Financial risk management

The Group's financing activities, including liquidity and risk management, are managed by the Group Treasury Department, in accordance with the finance policy. The Parent Company acts as an internal bank and provides financing, trading and consulting services to the Group companies. The Treasury Department administrates also the Group level master insurance policies.

The principal aim of the financing activities is to ensure sufficient and cost-efficient funding to support implementation of the Group’s strategy and to decrease the volatility and unpredictability in the Group’s financial performance of the Group that is caused by financial risk, to the extent that it can be justified economically and competition-wise.

Refinancing risk

The refinancing risk is managed through diversification of the funding sources and the ability to provide alternative credit risk to investors. At the year-end the Parent Company had at its disposal unutilised committed revolving credit facilities worth EUR 200 million. These back-stop arrangements are made with the Group’s core banks and at the year-end they ensured funding for an average of one year and seven month period forward. At year-end the Group also had at its disposal a portfolio of free short-term credit facilities and account overdrafts worth EUR 210 (208) million and a EUR 200 (100) million free Commercial Paper programme. Bank relations are handled at frequent meetings with the Group’s core banks, and the Commercial Paper programme has been in active use. As an alternative off-balance sheet funding source, the Group has an Asset Securitisation programme that enables accounts receivables to be sold without recourse up to the limit of SEK 1,200 million (EUR 132 million). The free purchase limit at the end of the year was 510 SEK million (EUR 56 million).

Liquidity risk

The target is to maintain a good liquidity position under all circumstances with sufficient account overdrafts, credit facilities and cash in hand. Liquidity management is handled with cash pools in Finland, Sweden, Norway and Denmark. Excess liquidity is concentrated in the Parent Company by using internal account overdrafts and internal credit facilities. Excess liquidity in the Parent Company is primarily used to reduce short-term interest bearing debt. The residual excess liquidity is invested in short-term and liquid money market instruments in accordance with the counterpart list.

Foreign exchange risk

The Group’s customers are mainly local pharmacies, hospitals and consumers. The net sales are almost exclusively denominated in the local currency in each country. In 2003 the currency split of the net sales was: SEK 37%, DKK 25%, EUR 17% and NOK 15% and other currencies 6%.

On the supplier side the Group’s main partners are international pharmaceutical companies. In the Nordic countries the suppliers carry almost exclusively the existing foreign exchange risk. In Estonia, Latvia, Lithuania and in Tamro MedLab-Group the foreign exchange risk is to some extent carried by the distributor or wholesaler. About 3%, or EUR 131 million, of the Group’s purchases are exposed to the currency risk. The currency split for that amount was: EUR 86 %, USD 8 % and other currencies 6%.

The transaction risk in purchases is reduced by targeting to the agreement currency that correlates to the local currency, by using currency clauses in the supplier agreements, by active sales pricing and by entering into fwd-rate agreements. According to the principal policy, the purchases exposed to a foreign exchange risk are hedged if that can be found to be economically justified, at the point when the translation position opens. Depending on the commitment level of the corresponding sales, the purchases can also be hedged on a rolling basis up to the 24 months ahead.

According to the main policy, the internal loans of Group Companies are denominated in the subsidiaries’ local currency. The open position in the Parent Company is selectively hedged to the extent that these loans are not considered equity-type loans and the hedging is found to be justified economically, taking into account the expected volatility of the currency.

The Group does not hedge foreign-currency-denominated shareholders' equity and equity type loans. The foreign-currency-denominated shareholders’ equity and equity-type loans at year-end 2003 were EUR 344 million. During the 2003 the equity exposure was re-structured towards a more equally diversified portfolio concerning volatile currencies. Of the total amount NOK represented 38%, SEK 32%, DKK 24% and others 6% at the year-end.

The euro-value movements of the shareholders’ equity and equity-type loans are reported as consolidation differences in the Group shareholders’ equity.

Interest rate risk

The Group’s interest rate risk is defined as an adverse change to the value of the Group caused by interest-rate fluctuations. The target interest-rate duration and currency diversification are defined by taking into consideration the interest-bearing loans, interest-bearing investments, derivative instruments and cyclicality of the operational cash flows.

Credit risk

The credit risk of the financial investments and derivative instruments is handled in accordance with the frequently updated counterpart list. The counterpart are list is drawn up so that the risk nominal amount and maturity of each instrument and counterpart is limited. The policy is to include only low-credit-risk instruments and names to the counterpart list.

The credit risk inherent in the account receivables is handled in the business units and monitored at Group level. Historically the risk has not been relevant in the main business areas.

Derivative instruments

According to the policy, the derivative instruments are used only to hedge the underlying business within the risk limits. The derivative instruments used have to be liquid enough and effectively priced in the market. The derivative instruments are included when measuring the counterpart risk.

The Group’s open derivative instruments are presented in tabular form in the Notes to the Financial Statement.

Insurances

The Group aims to reduce property damage, crime and liability risks by active risk reduction measures. Main responsibility for identifying, reducing and covering risks lies in with the business units. Group wide master insurance policies are used to cover the property damage, liability and crime risks. Additionally numerous local insurance policies are used to supplement the specific risk coverage needs arising from the assets and operations of the business units.