed-rate loans, continuing the corporate strategy of previous years. The continuing trend of very low and relatively constant rates has led management to evaluate the use of hedging instruments as unnecessary.
Further information is given in the notes to the 2018 Consolidated Financial Statements.
Liquidity risk Liquidity risk is the risk that the Group is unable to meet its payment commitments due to the difficulty of procuring funds (funding liquidity risk) or promptly liquidating assets on the market (asset liquidity risk). To this end, through careful treasury planning, the Group pursues the fundamental objective of guaranteeing an adequate level of liquidity, minimising the associated opportunity cost and maintaining balance in terms of the duration and composition of the debt.
As regards the assets that contribute to the calculation of the “Net financial position”, it should be noted that the Group’s liquidity management is based on prudential criteria. Policy is therefore in line with that for previous years whereby cash surpluses are used to reduce current account overdrafts and/or other types of short-term bank loan or, alternatively, intercompany current accounts are used to meet the needs of the various Group companies (this includes the start of a new in-house banking relationship between Sofidel S.p.A. and Soffass S.p.A.).
There are no other financial and/or trade payables, other than those shown on the balance sheet, which will involve disbursements by the company under specific agreements.
Further information is given in the notes to the 2018 Consolidated Financial Statements.
Legal/compliance/ reputational risk Legal/compliance/reputational risks regard the possibility of incurring fines and/or financial losses due to infringements of the law, secondary legislation, rules, company standards and codes of conduct. The Group, in accordance with its principles, works at different levels to limit these risks, which extend across different company processes. More specifically, the Group pursues these objectives through:
  • proactive management of intangible assets, targeted at creating and protecting its own credibility and maintaining the loyalty and cooperation of all stakeholders (from suppliers, to customers, to consumers);
  • the integration of sustainability in the business as a strategic line of development.
Through a dedicated function, the Group oversees the analysis of compliance risks at all companies; in addition, in the Italian Group companies, organisational models were adopted for the prevention of the offences set forth in Italian Legislative Decree 231/2001, with the creation of a Supervisory Body.
During the year just ended, the Group was not involved in any lawsuits relating to unfair competition or monopolistic practices in the market, nor has it been investigated by the Antitrust Bodies operating in the countries in which its companies are located.
At the same time, no instances of non-compliance with regulations or codes of conduct concerning advertising material, promotions or the sponsorship of its own products were recorded.
Reporting risk Concerns the reliability of the information provided by the internal and external reporting process relating to accounting and non-accounting information. To guard against this risk, the Group has implemented and continues to implement administrative, financial and management procedures to help minimise its occurrence. More specifically, the work underway aims to make economic and financial planning more integrated and efficient, in order to enable a better level of monitoring throughout the company.
Among the tools used, it is important to mention SAP, Bw Sem, Piteco and Tagetik; in particular, the SAP management software has allowed total integration of the different business areas, which can now be constantly monitored on a group basis.
The certification of the annual financial statements by a leading independent auditing firm is an additional way to check the process.
The Group also introduced the Piteco and Piteco CBC (Corporate Banking Communication) applications a few years ago, for the fully secure handling of Company- Bank connectivity, implementing management solutions in the treasury area for the handling of all payment instructions, the complete automation of authorisation workflows, their traceability and the secure management of instruction flows via mobile devices and digital signatures.
The management of supplier payments, in particular, is a complex process that the Group focuses heavily on in terms of security and efficiency. The payment management system offered by Piteco allows the company, via a single platform, to govern the incoming and outgoing instructions from the company to banks, including, among other things, payments to suppliers, payment of taxes (except in some countries where Internet banking is still used) and salaries.
It is especially significant that Piteco can be integrated with all the main ERPs. To make this platform even more efficient and cut costs, the Group has set up a connection to the Swift network.
A project to redefine roles and SAP authorisations continued during 2018 with the aim of bringing them into line with the Group’s organisational structure. The extraordinary projects started in 2018 were:
  • roll-out of the new SAP Vistex tool for managing promotional costs and year-end bonuses to Sofidel France and Sofidel Benelux;
  • completion of the TNSJ software extension for managing the travel approval process and expenses for the Group’s foreign countries;
  • implementation on SAP of the tool for generating and sending electronic invoices to the Italian tax authorities;
  • implementation of the SAP VIM module for the automatic receipt of supplier invoices and inclusion of a dashboard in the system to monitor the status of the invoices received;
  • implementation of the Ingentis software for the design and reporting of company organisation charts;
  • implementation of the Qradar software in compliance with the new GDPR, with the aim of logging the activities of system administrators;
  • confirmation of the commitment to the 27001 certification project for the security of company data. Various procedures and rules were prepared including the Group’s new IT rules;
  • active participation in the project needed to bring the Group into line with the new European personal data principles (GDPR).

Strategies and risks associated with products and customers

The strategy: constant search for a sustainable product to serve the community in which the Group operates.

Product safety: an essential value

The Group has been committed to product safety for many years, in order to ensure the maximum protection of consumer safety, anticipate market requirements and seize further opportunities to improve the qualitative performance of the products produced. For further information please refer to the “Product quality and safety” section.

Product quality depends on the quality of the company system

The Group has implemented quality management systems at its companies since the mid-90’s, further confirming its overriding interest in the quality of the products manufactured.

This is assured by compliance with quality management system procedures, the drive towards constant improvementtimely and careful training of the staff involved and constant monitoring of processes.

A Compliance Indicator has also been prepared in which all the Non-Conformities found, i.e. the features of the articles produced which do not meet the requirements established in the relevant documentation (procedures, technical specifications, etc.) are weighted according to how serious they are and compared with total production.

THE RISKS: PROTECTION OF THE COMPETITIVE ADVANTAGE ACQUIRED OVER TIME
TYPE OF RISK RISK DESCRIPTION RISK MANAGEMENT POLICY
Country risk The economic, equity and financial situation of the Group is influenced above all by the various political and economic factors that affect macroeconomic trends, including, mainly: political and economic instability, the rate of unemployment, the level of consumer confidence and the trend in household disposable income and, therefore, private consumption. The Group does not operate in countries that are socially, politically and economically unstable. In addition, the geographical distribution across different countries and continents makes it possible to offset the negative economic trends of one country with the positive trends of others. Distribution on a global scale also allows the company to be close to its main end markets, especially in Europe, thus benefiting from significant savings as well as the possibility of offering a “global” service. Lastly, the aforementioned proximity to markets allows the company to better understand consumers’ needs.
United Kingdom 17.20%
USA 16.90%
Italy 16.00%
Other European Countries 49.90%
100.00%
Sector-related risk The economic, equity and financial position of the Group is affected by the economic trend in the reference sector: trend in competition, potential new entrants, threat of replacement products, etc.. To this end, the Group has diversified its activities across a number of sectors (Private Label, Brand, Away-From-Home and e-commerce), seeking to offer increasingly high performance and innovative products and dedicating specific internal resources to each of these.
Parent Reels 5.78%
Away-From-Home (AFH) 14.75%
Brand 25.37%
Private Label 54.10%
100.00%
Production risks These are the risks of unexpected breakdowns or downtime, loss of plant efficiency, fire, flood and theft. The policy of planned maintenance implemented for years and the continuous technological upgrading of plants minimises the risk of unexpected breakdowns or downtime. By contrast, as regards risks connected with a loss of plant efficiency and performance quality, a specific corporate function constantly monitors specific KPIs identified for machines at the different plants, in order to take prompt action if needed. The various production plants, from the walls to the equipment inside them, are also insured against the main risks (fire, flood, theft, etc.) with leading international insurance companies whose levels of insurance cover are regularly reviewed.
With regard to the production side, the existence of procedures for the collection of process data should be noted, aimed at improving control of inefficiencies and planning of the measures to be taken to eliminate them, as well as the constant technological renewal of the paper mill and converting production structure which has recently involved various Group plants.
Risks associated with distribution logistics These are the risks of inefficiencies linked to distribution, which may lead to disputes with customers and therefore unpaid invoices. In this area, the Group ensures:
  • careful selection of transport firms, choosing those that provide the best guarantees in terms of continuity and fast deliveries;
  • accurate logistics planning to minimise inefficiencies, monitored through specific KPIs (e.g. the service rate, which monitors the completeness and punctuality of deliveries and stock reduction, which aims to optimise stock levels);
  • constant attention to customer requirements through customer care policies.
These actions aim to greatly mitigate the risks under review.
During the year, no significant events occurred in this regard that require reporting.
Risks linked to customer dependency These are the risks of over-dependence on certain customers. In this area, management policies aimed at consolidating and developing own brands - involving the strengthening and implementation of existing brands - and at consolidating relationships with the large-scale distribution chains - involving stakeholder engagement measures to create long-term partnerships and the launch of products that are consistently innovative and characterised by high turnover and profit margins - tend to lessen this category of risk.
In any event, during the year, concentrations of supplies or situations that render these risks significant were not reported.

Strategies and risks associated with the supply chain

THE RISKS: SUSTAINABLE MANAGEMENT OF THE SUPPLY CHAIN
TYPE OF RISK RISK DESCRIPTION RISK MANAGEMENT POLICY
Risks of “unqualified” supplies These are the risks of procuring non-compliant materials and services in terms of quality and environmental sustainability, ethics, etc. The Group’s primary objective is to have a supply chain with no reputational risk. This goal has been broken down into two lines of action: assessment of suppliers’ sustainability strategies and performance and adoption of a sustainability model in purchasing. The tool chosen for supplier sustainability assessment is the TenP platform which provides a prequalification system for assessing individual suppliers in terms of working conditions, respect for human rights, environmental protection and the fight against corruption.
The involvement of all suppliers allows the Group to further improve its performance, minimising reputational risk.
Supplier dependence risks These are the risks of dependency on suppliers of goods and services. The fact that suppliers of goods and of services are interchangeable, because the company constantly diversifies its suppliers, at a national and international level, means that the risk of dependence is negligible.
Risks associated with the digitisation of systems These are the risks of dependency on suppliers due to greater use of technology in factory systems and management systems The Group protects itself against this risk as follows:
  • for the technology used in the management systems the Group, despite having an integrated ERP management system for all areas (SAP), uses alternative suppliers for accessory programs which are, nonetheless, of primary importance (Tagetik, Sales Force, Piteco, etc.);
  • for the technology used in factory systems, the presence of different applications at the individual plants, interfaced at corporate level with the SAP management program, makes it possible to greatly reduce the risk in question.

Strategies and risks associated with personnel and the environment

THE RISKS: PROTECTION OF RESOURCES TO GUARANTEE LONG-LASTING SOCIAL AND ENVIRONMENTAL BENEFITS
TYPE OF RISK RISK DESCRIPTION RISK MANAGEMENT POLICY
Risks associated with employees and the safety of the working environment These include the risks of workplace accidents, but also of pay demands and the transfer of company know-how outside the company, for example, due to high turnover of employees. The protection of workers’ health is ensured by constant monitoring of working environments, with implementation of the best safety standards for machines and equipment, and by conducting training programmes and providing information.
Careful attention is paid to the choice of personal protection equipment (PPE) in order to constantly check its efficiency and continually improve its effectiveness so as to ensure ever better levels of protection and comfort. Adoption of these measures has made it possible to minimise risks, as confirmed by the results recorded in 2018 on the Frequency Rate (FR)* and Severity Rate (SR)**.
FREQUENCY RATE AND SEVERITY RATE, at 31/12/2018
Index Frequency Rate (FR) Severity Rate (SR)
12.98 0,41
* (FR): number of accidents/hours worked x 1,000,000 ** (SR): days of absence due to accidents/hours worked x 1,000
The values of the accident rates shown do not take account of accidents while travelling or those causing less than three days’ absence. In addition, only accidents which caused the worker to leave the work position are counted.
Lastly, no significant wage claims or actions were taken by employees and staff turnover levels were insignificant.
Operating risks associated with environmental legislation or accidents with environmental repercussions These include the risk of fines or limits on production activity following breaches of legal requirements or authorisation conditions, or as a result of accidents due to natural causes or techniques that could lead to pollution or changes in the main environmental areas (fires, floods, failures or breakdowns). The adoption of Environmental Management Systems certified in accordance with international standards (ISO 14001, EMAS) and frequent audits, both internal and by third parties, are the main forms of oversight to prevent the risk of legislative breaches or accidents with environmental consequences. For further information, refer to the “Management Systems” section. Coverage of plants adopting such management systems has been completed in Europe. The uncertified plants are in any case protected by procedures and controls which guarantee updates in line with legislation, training and instruction, operating control and audit activities.
Operating risks associated with the availability of natural resources (water, wood and wood by-products, fuel) These are the risks connected with the reduced availability of many natural resources, including some that are indispensable for paper production, such as freshwater and wood for the production of cellulose and for energy use, considering that climate change and the increase in global consumption is leading to significant changes in the availability of such resources. The Group has made significant investments, reducing as much as is technically possible the amount of water required for the production process. As of today, the average water withdrawal of the Group is less than half the sector benchmark and in recent years has had the following trend.
ANNUAL SPECIFIC WATER WITHDRAWAL OF THE SOFIDEL GROUP PLANTS
2018 2017 2016
Withdrawal (m3/t paper) 7.1 7.1 6.8
Data do not include the Sofidel America Circleville plant.
In terms of forest resources, the purchase of products with Chain of Custody certification and the decision to give priority to material from countries with low forest risk are the main means of managing this potentially critical area.
The risk of unplanned interruptions in the energy supply is mitigated by the effect of continuous monitoring of the state of financial health of the energy suppliers and through maintenance and continual updating of plants in accordance with technical standards in the energy field.
Risks associated with cellulose availability These are the risks associated with the availability of cellulose, the main material in the production process, both in terms of quantity and quality. In fact, the entire production cycle can be slowed down by shortages or delays in the delivery of cellulose, or by damage due to the low quality of the cellulose. In this area, the Group protects itself in accordance with its policy:
  • through careful selection of suppliers aimed at identifying business partners able to guarantee quantity and delivery terms, as well as quality of the fibres (understood as the intrinsic quality of the materials and as a guarantee of eco-sustainable management of forest resources);
  • by entering into supply contracts, including multi-year contracts, in order to obtain better economic conditions by exploiting greater contractual force.
In 2018, all purchases of cellulose came from certified or controlled sources.

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