3. Risk Management
Due to its global activity, the Group is exposed to a number of risks: strategic, operational, and financial. Within the scope of the annual risk management process, the individual risk positions are classified into these three categories, where they are assessed, limited, and assigned to authorities.
In view of the existing and inevitable strategic and operating risks of the core business, Management's objective is to minimize the impact of the financial risks on the operating and net profit for the reporting period.
Financial Risk Management — The Group is exposed to financial risks. The financial instruments are divided, in accordance with IFRS 7, into the following categories: market risks (exchange rates, interest rates, and commodities), credit risks, and liquidity risks. The central treasury department (Corporate Treasury) is responsible for the coordination of risk management and works closely with the operational Group companies. The decentralized Group structure gives strong autonomy to the individual operational Group companies, particularly with regard to the management of exchange rate and commodity risks. The risk policies issued by the Audit Committee serve as guidelines for the entire risk management.
Centralized systems, specifically for the regular recording and consolidation of the Group-wide foreign exchange and commodity positions, as well as regular internal reporting, ensure that the risk positions can be consolidated and managed in a timely manner despite the Group's decentralized management system. The Group only engages in derivative financial instruments in order to manage existing or future transactions of operating and / or financial assets and liabilities.
Market risks
Exchange rate risks — The Group's reporting currency is the Swiss franc, which is exposed to fluctuations in foreign exchange rates, primarily with respect to the euro, the various dollar currencies, and pound sterling. Foreign exchange rate risk is not generated from sales, since the operational Group companies invoice in their local functional currencies. On the other hand, the Group is exposed to exchange rate risk on trade payables for goods and services. These transactions are hedged to a great extent using forward currency contracts. The operational Group companies transact all currency instruments with Corporate Treasury, which hedges net positions by means of financial instruments with credit-worthy financial institutions (short-term rating A1 / P1).
Since the operational Group companies transact the majority of their transactions in their own functional currencies and any remaining non-functional currency-based transactions are hedged with currency forward contracts, the exchange rate risk at balance sheet date is not material. The changes, in exchange rates, include the fair value of the currency forward contracts since entering into the contract and are recognized in accordance with IAS 39.
Interest rate risks — Corporate Treasury monitors and minimizes interest rate risks from a mismatch of quality, maturity period, and currency of the liquid funds on a continuous basis. Corporate Treasury may use derivative financial instruments in order to manage the interest rate risk of balance sheet assets and liabilities, and future cash flows. As of December 31, 2014 and 31 December, 2013, there were no such transactions.
The most material financial assets as of December 31, 2014 and 2013 are not interest-bearing. These include predominantly cash and cash equivalents in Swiss franc. The acquisition of Russell Stover Candies, LLC caused a reduction of liquid funds and minimized the interest rate risks of the financial assets of the Lindt & Sprüngli Group. Instead, the majority of the interest rate risk related to the financial liabilities of the Lindt & Sprüngli Group has been covered with the issuance of fix rate bonds. The sensitivities on the other positions are not material.
Commodity price risks — The Group's products are manufactured with raw materials (commodities) that are subject to strong price fluctuations due to climatic conditions, seasonal conditions, seasonal demand, and market speculation. In order to mitigate the price and quality risks of the expected future net demand, the manufacturing Group companies enter into contracts with suppliers for the future physical delivery of the raw materials. In exceptional market conditions, commodity futures are also used; however, they are only processed centrally by Corporate Treasury. The commodity futures of cocoa beans of a necessary quality are always traded for physical-delivery agreements. The number of outstanding commodity futures is dependent on the expected production volumes and price development and so can be at various levels throughout the year. Based on the existing contract volume as of December 31, 2014 and 2013, no material sensitivities exist on these positions. The changes in commodity prices include the fair value of the futures since entering into the agreement and are recognized in accordance with IAS 39.
Credit risks
Credit risks occur when a counterparty, such as a supplier, a client or a financial institute is unable to fulfil its contractual duties. This risk is minimized since the operational Group companies have implemented standard processes for defining lending limits for clients and suppliers and monitor adherence to these processes on an ongoing basis. Due to the geographical spread of the turnover and the large number of clients, the Group's concentration of risk is limited. Financial credit risks are limited by investing (liquid funds and / or derivative financial instruments) with various lending institutions holding a short-term A1 / P1-rating only. The maximum risk of loss of balance sheet assets is limited to the carrying values of those assets, as reflected in the notes to the financial statements (including derivative financial instruments).
Liquidity risks
Liquidity risk exists when the Group or a Group company does not settle or meet its financial obligations (untimely repayment of financial debt, payment of interest). The Group's liquidity is ensured by means of regular Group-wide monitoring and planning of liquidity as well as an investment policy coordinated by Corporate Treasury. Liquidity, which the Group defines as the net liquidity position (cash and cash equivalents, marketable securities less bank borrowings), is continually monitored on a company-by-company basis by Corporate Treasury. As of December 31, 2014, the net financial position amounted to CHF -844.2 million (net liquidity of CHF 724 million in 2013). For extraordinary financing needs, adequate credit lines with financial institutes have been arranged.
The tables below present relevant maturity groupings as at December 31, 2014 and 2013, of the contractual maturity date:
| CHF million | < 3 months | Between 3 and 12 months | Between 1 and 3 years | Over 3 years | 2014 Total |
|---|---|---|---|---|---|
| Bond | 0.1 | 5.3 | 260.9 | 775.0 | 1,041.3 |
| Loans | – | – | 1.2 | 0.1 | 1.3 |
| Accounts payable | 184.9 | 5.2 | – | – | 190.1 |
| Other accounts payable | 39.0 | 1.2 | – | – | 40.2 |
| Derivative assets | – 4.4 | – 8.7 | – 0.5 | – | – 13.6 |
| Derivative liabilities | 9.5 | 2.7 | 20.6 | – | 32.8 |
| Bank and other borrowings | 17.8 | 0.4 | – | – | 18.2 |
| Total contractually fixed payments | 246.9 | 6.1 | 282.2 | 775.1 | 1,310.3 |
| CHF million | < 3 months | Between 3 and 12 months | Between 1 and 3 years | Over 3 years | 2013 Total |
|---|---|---|---|---|---|
| Loans | – | – | 0.9 | 0.1 | 1.0 |
| Other long-term borrowings | – | – | 2.9 | 8.0 | 10.9 |
| Accounts payable | 177.9 | 3.6 | – | – | 181.5 |
| Other accounts payable | 39.1 | 1.4 | 0.1 | – | 40.6 |
| Derivative assets | – 5.0 | – 11.3 | – | – | – 16.3 |
| Derivative liabilities | 1.4 | 1.2 | 1.0 | – | 3.6 |
| Bank and other borrowings | 3.8 | 2.2 | – | – | 6.0 |
| Total contractually fixed payments | 217.3 | – 2.9 | 4.9 | 8.1 | 227.3 |