G27 Supplementary information – financial risk management

Financial risk management

Through its comprehensive international operations, Sandvik is exposed to financial risks.

Group Treasury is the function responsible for managing most of the Group’s financial risks. The primary objectives of the function are to contribute to the creation of value by managing the financial risks to which the Group is exposed to during the ordinary course of business, and to optimize the Group’s financial net.

The Board of Directors is responsible for establishing the Group’s finance policy, which comprises guidelines, objectives, and limits for financial risk management within Group Treasury as well as the management of financial risks within the Group.

Group Treasury supports subsidiaries with loans, deposits, foreign exchange deals, banking solutions, and acts as an advisor in financial matters. The function conducts internal banking operations and is based at the head office in Stockholm. It is also responsible for the Group’s bank account arrangements.

In addition, Group Treasury conducts payment advice and payment solutions, and is responsible for the Group’s global policy for granting credit to customers in conjunction with sales. The customer finance activity is carried out through the business area Sandvik Mining and Rock Solutions at selected locations worldwide.

Finally, Group Treasury also manages the financial risks associated with the Group’s defined-benefit pension plans, is presented in note G21.

Only institutions with a solid financial position and solid credit ratings are accepted as the Sandvik counterparties in financial transactions.

Currency risk – Transaction exposure

Risk

Transaction exposure is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

The Sandvik annual transaction exposure, meaning the Group’s net flow of currencies, after full offsetting of the counter-value in the exporting companies’ local currencies, and measured at the average exchange rate, amounted to SEK 14,919 million (15,242) in 2024. The most important currencies for one year of exposure are shown in the following graph.

Exposure

Sandvik generally offers customers the possibility to pay in their own currencies through the global sales organization. As a result, the Group is continuously exposed to currency risks associated with account receivables denominated in foreign currency and with future sales to foreign customers. Since a large percentage of production is concentrated to a few countries, while sales occur in many countries, Sandvik is exposed to a large net inflow of foreign currencies.

In order to mitigate the currency risk, pricing is adjusted against both customers and suppliers in circum­stances where Sandvik is affected negatively by currency movements. To further reduce exposure to foreign currencies, currencies received are used to pay for purchases in the same currency via a monthly netting structure.

The net flow of all sales and purchases in non-functional currencies is hedged through financial instruments and bank account balances in accordance with guidelines set in the Group’s finance policy. In addition, major project orders are currency hedged to protect the gross margin. Under the finance policy, the Chief Financial Officer has a mandate to hedge the annual transaction exposure. At year-end, the total hedged amount was SEK 2,342 million (1,786). The average duration for the hedged volume of foreign currency was 2 months (2). Unrealized results from outstanding currency contracts for hedging of future net flows amounted to SEK –26 million (–67) at year-end. This amount consists of SEK –29 million in losses related to contracts maturing in 2025 and SEK 2 million in profit related to contracts maturing in 2026 or later.

If all exchange rates for the exposure currencies were to change by 5 percent in an unfavorable direction, total EBIT over a 12-month period would change by approximately SEK –2,066 million (–2,331), assuming that the composition is the same as it was at year-end.

Currency risk – Translation exposure

Risk

Translation exposure occurs when assets and liabilities are denominated in different currencies.

Since the Swedish krona (SEK) is the Sandvik functional currency, a translation risk related to the valuation of the net assets in foreign subsidiaries and the profit/loss in foreign currency achieved during the period occurs. The net assets, which usually consist of the foreign subsidiaries’ shareholders equity, are translated to SEK at the rates applied at the balance sheet date. At December 31, the Group’s net assets in subsidiaries in local currencies amounted to SEK 110,735 million (113,876).

Exposure

Comments

To avoid translation risk in the balance sheets of subsidiaries, they are financed in their functional currency through the internal bank. External borrowing often takes place in a specific currency, as shown in the first graph. The currency risk that arises in the internal bank as a result of this is managed using various derivatives.

Sandvik has chosen not to hedge future profits in foreign subsidiaries. Sandvik has since 2023 started to hedge net investment in foreign currency. At year end there is USD 1,540 million hedged of a USD net asset. The second graph shows the distribution of net assets among various currencies.

If exchange rates were to change by 5 percent in an unfavorable direction, the net effect on other comprehensive income would be approximately SEK –4,690 million (–4,927). This net effect primarily comprises of translation exposure in equity.

Interest rate risk

Risk

Interest rate risk is defined as the impact that changes in market interest rates will have on the Group’s net interest items. That impact depends on the interest terms of assets and liabilities. Sandvik measures interest rate risk as the change over the forthcoming 12 months given a 1 percentage point change in interest rates.

Interest rate risk arises in two ways:

• The Company may have invested in interest-bearing assets, the value of which changes when the interest rate changes.
• The cost of the Company’s borrowing fluctuates when the general interest rate situation changes.

Exposure

If market rates were to rise by 1 percentage point across all tenors, in relation to loans for which the interest rate will be reset during the coming year, interest costs would be impacted by SEK –157 million (–182).

An interest-rate sensitivity analysis of interest rate swap agreements valid at year-end, and to which hedge accounting was applied, shows that other comprehensive income would change by SEK 0 million (0) and interest cost in the income statement would change by SEK –69 million (–67) as a result of a 1 percentage point rise in the interest rate curve.

Comments

The Group’s interest rate risk arises mainly in connection with borrowing. Interest rate swap agreements are sometimes used to achieve the desired fixed interest term. The Group Chief Financial Officer has a mandate to vary the average fixed-interest term of the Group’s debt portfolio within an interval of 6–36 months. The average fixed-interest term on the Sandvik borrowing was 20 months (23) at year-end, with consideration given to interest rate swap agreements entered into.

In line with the Group’s finance policy, internal lending to foreign subsidiaries is hedged with currency derivatives. Consequently, there is an interest-rate effect in currency derivatives of 1.8 percentages points between the currencies the Group borrows and the currencies the Group lends. The Group’s average interest expense, including other loans and effects of various derivatives, was 5.0 percent (4.8).

Hedge accounting is applied when an effective link exists between hedged loans and interest rate swaps. To the extent that fair value hedges are effective, the value of the hedged items are adjusted and the effects on the profit for the year are reduced. When cash flow hedges are effective, the effects are transferred from profit for the year to other comprehensive income.

The Group has interest rate swap agreements with a notional amount of EUR 1,000 million to which it applies fair value hedging and interest-rate swap agreements with a notional amount of SEK 0 million to which it applies cash flow hedging. The hedge relationships for these are 100 percent effective. Further information of all interest rate derivatives can be found at the end of this note.

The Sandvik loan conditions do not currently include financial covenants linked to key figures. Only under exceptional circumstances are assets pledged in connection with debt raising. Such pledging is disclosed in note G26.

In the event that Sandvik has surplus liquidity, it is placed in bank deposits or in short-term money market instruments (durations of up to 90 days), which means that the interest-rate risk (the risk of a change in value) is low.

Liquidity and refinancing risk

Risk

Liquidity and refinancing risk is defined as the risk that financing possibilities will be limited when loans are to be refinanced, and that payment commitments cannot be honored as a result of insufficient liquidity.

Exposure

Comments

According to the finance policy, the Group’s liquidity reserve, comprising of unutilized committed credit facilities and accessible cash and cash equivalents, should at all times exceed 10 percent of the Group’s projected annual revenues. The liquidity reserve should also exceed the amount of loans maturing within 12 months. At year-end, the Group’s committed long-term credit facilities and accessible cash amounted to SEK 14,763 million. Loans maturing in 2025 are SEK 4,974 million (11,311).

Sandvik has a revolving credit facility totaling SEK 11,000 million maturing in 2029.

The aim of the Sandvik financing strategy is to achieve a well-balanced maturity profile for liabilities to thereby minimize the refinancing risk. The finance policy further stipulates that the debt portfolio’s weighted average duration should exceed 3 years. At year-end 2024, the weighted average duration amounted to 3.7 years. The maturity structure for the Group’s financial liabilities and derivatives is presented further down in this note.

At year-end, Standard & Poor’s, the international credit rating agency, had assigned an BBB+ credit rating to the Sandvik long-term borrowing and A–2 for its short-term borrowing. For a continuous update on the Sandvik credit rating, please visit home.sandvik.

Credit risk

Risk

The Group’s commercial and financial transactions give rise to credit risk in relation to the Sandvik counterparts. Credit risk or counterpart risk is defined as the risk for losses if the counterpart does not honor its commitments.

The credit risk to which Sandvik is exposed to can be divided into three categories:

• Financial credit risk
• Credit risk in trade receivables
• Credit risk in customer financing

Comments

Sandvik has entered into agreements with the company’s most significant banks, covering such matters as the right to offset assets and liabilities that arise from financial derivative transactions, so- called ISDA agreements. This means that the company’s counterpart exposure to the financial sector is limited to the unrealized net gains that arise in derivative agreements, investments and bank balances. At December 31, the value of these amounted to SEK 4,740 million (5,030).

Sandvik companies are generally exposed to credit risk associated with outstanding trade receivables from ongoing sales. The credit risk is normally spread over a large number of customers within different segments in the business areas. The total credit losses belonging to Sandvik, defined as the total of receivables written off and change in bad debt reserve, amounted to SEK –71 million (–100), equivalent to 0.1 percent of sales. The gross value of trade receivables was SEK 20,665 million (19,300) at December 31. Total impairment of these was SEK –828 million (–804). An age analysis of trade receivables at December 31, is presented in note G18.

Sandvik offers short-term and long-term customer financing through its own Financial Services companies and in partnership with financial institutions and banks. At year-end, the value of outstanding credits referring to finance leases amounted to SEK 6,332 million (6,602), of which SEK –147 million (–154) was reserved for doubtful receivables.

In addition to the traditional financing of equipment, Sandvik also offers operational leases for equipment as well as short-term rentals. At year-end, the net carrying amount of the operational lease portfolio was SEK 877 million (696) and the short-term rentals was SEK 833 million (670).

The Group’s financial instruments measured at fair value in the balance sheet

Financial assets and liabilities are not offset in the balance sheet. Derivative contracts are subject to framework agreements governing offsetting, and the carrying amounts of assets not offset in the balance sheet amounted to SEK 555 million. The carrying amount of corresponding liabilities was SEK –1,993 million. No collateral has been received or pledged. In the event of a default by a derivative counter party, assets and liabilities for a total value of SEK 342 million would be offset in accordance with the framework agreement governing offsetting.

Calculation at fair value of the Group’s non-current borrowings would decrease the total carrying amount by SEK 263 million (373). When measuring interest-bearing liabilities, the company’s Swedish and European bond loans have been remeasured using observable market prices for identical securities to value the Group’s marketable debt instruments. Other non-current debt has been remeasured in accordance with the principles described below. For short-term loans and deposits, no remeasurement was carried out, given that the carrying amount is considered to represent a good approximation of the fair value due to the short duration.

Net result per valuation category

Supply chain finance programs (SCF)

Since 2013 and ongoing, Sandvik engages in programs characterized by finance institutions offering to pay owed amounts to suppliers, the Sandvik entity owing the amount agreeing to pay it back to the finance institutions according to the terms and conditions at the same date as the suppliers are paid, or later. These programs are typically designed to provide Sandvik with extended payment terms and the suppliers with terms earlier than the original invoice payment due date, if suppliers choose to discount the invoices with the financial institution. In the most sizeable program where Sandvik participates, the financial institution in question is in good financial standing, representing very low liquidity risk. In other programs, exposed liquidity risk is limited.

The outstanding amounts confirmed under the programs are recognized in the balance sheet as part of accounts payable. Neither have any guarantees been issued as security for the finance providers, nor have any assets been pledged.