Holmen
Annual Report 2016

Plain-text annual report

Annual Report Forest Paperboard Paper Wood products Renewable energy 2016 Contents The Board of Directors and the CEO of Holmen Aktiebolag (publ.), corporate identity number 556001-3301, submit their annual report for the parent company and the Group for the 2016 financial year. The annual report comprises the administration report (pages 4–5, 10–11, 27–29, 32–41, 70, 74–75) and the financial statements, together with the notes and supplementary information (pages 42–69). The Group’s income statement and balance sheet and the parent company’s income statement and balance sheet will be submitted to the Annual General Meeting for adoption. The basis for the sustainability information presented is the sustainability issues identified as key in view of the business that Holmen conducts. The sustainability work is reported in accordance with the Global Reporting Initiative’s GRI G4 guidelines at Core level. The Sustainability Report comprises pages 7,12–13, 24–31, 37, 80–81, the GRI index on the website holmen.com and the pages on holmen.com as set out in the GRI index. The information is audited by a third party, see separate assurance report at holmen.com. This is Holmen The year in brief Strategy and targets CEO’s message Operations in 2016 A sustainable business Forest Renewable energy Paperboard Paper Wood products Environment Employees A sustainable future Corporate governance report Risk management Shareholder information Financial statements Notes Proposed appropriation of profits Auditor’s report Review of Sustainability Report Board of Directors Group management Key figures Ten-year review, finance Five-year review, sustainability Definitions and glossary Calendar 4 5 6 8 10 12 14 16 18 20 22 24 28 30 32 36 40 42 48 70 71 73 74 76 77 78 80 82 83 This is a translation of the Swedish annual report of Holmen Aktiebolag (publ.). In the event of inconsistency between the English and the Swedish versions, the Swedish version shall prevail. HOLMEN ANNUAL REPORT 2016 3 A forest owner with profitable industry Forest Active and sustainable forestry is conducted on over a million hectares of productive forest land owned by Holmen. Harvesting equates to 85 per cent of the annual growth and amounts to 3 million cubic metres per year. Renewable energy In a normal year, the renewable energy production from 21 hydro power stations and 4 wind farms amounts to 1.2 TWh. Paperboard Market-leading paperboard in the highest quality segments for consumer packaging and advanced graphical printing. The Swedish mill and the British mill produce a combined total of 0.5 million tonnes per year. Paper Magazine and book paper that utilises the properties of fresh fibre to provide cost-effective alternatives to traditional paper choices. The two Swedish mills produce a combined total of 1.1 million tonnes per year. Wood products Wood products for the joinery and construction industries at two large- scale sawmills that are integrated with the Group’s paper and paperboard mills. Annual production amounts to 0.8 million cubic metres. Forest and hydro power make up two thirds of Holmen’s assets. Together with large-scale production of paperboard, paper and wood products in well invested plants, this provides stable profitability that will increase over time. At the same time, Holmen’s business brings substantial climate benefits, as it reduces the amount of carbon dioxide in the atmosphere by over two million tonnes per year. 4 HOLMEN ANNUAL REPORT 2016 / THIS IS HOLMEN A good result Operating profit increased by SEK 462 million to SEK 2 162 million (exclud- ing items affecting com- parability) due to improved results in paper, paper- board and forest. The return on capital employed increased from 6.4 per cent to 8.6 per cent. The paper mill in Madrid was sold during the year which, com- bined with increased sales of new products, has shifted the focus of the paper business towards mag- azine and book paper. Sales of paperboard to new customers in premium segments both inside and outside Europe rose. At the same time, an investment pro- gramme was concluded, provid- ing potential for growth. The vol- ume of standing timber grew by 1 per cent and forestry costs were reduced while retaining high qual- ity in forest management. Deliv- eries of wood products grew fol- lowing investments in increased capacity, and costs fell due to pro- duction being better adapted to the supply of raw material. Hydro power production reduced as a result of lower rainfall. Outlook. The harvest of Holmen’s own forest is estimated to re- main unchanged in 2017 in line with the long-term plan. The am- bition is to boost deliveries of pa- perboard following the complet- ed investments, but competition is expected to increase due to sig- nificant additional capacity in the market. The structural downturn for printing paper is forecast to continue. Holmen’s strategy is to grow in the area of magazine and book paper by offering customers a cost-effective alternative to tra- ditional products, while reducing deliveries of newsprint. The mar- ket balance for wood products is good. Holmen has an opportuni- ty to increase production some- what in 2017, while at the same time improving the value added through the ongoing investment in a wood treatment plant. Hydro power production was significant- ly lower than usual in 2016. Low levels in water storage reservoirs mean that production may also be lower than normal in 2017. FACTS Net sales, SEKm Operating profit/loss, SEKm Operating profit/loss, SEKm** Profit for the year, SEKm Profit for the year**, SEKm Diluted earnings per share, SEK Dividend per share, SEK Return on capital employed, %** Cash flow before investments Cash flow from investments Net financial debt Debt/equity ratio, times Average number of employees * Board proposal ** Excl. items affecting comparability 2016 15 513 1 930 2 162 1 424 1 652 16.9 12* 8.6 1 961 123 3 945 0.19 2 989 2015 16 014 769 1 700 559 1 323 6.7 10.5 6.4 2 526 832 4 799 0.23 3 315 NET SALES AND OPERATING MARGIN OPERATING PROFIT/LOSS AND RETURN SEKm 20 000 16 000 12 000 8 000 4 000 0 15 513 13.9 % 20 16 12 8 4 0 11 12 13 14 15 16 SEKm 2 500 2 000 1 500 1 000 500 0 2 162 8.6 11 12 13 14 15 16 % 10 8 6 4 2 0 Net sales Operating margin* Operating profit/loss* Return on capital employed* * Excl. items affecting comparability * Excl. items affecting comparability NET SALES Market % 13 24 64 NET SALES* Business area % 2 9 17 OPERATING PROFIT/LOSS* Business area % OPERATING CAPITAL* Business area % 5 12 43 11 3 9 21 57 36 35 39 Sweden* Rest of Europe Outside Europe Total: 15 513 3 660 SEKm 9 876 SEKm 1 977 SEKm * Of which forest and energy 19% Total: 15 513 Forest 2 572 SEKm Paperboard 5 252 SEKm Paper 5 431 SEKm Wood products 1 342 SEKm Renewable energy 314 SEKm Total: 2 162 Forest 1 001 SEKm Paperboard 903 SEKm Paper 289 SEKm Wood products -3 SEKm Renewable energy 120 SEKm Total: 30 799 Forest 17 798 SEKm Paperboard 6 426 SEKm Paper 2 815 SEKm Wood products 892 SEKm Renewable energy 3 412 SEKm * Excl. Group-wide * Excl. items affecting comparability and * Excl. Group-wide Group-wide HOLMEN ANNUAL REPORT 2016 / THE YEAR IN BRIEF 5 Strategy and targets Holmen’s strategy is to own forest and energy assets and to develop industrial operations in paperboard, paper and wood products. The substantial forest and energy assets shall deliver stable revenue that grows over time. Large-scale industrial operations at efficient facilities shall provide good profitability through the refining of forest raw material into high-performance consumer paperboard, cost- effective printing paper and wood products for the joinery and construction industries. Strategic direction FOREST Active forestry The revenue from and future value of Holmen’s forest holdings are to increase through active and sustainable forestry, a clear focus on costs and the further development of methods, technologies and expertise. The position in the wood market and economies of scale will contribute to the competitiveness of the industrial operations. RENEWABLE ENERGY Long-term hydro power Hydro power is to be managed with a focus on long-term profitability. The potential to develop wind power on Holmen’s land will be monitored such that it can be exploited when good profitability is assured. PAPERBOARD Organic growth PAPER Specialisation The position as a market leader in Europe when it comes to high-performance paperboard for consumer products is to be reinforced through product development, while exploiting opportunities for global growth. Well invested production facilities that are self-sufficient in energy ensure competitive production costs and the opportunity to grow through complementary investments. Holmen will grow in the area of magazine and book paper by offering customers a cost-effective alternative to traditional products, while reducing deliveries of newsprint. The structural downturn in the market demands a constant focus on costs, while also continuously developing market position. WOOD PRODUCTS Large-scale integrated production Cost-effective production of high-quality wood products for the joinery and construction industries, based on a strong organisation for wood procurement, large-scale production and co-location with the Group’s paper and paperboard mills. Sales to local markets are to be increased by adding value through increased processing. 6 HOLMEN ANNUAL REPORT 2016 / STRATEGY AND TARGETS Financial targets: PROFITABILITY The aim is that forest and energy, which constitute two-thirds of the Group’s assets, will provide a stable return on capital employed of at least 5 per cent, while the industrial business will consistently return more than 10 per cent. Taken together, this means that the Group’s return will exceed 7 per cent. CAPITAL STRUCTURE Our financial position must be strong in order to secure room for manoeuvre when making long-term commercial decisions. The target for debt/equity ratio is a maximum of 0.5. DIVIDEND Decisions on dividends are to be based on an appraisal of the Group’s profitability, investment plans and financial position. Outcome 2016: Comment: The return on capital employed was 8.6 per cent. The return increased from 6.4 per cent to 8.6 per cent due to the return from paper turning from negative to 10 per cent, alongside an increase for paperboard and forest. The debt/equity ratio was 0.19. Good cash flow in recent years has enabled a higher dividend, while at the same time strengthening the financial position. The Board proposes a dividend of SEK 12 per share in 2017. The proposed dividend corresponds to 4.7 per cent of equity. Over the past five years the dividend has averaged 4 per cent of equity. PROFITABILITY Return on capital employed, % CAPITAL STRUCTURE Debt/equity ratio, times DIVIDEND PER SHARE 10 8 6 4 2 0 8.6 11 12 13 14 15 16 Excl. items affecting comparability 0.5 0.4 0.3 0.2 0.1 0.0 0.19 11 12 13 14 15 16 SEK 15 12 9 6 3 0 % 10 8 6 4 2 0 Proposal, SEK 12 4.7 11 12 13 14 15 16 Dividend Dividend as percentage of equity Sustainability targets: INCREASED GROWTH IN HOLMEN’S FORESTS By 2050, annual growth in Holmen’s forests is to be 25 per cent higher than in 2007. This will deliver both larger harvests of wood from the Group’s forests and greater capture of carbon dioxide. REDUCED USE OF FOSSIL FUELS By 2020, use of fossil fuels at the Group’s mills will be down 75 per cent compared with 2005. Outcome 2016: Comment: Progress will be checked in the next inventory of Holmen’s forests in 2021. Silviculture measures to ensure increased growth are being implemented. The use of fossil fuels at the mills has fallen by 75 per cent since 2005. Following the sale of the Spanish mill, all production units are largely powered by non-fossil fuels. The target has been revised to a reduction of 90 per cent instead of 75 per cent by 2020. INCREASED PRODUCTION OF RENEWABLE ELECTRICITY Company-generated renewable electricity shall account for 50 per cent of Holmen’s total electricity consumption by 2020, compared with 31 per cent in 2005. The proportion of company- produced renewable electrical energy amounted to 45 per cent. This figure is down on 2015 primarily because of lower hydro power production, due to low precipi- tation in 2016. HOLMEN ANNUAL REPORT 2016 / STRATEGY AND TARGETS 7 With the storage of carbon dioxide in the forest and wood products and the production of renewable energy, Holmen is perfectly placed to be part of the solution to the climate change issue. The challenges lie in the right to manage the forest and in the market’s acceptance of fresh fibre-based products in competition with recovered fibre. Without fresh fibre, there is no future recovered fibre. The way we are permitted to manage our forest is affected by political decisions in both Sweden and Brussels. It’s a basic question of ownership rights that we take extremely seriously. Major investments are strengthening the forest industry’s competitiveness and increasing demand for wood raw material. Dear shareholder This year’s strong results are testament to the success of our investments and long-term strategy. Holmen’s substantial forest and energy assets provide sta- ble profitability, while the well invested industrial operations create potential for growth. Against the background of this, the Board has resolved to propose a dividend of SEK 12 (10.5) per share. Holmen combines forest ownership with the profitable manufacturing of paperboard, paper and wood products. Combined with our renewable energy assets, the forest assets make up two-thirds of the Group’s capital and con- tribute to a stable cash flow that will increase over time. Holmen’s financial situation is strong with low net financial debt, which provides sta- bility but also the freedom and opportunity to develop the company. Well invested profitable industry Holmen has an enviable position as a market leader in the highest quality segments for con- sumer packaging and paperboard for advanced graphical printing. The major structural invest- ments that have been made in our two paper- board mills, the recovery boiler at Iggesund Mill and the biofuel boiler at the mill in Work- ington, have gradually made an impact, result- ing in a significantly improved cost position and sizeable environmental gains. With last year’s investment in a new press section at Workington and expanded pulp capacity at Iggesund, we now have the potential to in- crease production by around 10 per cent, while at the same time further driving down produc- tion costs. Demand for consumer packaging is grow- ing, particularly in Asia, but to some extent also in Europe and the USA, whereas the mar- ket for paperboard for graphical printing is stagnating. The combination of competitive- ness and continued product development is crucial in defending and advancing our posi- tion in a market that also faces the challenge of new capacity. With a strong offering, we have excellent opportunities to grow in the premium segment in Europe, Asia and the USA. In paper, our position has radically improved. With the sale of the mill in Madrid, we can put a business with no prospect of survival behind us. Instead, we can focus on fresh fibre-based magazine and book paper at our two Swedish paper mills, a concept that has proven to work well in the tough printing paper market. Over- all, this has given us a smaller but significantly more profitable paper business. The printing paper market remains extremely challenging, but through a clear long-standing strategy, we have a product mix and position in the market that stands us in good stead against the compe- tition. We are therefore optimistic about the future. The large fire that hit the paper mill in Hallstavik in late 2015 also impacted on the operation in 2016. The reconstruc- tion was a major test for the organisation, both in production and on the marketing front. Looking back, we can report that our employees really delivered, so that we now have a mill in excellent condition and we are well on the way to regaining positions we were forced to give up when production was shut down. Wood products have a bright future. More housing needs to be built and the focus on wood construction has become much sharper in recent years, not least due to sustainability considera- tions. This is feeding through to demand, which is seeing a positive trend. The challenge lies in the relatively low added value and an elastic supply on the market. For a company such as Holmen, with forest holdings plus two large- scale sawmills integrated with the Group’s paperboard and paper mills, processing wood products to add additional value is a natural area for development and we are constantly exploring such opportunities. One step that we have taken in this direction is this year’s decision to invest in a wood treatment plant at Braviken Sawmill in order to broaden the product range for builders’ merchants. Strength in renewable raw materials The growing forest is the starting point for all Holmen’s business. Thanks to active silviculture measures, our younger forests are growing fast- er than those that are currently ready for har- vesting. Since the amount harvested is less than the annual growth, in the long term we will be able to harvest more, which generates higher cash flow, while still ensuring that we have a larger volume of standing forest. A key factor for the future value of the forest is the ability of the industry and the sawmills to pay for the wood raw material. It is crucial in this respect to have competitive industries that make full use of the comparative benefits offered by the Swedish raw material – fresh long fibre. After a period of capacity reductions in printing paper, major investments are now being made in both pulp mills and paperboard production in the Nordic region, so strengthening the industry’s compe- titiveness and increasing demand for wood. Coupled with the rise in wood construction, this represents a positive outlook for a forest owner such as Holmen. 8 HOLMEN ANNUAL REPORT 2016 / CEO’S MESSAGE The Swedish energy agreement that was approved over the summer provided positive news. The decision to gradually lower the prop- erty tax on hydro power to the same level as oth- er electricity production creates fairer conditions and increases our opportunities to make neces- sary investments in our power stations. Energy is a good asset that provides cash flow and a stable revenue stream over time. The future is growing in the forest There is no doubt that the forest as a raw mate- rial has good future prospects, not least in the transition to an economy in which products based on fossil raw materials are replaced with renewable alternatives. Strategic choices and investments for the future have strengthened our sustainability profile, which has led to recognition in several contexts. Most recent is the listing on the Global 100, an index of the hundred most sustainable corporations in the world. This achievement is the result of focus- ed and target-driven work, and I am both pleased and proud to work for a company that contributes to sustainable development. Holmen has also been affiliated to the UN’s  Global Compact since 2007 and sees it as only natural to support its ten principles, which cover areas such as human rights and social and environmental responsibility. The products of the future will come from the forest, and I am in no doubt that, like our forests, Holmen will continue to develop and grow ever stronger. Stockholm, 13 February 2017 Henrik Sjölund President and CEO The listing on the Global 100 index as one of the world’s most sustainable companies is recognition of our focused and target- driven work. Around Holmen 2016 How would you sum up the past year in your business area? What is happening now and how does the future look? Sören Petersson Head of Forest business area Fredrik Nordqvist Head of Renewable energy business area We have succeeded in improving profits through further cost reductions and slightly higher prices. At the same time, we have continued to develop silviculture measures that will bring increased growth and improve the natural assets in our forests. The harvested volume returned to normal levels after a few years of higher volumes caused by storm felling. Low rainfall and run-off into our reservoirs resulted in low production. We have been able to partially compensate for this by concentrating production on times with better prices. The energy agreement that was approved on 10 July proposes a gradual low- ering of the property tax for hydro power. This is an important step in the right direction that improves conditions for future reinvestment. We want to develop the wood business in order to strengthen our capacity to supply the industry with raw material at a competitive cost and to obtain good value from what we harvest in our own forest. In this area, we are working to develop our relationship with private wood suppliers and to optimise wood deliveries, amongst other things. Active measures will enable us to achieve increased growth, climate benefits and improved natural assets in Holmen’s forests. In the transition to an energy system based entirely on renewable sources, hydro power is uniquely equipped to provide controllable energy production at low operating costs. EU Directives mean that all hydro power stations in Sweden will need to undergo environmental assessment. Hol- men’s power stations are all well placed to meet the necessary environmental adaptations, and the lower property tax enable necessary investments for the future. OPERATING PROFIT/LOSS OPERATING PROFIT/LOSS SEKm 1 200 900 600 300 0 1 001 5.7 11 12 13 14 15 16 % 8 6 4 2 0 SEKm 500 375 250 125 0 Operating profit/loss Return on operating capital 120 3.5 11 12 13 14 15 16 Operating profit/loss Return on operating capital % 16 12 8 4 0 FACTS 2016 2015 FACTS 2016 2015 686 2 572 2 814 638 External net sales, SEKm Earnings from operations, SEKm Operating profit/loss incl. change in value of forests, SEKm 905 31 Investments, SEKm Book value of company forest, SEKm 17 448 17 173 384 Average number of employees Harvesting in own forests, ’000 m3sub 3 213 1 001 30 364 2 986 External net sales, SEKm Operating profit/loss, SEKm Investments, SEKm Operating capital, SEKm Average number of employees Company-generated hydro and wind power, GWh 314 120 23 268 176 18 3 412 3 351 11 10 1 080 1 441 10 HOLMEN ANNUAL REPORT 2016 / OPERATIONS IN 2016 Henrik Sjölund Head of Paperboard business area Nils Ringborg Head of Paper business area Johan Padel Head of Wood products business area Despite rebuilds at both mills, we managed to de- liver good results. Production has been raised to new levels on occasion, and the challenge now is to achieve stability at this higher level. Sales in the premium segment increased through continued product development, but also thanks to invest- ments in additional sales resources and distribu- tion centres outside Europe. The sale of the paper mill in Madrid was, of course, the main event of the year. Now we are a speciality paper manufacturer with two competitive mills. Thanks to good production and sales of the magazine product Holmen UNIQ, we have been able to deliver good results in a difficult market. On the marketing front, we have improved our offering, with a higher service level and comple- mentary services, which are becoming increasingly important for both existing and new customers. The switch to sawing two wood species and meas- ures relating to stock and logistics have significantly lowered costs at Braviken. We have also been able to increase production at Iggesund, following invest- ment in more efficient flows through the sawmill. Unfortunately, this was not enough to compensate for the price reductions that occurred towards the end of 2015 and so profits are down slightly. We are, however, in a strong position for the future, with two large-scale and competitive sawmills. The investments of recent years have given us the potential to increase production and at the same time reduce production costs, which will be crucial in defending our position in a market made more challenging by new capacity. With a strong offering in the premium segment, we will continue to grow in Asia and the USA, while consolidating our strong position in the European market. With a business focused on fresh fibre-based magazine and book paper, we deliver products that give our customers more print surface at a lower cost. Continued production optimisation and efficiencies, further development of our product portfolio and a focus on sales and marketing will strengthen our position in a challenging market. To meet the growing demand for treated products and boost the value added by our wood products, Braviken Sawmill is gaining a wood treatment plant and a distribution warehouse. At Iggesund Sawmill, the focus is on maintaining the production rate and the profitability level. OPERATING PROFIT/LOSS OPERATING PROFIT/LOSS OPERATING PROFIT/LOSS SEKm 1 000 750 500 250 0 903 13.9 11 12 13 14 15 16 % 20 15 10 5 0 SEKm 400 200 0 -200 -400 9.4 289 11 12 13 14 15 16 % 10 5 0 -5 -10 SEKm 50 0 -50 -100 -150 % 5 -0.3 0 -3.3 -5 -10 -15 11 12 13 14 15 16 Operating profit/loss Return on operating capital Operating profit/loss, excluding items affecting comparability Return on operating capital, excluding items affecting comparability Operating profit/loss Return on operating capital, excluding items affecting comparability FACTS 2016 2015 FACTS 2016 2015 FACTS Net sales, SEKm Operating profit/loss, SEKm Investments, SEKm Operating capital, SEKm Average number of employees Deliveries, ’000 tonnes 903 413 5 252 5 472 847 324 6 426 6 622 1 406 1 432 499 497 Net sales, SEKm Operating profit/loss excl. items affecting comparability, SEKm Investments, SEKm Operating capital, SEKm Average number of employees Deliveries, ’000 tonnes 5 431 6 148 289 259 -74 347 2 815 3 558 861 1 150 1 325 1 134 Net sales, SEKm Operating profit/loss excl. items affecting comparability, SEKm Investments, SEKm Operating capital, SEKm Average number of employees Deliveries, ’000 m3 2016 2015 1 342 1 314 -3 52 892 225 776 9 103 924 213 729 HOLMEN ANNUAL REPORT 2016 / OPERATIONS IN 2016 11 A sustainable business Holmen’s value creation begins in the sustainably managed forest. This is the source of the renewable raw material underpinning the high-quality products that are appreciated by customers around the globe. The business as a whole, with its own energy production and resource-efficient production units, contributes to long-term value growth and brings climate benefits by reducing the amount of carbon dioxide in the atmosphere by over two million tonnes per year. FOREST PAPERBOARD SOCIETY PAPER RENEWABLE ENERGY WOOD PRODUCTS SURPLUS ENERGY RECOVERED ENERGY BIOFUEL Growing forest ensures stable profitability. Holmen operates active and sustainable fores- try with high growth. Harvesting amounts to 85 per cent of the annual growth, which means that the volume of standing timber is increas- ing year on year. Continuous development of methods and technologies ensures high pro- ductivity and good revenue over the long term. Energy-efficient production units. Production at the Group’s energy-efficient mills and sawmills in Sweden is largely based on renewable electrical and thermal energy. The paperboard mill in the UK is self-sufficient in electrical and thermal energy, and sells its surplus electricity production to the local community. Renewable energy from own production. Holmen’s wholly and partly owned hydro power stations are stable and effective suppliers of renewable energy. Electricity production at the hydro power stations and wind farms, together with the electricity production at the larger mills, covers half of the Group’s electricity consumption. Optimal raw material usage. Nothing goes to waste when it comes to the use of the wood raw material. The logs become wood for joinery and construction. Chips and shavings are turned into pulp. Branches and bark become by-products that can be further pro- cessed or used for fossil-free energy production. Customised products and services. Holmen delivers products that exploit all the potential of the forest raw material to create clear competitive advantages for the customer. High quality, reliable deliveries and customised services all bring customer benefits. Continuous product development, coupled with effective and resource-efficient processes, creates products for the future. Paperboard, paper and wood products con- stitute basic materials in people’s everyday lives. The products are made from renewable raw material and help to capture carbon dioxide from the atmosphere, and since they can replace pro- ducts made from fossil raw materials, they reduce society’s overall emissions of greenhouse gases. 12 HOLMEN ANNUAL REPORT 2016 / A SUSTAINABLE BUSINESS Value creation on every front Economy STAKEHOLDERS Customers Suppliers Sales of paper, paperboard, wood products, wood and electricity Purchases of products, materials and services, along with depreciation, etc. Employees Wages and social security costs Lenders State Interest Taxes Shareholders Net profit Board’s dividend proposal ECONOMIC VALUE (SEKm) 17 072 -12 873 -2 268 -71 -436 1 424 1 008 Holmen’s operations in 2016 broken down into stakeholders based on the Group income statement. Environment • Sustainable forestry to safeguard biodiversity • Carbon dioxide is captured by growing forest and stored in products • Renewable products that can replace climate-negative alternatives • Renewable electricity production • Almost 100 per cent of thermal energy is produced at Holmen’s own mills • Fresh fibre from Holmen contributes to the recovered fibre ecocycle • Almost 100 per cent of by-products and waste is put to good use • Reduced emissions to air and water from the plants Society • The economy benefits from direct and indirect job opportunities • Delivery of carbon-free electrical and thermal energy plus biofuel • Safe working environment with fewer industrial accidents • Assessment of suppliers’ work on human rights and employee rights • Regular contact with local residents, the general public, authorities and the media • Forests are important for people’s wellbeing and recreation • Investors have an opportunity to buy shares in a sustainable company In collaboration with our stakeholders Customers. Almost 90 per cent of Holmen’s deliveries go to European customers. Other exports go primarily to customers in the USA, North Africa, the Middle East and countries in Asia. In the drive for growth in the international markets, Holmen is expanding its presence to include more and more countries. This allows us to increase customer service and strengthen work on building relations. Holmen’s business ethics policy and associated guidelines provide guidance on how to maintain good business practices when dealing with external contacts in various markets. Suppliers. Purchasing is a key strategic issue within Holmen. The Group’s Supplier Code of Conduct increases the focus on human rights and working conditions among suppliers, with a view to ensuring good conditions for everyone who works in Holmen’s value chain. Suppliers in high-risk countries are subject to tighter requirements on showing compliance with the principles of the code. Employees. Competent and motivated employees who embody the company’s values are a key fac- tor for the success and long-term sustainability of Holmen. Priority issues are health and safety, lead- ership and management by objectives. Delegation of responsibility, skills development and participation in the development of the business are other key areas. Society. Holmen plays a significant role as a major em- ployer in a number of locations. The business creates jobs not only within the Group, but also for contractors, suppliers and various social functions. This means, in turn, that Holmen contributes substantial tax revenue. Continuous dialogue with local communities, indigenous peoples and stakeholder organisations, as well as part- nerships with universities and colleges, creates condi- tions for sustainable development, with the forest as a core factor in economic growth and human wellbeing. Public authorities. Environmental permits are required for the majority of the Group’s operations. Openness and transparency allow us to establish the conditions for good oversight of and trust in our actions. During permit applications, the authorities, the general public and local residents all have an opportunity to put forward their views. Shareholders, investors and analysts. Holmen wishes to create long-term value for shareholders through dividends and growth with a good return on in- vested capital. Sustainability issues are becoming in- creasingly important to investors and analysts, who are keen to establish long-term relationships with compa- nies that have high ambitions in this regard. The Group’s financial statements and sustainability reporting are an effective way of providing relevant data for analysis. HOLMEN ANNUAL REPORT 2016 / A SUSTAINABLE BUSINESS 13 Managed forests brings climate benefits Holmen manages its forest holdings, which are among Sweden’s largest, both actively and sustainably. The renewable raw material from the for- est is a stable source of revenue and a key component in society’s drive to meet the challenge of climate change. It all begins in the forest Holmen’s forests cover 1.3 million hectares, of which a little over a million is productive forest land. Holmen manages these forests and is largely able to supply its production plants in Sweden with its own renewable raw material. The strategy is to increase the revenue from and future value of the forest holdings through active and sustainable forestry, a clear focus on costs and the continued development of methods, technologies and expertise. Economies of scale and efficient logistics gives us a strong position in the wood market, which contributes to the Group’s competitiveness. Forest’s value is growing The growth of the forest and its value are dependent to a large extent on how it is man- aged. Holmen’s annual harvesting is governed by a long-term plan based on forest inventories that are conducted every 10 years. In the latest plan from 2011, the annual harvest is forecast at around 3.0 million m3sub, which accounts for around 85 per cent of the growth. The volume of wood is thus growing by 1 per cent per year. The long-term target for 2050 is that the annual growth in Holmen’s forests will be 25 per cent higher than in 2007. This means that today’s volume of standing timber, 120 million m3 growing stock, solid over bark, will increase to 160 million m3 growing stock, solid over bark by 2050, whilst at the same time, harvests will rise from 3 to 4 million m3sub per year. It is Holmen’s active and sustainable for- estry that allows harvests to be increased while maintaining growth in the volume of standing timber. Economic value. The recognised value of Holmen’s forest holdings as at 31 December 2016 amounted to SEK 17 488 million under 14 international accounting standard IAS 41. A deferred tax liability of SEK 3 854 million is stated in relation to that figure, which means that the growing forest, net after tax, is rec- ognised at SEK 13 594 million. See Note 11, page 59. The annual cash flow that the forest delivers gives an annual dividend yield of 4 per cent. Cash flow is made up of the net balance of sales revenues and costs of harvesting, silviculture and administration. Growth can be increased through active forestry, which provides greater opportunities for harvesting and a rise in cash flow. Value for the climate. Actively managed forests mitigate the greenhouse effect in multiple ways. The larger the area that is managed and the more the forest grows, the more carbon dioxide is absorbed. Younger and middle-aged stands, where growth is greatest, absorb more carbon dioxide than older stands, where growth is in decline. Furthermore, the benefit to the climate becomes many times greater when the forest’s products are able to replace fossil materials and processes. Forest that is not managed brings nowhere near the same climate benefits. Since the forest raw material is not extracted, no substitution effect is achieved, which slows down the phasing out of products that are harmful to the climate. Robust against climate change. Conifers have been on the planet for millions of years and are consequently highly adaptable to change. A warmer climate may, however, affect the forest in various ways. Growth may increase in certain areas, but periods of ground frost may become shorter, which makes harvesting more difficult. The seeds for the company’s plant nurseries are selected to grow and thrive in a changing climate, and Holmen’s silviculture is robust in climate terms. Active and sustainable forestry Under Holmen’s active forestry, the volume of standing timber is built up over a period of 70–90 years, with a new growth cycle beginning after harvest. The most important silviculture measures come in the years immediately after harvest. The soil is prepared and the land is reforested through planting or sowing. The forest is cleaned and thinned in order to select trees with the best potential for continuing their growth. Around 10–30 years before the forest is harvested, it can be fertilised to further boost growth. Focus on productivity and the environment. Long-term development of quality and profitability requires continuous improvements to technology, methods and skills. Holmen works with other actors in the industry, manufacturers and researchers, to improve productivity and develop the natural assets of the forest. Quality-assured regeneration. Holmen invests around SEK 160 million a year in future growth through silviculture, stewardship and fertilisation. The foundation for future growth in the forest is laid when new forest is planted. Regeneration is quality-assured and Holmen conducts long-term development work that covers the entire chain from seed to new planting. Together, the company’s two nurseries produce 35 million seedlings each year, with the majority planted on the Group’s land. At least two new trees are planted for every tree harvested. Traceability and nature conservation. Holmen’s forests are certified and all wood is traceable. In 2016, Holmen adopted a new nature conservation strategy aimed at ensuring that all naturally occurring species are able to thrive in Sweden’s forest landscape. The strategy sets out how Holmen works to combine high growth with preserving biodiversity. Right to manage the forest The significance of forestry for both the climate and the Swedish economy places it squarely on the political agenda. Holmen works with the industry to make politicians, authorities and the general public aware that active and sustainable forestry is the very foundation of the emerging bioeconomy and is vital with regard to the climate. The aim is to establish a regulatory framework that takes account of the industry’s unique position in contributing to an economically, environmentally and socially sustainable society. Restricting the right to manage the forest one owns could lead to smaller harvests. This could affect the supply of forest raw material to the industry and thus hit the competitiveness of Swedish forestry. One concrete example is the Species Protection Ordinance, which has been implemented in a different, stricter way in Sweden than in the rest of the EU. Market with opportunities Demand for logs is affected by the sawmills’ needs, which in turn are governed by the construction market in various parts of the world, and the degree of substitution between different building materials. Widespread interest in wood construction and a growing market for timber-framed buildings are generating increased demand for logs. Pulpwood upturn. Pulpwood is used to manufacture the pulp that in turn is used for the production of paperboard and paper. Global demand for printing paper is falling, whereas demand for paperboard is rising. Pulp manufacture is capital intensive and demand for pulpwood in local markets is thus predictable over the short and medium term. The market for pulpwood is in equilibrium in Sweden, with the major investments in Swedish pulp mills in recent years ensuring a stable demand for forest raw material. HOLMEN ANNUAL REPORT 2016 / FOREST VOLUME OF STANDING TIMBER m3 growing stock, solid over bark per hectare productive forest land +1%/year 15 12 1948 1955 1965 1975 1988 1993 2000 2010 2020 2030 2040 2050 Assessment of tax Forecast 160 120 80 40 0 HOLMEN’S FORESTS 2016 Total land acreage Total forest land acreage* of which nature conservation areas Productive forest land** 1 275 000 ha 1 153 000 ha 187 000 ha 1 042 000 ha Total volume of standing timber, 120 million m3 growing stock, solid over bark on productive forest land * Analysis performed by the Swedish National Forest Inventory, according to the international definition of forest land: Land with an area of more than 0.5 hectares, a tree canopy cover of more than 10 per cent and trees with a minimum height of 5 metres at maturity. ** Forest land that on average can produce 1 m3 growing stock, solid over bark per hectare and year (on average during the growth period of the forest stand). The volume of standing timber is growing by 1 per cent per year and has doubled over the past 100 years. MAP Holmen’s forest holdings Holmen’s Swedish industries 15 HOLMEN ANNUAL REPORT 2016 / FOREST Hydro power gives stable energy production Holmen’s own energy production is dominated by climate-smart and renewable hydro power. Compared with other renewable energy sources, hydro power has the unique advantage of be- ing controllable. Storing reserves of water in lakes and watercourses makes it possible to adapt the energy production to demand by re- ducing or increasing the flow of water through the turbines. In an energy system that is in- creasingly based on weather-dependent renew- able sources, hydro power contributes stable and controllable energy production, based on a non-finite resource. Another benefit of hydro power is service life, since a hydro power sta- tion can deliver climate-smart energy for over 100 years. The need for investment is relatively small, compared with other energy types, and the basic operating costs are low. For every kilowatt hour produced via hydro power, fos- sil-based electricity production can be cut back. Overall, hydro power brings major social benefits on the path to a bio-based economy. Wind power a supplement. Holmen is a major land owner and has the potential to develop its land holdings by establishing wind farms on sites with good wind conditions. At this moment in time, further expansion is unvi- able due to low prices for electricity and elec- tricity certificates, and activity in ongoing pro- jects has therefore been tailored to current market conditions. Energy peat is considered a slowly renew- able resource, which makes it possible to add value to certain land assets within Holmen that are not productive forest land. Peat can be used in energy production, but also as a soil impro- ver, animal bedding and a building material. Holmen’s peat field outside Örnsköldsvik was taken into use in 2009 and is harvested annual- ly for energy purposes. In 2016, the harvest equated to 70 (63) GWh electrical energy. Complex market conditions Globally, in recent years energy has gone from being in short supply to being in surplus, which has put pressure on prices. The change has been driven by new methods of extracting oil and gas in North America, poorer control of output within OPEC and large quantities of weather-dependent electricity production being subsidised into Europe. Swedish energy agreement. In 2016, a broad political agreement was reached in Swe- den on ensuring that the nation has competi- tive electricity prices and a robust energy sup- ply, as well as putting the conditions in place to invest in renewable electricity production. The power tax on nuclear power is going to be removed in order to facilitate investment in efficient operation and increased safety in the remaining reactors, while the electricity certifi- cate system is being extended until 2030. Investments in solar, wind and hydro power and bioenergy will contribute to the target of 100 per cent renewable energy supply by 2040. Positive consequences for hydro power. The energy agreement also states that hydro power plays a central role in Sweden’s renew- able electricity supply. The property tax on hydro power will be reduced to the same level as for other electricity production plants, i.e. 0.5 per cent, over a four-year period beginning in 2017. This will allow investments to con- tinue the operation of hydro power stations. As a consequence of an EU Directive, envi- ronmental permits for all hydro power stations in Sweden are likely to be reassessed. The pro- cess is expected to take many years. Holmen’s power stations are all well placed to meet the necessary environmental adaptations without any major impact on production. Renewable energy gives position of strength Holmen owns, manages and develops renewable energy assets. Hydro power forms the basis of the energy production, providing a stable revenue stream over time and at the same time bringing major benefits to society. Value of own energy assets Holmen wholly or partly owns 21 hydro pow- er stations. In a normal year, Holmen’s produc- tion share amounts to 1 112 GWh. Wind pow- er assets comprise part ownership of four wind farms, where the production share in a normal year amounts to 133 GWh. Holmen’s own pro- duction of hydro and wind power, combined with the bioenergy that is generated at the Group’s mills, amounts to just over 1 800 GWh per year, which covers around 50 per cent of Holmen’s total energy consumption. Varsvik wind farm outside Hallstavik. 4 wind farms 16 HOLMEN ANNUAL REPORT 2016 / RENEWABLE ENERGY Hydro power has a unique advantage over other renewable energy sources, since it is controllable. Holmen’s power plants RIVERS Umeälven Gideälven Faxälven HYDRO POWER STATIONS Harrsele Tuggen Stennäs Gammelbyforsen Björna Gideå Gidböle Gideåbacka Linnvasselv Junsterforsen Gäddede Bågede Iggesundsån Pappersfallet Ljusnan Iggesunds kraftstation Sveg Byarforsen Krokströmmen Långströmmen Ljusne Strömmar Motala Ström Holmen Bergsbron-Havet HOLMEN’S PRODUCTION SHARE % 49 22 10 10 10 10 10 10 7 100 30 100 100 100 20 20 9 11 7 100 100 GWh* 470 97 3 1 8 9 7 7 14 115 23 70 7 22 30 17 45 29 17 112 10 YEAR OF CONSTRUCTION 1957–58 1962 1985–96 –”– –”– –”– –”– –”– 1961–74 –”– –”– –”– 1915 2009 1949–75 –”– –”– –”– –”– 1990 1927 OWNER Varsvik VindIn WIND FARMS Varsvik Skutskär Trattberget Svalskulla, Finland * Refers to normal production HOLMEN’S PRODUCTION SHARE % 50 18 18 18 GWh* 83 5 38 9 YEAR OF CONSTRUCTION 2014 2009 2012 2014 ELECTRICITY SPOT PRICE, Price area Stockholm (SE3) SEK/MWh 800 600 400 200 0 322 11 12 13 14 15 16 21 hydro power stations HOLMEN ANNUAL REPORT 2016 / RENEWABLE ENERGY 17 packaging can be seen primarily in Asia, the Middle East and Africa, while demand for pharmaceutical packaging is rising in all mar- kets. Packaging for cosmetics is seeing a par- ticular increase in markets with rapid popula- tion growth, such as Asia, Eastern Europe, and South and Central America. Europe. Significant additions to capacity are expected to make competition stiffer and exports to other parts of the world are expect- ed to rise. We are boosting our customer work and our focus on niche segments, as well as working proactively to continue growing over the long term, together with our customers. North America. The market is relatively stable, and imports from Europe are expected to rise, although this trend depends on various factors, including currency fluctuations. Holmen is expanding in the premium segment, and has increased its presence and service level in the strategically key regions, for example through stock control and sheeting on the west coast of America. Asia. Rising prosperity is driving demand for status goods and thus also the need for high- quality packaging. This is a market with poten- tial and with emerging local brands. Holmen has increased its presence through a sales office in Japan and a service centre in Taiwan. Global growth for paperboard products Holmen is a market leader in the segment for high-performance paperboard for consumer packaging and graphical applications. The strategy is to grow globally with the support of efficient, well invested mills and two of the market’s strongest product brands. Premium products with potential Leading position. Holmen is a market leader in the highest quality segments for consumer packaging and paperboard for advanced graphical printing. The main customer groups are converters, wholesalers and brand owners who want to be able to offer their customers high-quality, sustainable and attractive prod- ucts. The global market for packaging board is growing, and Holmen is well positioned for growth. The strategy is to consolidate Holmen’s leading position in the European market, while at the same time growing in the premium seg- ment in global markets through continuous product development, a high level of service and close customer relations. Invercote and Incada drive progress Holmen markets its paperboard products under two brands: Invercote and Incada. Invercote is a multi-layered paperboard made from bleached chemical pulp (SBB). Incada is also a multi-layered paperboard, but with a surface layer of chemical pulp and a core of mechanical pulp (FBB). Together, they repre- sent one of the market’s most versatile ranges in the highest quality segment, giving the brands a high status among converters, brand owners and designers the world over. The paperboard is used primarily to make high-quality consumer packaging for confec- tionery, cosmetics, perfumes, wines, spirits, pharmaceuticals, tobacco and food products. The range is constantly being developed in close collaboration with customers, in order to meet the ever-growing demand for innovative, customer-specific packaging solutions. The paperboard from Holmen is renowned for its high and consistent quality, which helps to ensure predictability, efficiency and stable results in the customer’s production process. Fresh fibre strength ens proposition The shared feature of Invercote and Incada is that they are made from fresh fibre from sus- tainably managed forests, which has benefits for both the product and the environment. Higher strength, better brightness and a neu- tral effect on smell and taste in contact with food are just a few of the properties that add clear value to the end product. The combina- tion of the fresh fibre and the inherent proper- ties of the paperboard also make it possible to manufacture attractive and functional packag- ing solutions that offer an excellent substitute for packaging based on fossil raw materials. Sustainable ecocycle. The addition of fresh fibre is necessary to keep the recovered fibre ecocycle going. The forest is the source of all paperboard and paper, and wood fibre can be recycled up to seven times before it ends up as biofuel. Strong customer relations and modern service solutions Care by Iggesund is a modern service concept from Holmen that adapts to the customer’s specific need for availability, deliveries, support and advice concerning everything from prod- uct samples to food safety. The local support team works very close to the market, has in-depth knowledge of the prevailing condi- tions and speaks the customer’s language. The concept also includes environmental docu- mentation plus access to analysis facilities at the company’s own accredited laboratory for sensory and chemical analysis, known as the smell and taste lab, at Iggesund Mill. Climate-smart production process Invercote and Incada are manufactured in a resource- and energy-efficient way at the mod- ern paperboard mills in Iggesund, Sweden, and Workington, UK. Both mills hold chain-of-cus- tody certification and all the wood raw materi- al comes from well managed and sustainable forests. The plants in Workington and Iggesund already have the capacity to be self-sufficient in renewable energy. Iggesund Mill forms a bio co-location with Iggesund Sawmill that ensures every part of the tree is used on site. Chips from the sawmill serve as raw material for pulp production at the paperboard mill, while bark and wood shavings become biofuel and are converted into energy and district heating. The circle is closed when the surplus heat from the mill is used for drying processes at the sawmill. Global market with opportunities Global demand for packaging is rising in line with factors such as population growth, urban- isation and an emerging middle class with more single-person households. Demand in the various product segments varies from conti- nent to continent, but there is a general upward trend for renewable packaging materials, with paperboard considered to have major advan- tages over other materials. Growth in food 18 HOLMEN ANNUAL REPORT 2016 / PAPERBOARD Iggesund Mill Raw materials: Softwood and hardwood pulpwood Process: Sulphate pulp Products: Multi-layered paperboard made from bleached chemical pulp (SBB) Brand: Invercote Workington Mill Raw materials: Spruce pulpwood and purchased sulphate pulp Process: TMP Products: Multi-layered paperboard, surface layer of chemical pulp, core of mechanical pulp (FBB) Brand: Incada END PRODUCTS, % Consumer packaging Graphical printing 84% 16% EUROPEAN PAPERBOARD MARKET 2016 0.5 2.3 s e c i r P 2.4 3.6 MILLION TONNES SBB Prestige products for graphical printing, perfumes, confectionery and tobacco. FBB Confectionery, pharmaceu- ticals, tobacco, frozen goods, skin care and hygiene articles. SUB/LPB (solid unbleached board and liquid packaging board) Beverages, dairy products and dry goods. WLC (white lined chipboard) Dry goods and household products. For every tree that is harvested to make our paperboard, at least two new ones are planted. HOLMEN ANNUAL REPORT 2016 / PAPERBOARD 19 the EU Ecolabel, the official ecolabel of the European Union. Only products that meet stringent environmental, functional and quali- ty requirements are allowed to carry the EU Ecolabel. The ecolabelling process mainly examines the use of fibre raw materials, chemi- cals and energy and emissions to air and water in manufacturing. A changing market The magazine market is looking for new paths. Many magazine publishers are being squeezed by competition from digital channels and are constantly reviewing their paper choices as they chase lower costs. Here Holmen’s inno- vative products with clear cost benefits have an opportunity for volume growth by providing an answer to market challenges. Direct mail drives sales. Paper-based direct mail is still holding its own. In a short period Holmen has won the trust of retailers with products that combine high quality and com- petitive pricing, making the sums more than add up for customers. Growth in the book paper market. With a market share of 50 per cent, Holmen BOOK is the market’s leading wood-containing paper in Europe for paperbacks and hardback books. Its share has increased steadily in recent years. The trend is also increasingly moving towards digital printing, where Holmen’s paper is ideal. Holmen is now looking to new markets with potential outside Europe, mainly in Asia and Latin America. The challenger in magazine paper Holmen manufactures magazine and book paper that makes the most of the properties of fresh fibre. This means that the market is offered new opportunities to pro- duce printed materials sustainably and cost-effectively. Paper with built-in innovative thinking Holmen develops and sells fresh fibre-based speciality paper in the form of modern maga- zine and book paper that challenges traditional, more expensive paper grades. Efficient produc- tion units, continued specialisation and a strong marketing organisation are seeing Holmen strengthen its position in existing and new markets. Customers include retailers, printers and publishers across the globe seeking cost- efficient paper solutions. Fresh fibre offers unique benefits Holmen’s magazine and book paper is made from fresh fibre from Swedish forests, making it possible to develop paper grades with high bulk, creating paper that is thick but still light. This means that despite fewer tonnes of paper, the customer can produce printed material with the same thickness and feel as traditional, more expensive paper grades. In combination, this leads to lower costs for paper and distribution. Paper based on fresh fibre has extra stabili- ty for its weight. In addition, the paper has a naturally higher brightness that improves the way text and images are experienced, com- pared with paper based on recovered fibre. This makes printed material from fresh fibre- based paper a natural complement to digital media. Products that show the way Book paper. Compared with wood-free paper, Holmen BOOK gives its customers the oppor- tunity to lower paper costs considerably. Pub- lishers appreciate the paper because it main- tains high quality and offers product properties that enhance the reading experience thanks to the paper’s high stability and bright, smooth surface. The product comes in several varia- tions and is constantly being developed. Magazine paper. Holmen is an industry lead- er in developing new products entirely based on fresh fibre. The result is innovative products that, compared with traditional paper choices, offer clear cost benefits when purchasing and distributing finished products. The brands Holmen UNIQ, Holmen VIEW, Holmen TRND and Holmen XLNT represent a broad range of modern printing paper that is ideally suited for direct mail, catalogues and maga- zines, for example. The fact that all products are ecolabelled and based on traceable raw materials provides important arguments in an increasingly aware market. Services centred on the customer The new media landscape, rapidly changing consumer habits and tougher competition for market share are all affecting customers. Holmen offers services that help the customer to maximise benefits in the paper decision- making process. This includes analysing the customer’s product portfolio and strategic advice for profitable paper choices based on technical, commercial and experience-related aspects. Sustainable all the way Production takes place at two mills in Sweden. Both have streamlined and upgraded their operations in line with the strategy of switch- ing to speciality paper. The majority of the product brands can be produced in both mills, ensuring high efficiency, flexibility and delivery reliability. Favourable locations in terms of logistics mean short wood transport distances. Both mills are close to ports with good capaci- ty and efficient handling. Braviken Paper Mill and Braviken Sawmill make an energy-efficient bio co-location. The mill receives raw material in the form of chips and in turn provides the sawmill with energy and heat. Surplus bark and wood shavings are sold for energy and district heating production. Hallsta Paper Mill is one of the most resource-efficient mills in its segment in Europe. The residual products from the production pro- cesses are sold on as biofuel and soil products. Recovered paper needs fresh fibre. Pulp, paper and paperboard made from fresh fibre from Nordic forests play an important role in the European recovered fibre ecocycle. Forest resources are limited in the rest of Europe, which means that paper manufacture is based on recovered paper to a considerably higher extent. However, paper cannot be recycled again and again forever. The ecocycle needs a constant injection of fresh fibre from the forest. Traceable raw material. Holmen’s forestry, industrial production and products are certi- fied. Certification guarantees that the wood raw material is traceable and comes from sus- tainably managed forests. Unlike the majority of products based on recovered fibre, the exact origin of the wood raw material can be cited. Ecolabelled products. All magazine and book paper made by Holmen is approved by 20 HOLMEN ANNUAL REPORT 2016 / PAPER Braviken Paper Mill Raw materials: Spruce pulpwood Process: TMP Products: Magazine paper, book paper and newsprint Hallsta Paper Mill Raw materials: Spruce pulpwood Process: TMP Products: Magazine paper and book paper END-USERS, % Magazines, direct mail and books Daily newspapers 78% 22% PRODUCTION Proportion of speciality paper and newsprint 100 75 50 25 0 76 24 11 12 13 14 15 16 Speciality paper Newsprint The forest is the source of all paper. Without fresh fibre, there is no recovered fibre. HOLMEN ANNUAL REPORT 2016 / PAPER 21 pulp production and the final residual products are used as biofuel to produce energy and district heating. Steam from the mills is also used in the drying processes at the sawmills. Local renewable raw material. One key to both profitability and sustainability is the proximity to the raw material and efficient wood procurement. The business area Forest effectively sources wood raw material from Holmen’s own forest holdings and from other forest owners, ensuring a highly efficient logis- tics chain from forest to sawmill. The majority of the raw material used at the sawmills is cer- tified. Positive market trends The market for wood products is global and huge streams of goods are shipped between continents. The major exporters are Canada, Sweden, Finland and Russia. Typical markets in which Swedish sawmills are competing with other major exporting countries are the UK, China, North Africa and the Middle East. Demand largely follows the general eco- nomic cycle and has recovered relatively well since the financial crisis. In North Africa and the Middle East, however, the recent political unrest has seen the increase in demand tail off somewhat. North American consumption has recovered but has a little way to go to reach historical levels. Asia is breaking new records and is dominated by the Chinese market, which is also seeing the fastest growth. Con- struction is doing well in Europe. being driven by the construction of new homes, which in turn is affected by population growth, urbanisation and the aim to build sustainable cities. Building in wood will thus continue to increase and at the moment demand is out- stripping supply. There is great potential for growth, mainly in high-rise buildings, and the proportion of housing built in wood is expect- ed to rise as the capacity for industrial building in wood is expanded. New techniques for building in wood are also developing in paral- lel. Treated wood for builders’ merchants Strategic investments in a wood treatment plant and a distribution warehouse at Braviken Sawmill mean that Holmen will be able to offer a broader and more attractive range directly to builders’ merchants. Treated wood is an important part of the range offered by Swedish builders’ merchants and is used for terraces, decking, fences and jetties. Demand for treated products is growing and the saw- mill’s central location in a densely populated region means there are good opportunities to reach builders’ merchants with a wider range of wood products for outdoor use. Large-scale and sustainable production The investment in modern, large-scale sawmills with a high technological level and gradually extended additional processing results in a stronger product range. Combined with effi- cient wood procurement, this produces com- petitive sawmills. The product range of the sawmills is adapted to the properties of the local raw material and they complement each other in the market. Complete bio co-locations. The Group’s sawmills form bio co-locations with neigh- bouring paperboard and paper mills. This means that every aspect of the wood raw material is made use of in a cycle in which chips from the sawmills act as raw material in Increased processing of wood products Holmen delivers climate-smart wood products to the joinery and construc- tion industry and to builders’ mer- chants. Production takes place at two large-scale sawmills integrated with the Group’s paperboard and paper mills. Platform for growth Holmen manufactures and delivers high-quali- ty base products for further processing for joinery and construction industry customers in Europe, the Middle East, North Africa and to a growing extent also in Asia. Deliveries are also made directly to local Swedish builders’ mer- chants. Competitiveness is based on a strong organisation for wood procurement and cost-efficiency through large-scale production co-located with the Group’s paper and paper- board mills. With a finely-tuned production chain and working methods that put the cus- tomer in the centre, Holmen is building a solid platform for long-term and profitable custom- er relations with the capacity to meet demand in different markets. Climate-smart products for the future Wood products have the capacity to store car- bon for a long time. This makes buildings made from wood much more climate smart than houses built from materials made using fos- sil-based materials and processes. Besides the fact that wood is renewable and binds carbon dioxide, wood products can make a positive climate contribution through what is known as the substitution effect. Manufacturing materi- als such as steel and concrete creates emissions of fossil carbon that affect the climate. Replac- ing these materials with structural components made from wood results in climate benefits on several fronts, and also makes the entire chain from manufacturing to transport considerably more energy-efficient and cost-effective. Growing cities drive building in wood For a long time, the increase in the use of wood in Sweden has largely been attributable to ren- ovation work and extensions. Now the trend is 22 HOLMEN ANNUAL REPORT 2016 / WOOD PRODUCTS Braviken Sawmill Raw materials: Spruce and pine saw logs Process: Sawmilling Products: Spruce and pine wood products Iggesund Sawmill Raw materials: Pine saw logs Process: Sawmilling Products: Pine wood products Wood is a versatile raw material and the only renewable construction material. END PRODUCTS, % Construction timber Joinery timber Packaging timber 41% 43% 15% 100% of the tree is used 50 per cent The main part of the tree goes to our sawmills, where it is made into joinery products and construction timber. 40 per cent The thinner part of the tree and wood from thinning are used in our mills to produce products such as paperboard, and magazine and book paper. 10 per cent The rest of the tree is used as biofuel and for fossil-free energy production. HOLMEN ANNUAL REPORT 2016 / WOOD PRODUCTS 23 An important climate actor USE OF FOSSIL FUELS (base year 2005),% RENEWABLE ELECTRICITY PRODUCTION RELATIVE TO ELECTRICITY USE (base year 2005), % 20 0 -20 -40 -60 -80 60 50 40 30 20 -75 45 Holmen’s environmental work focuses on efficient use of raw material and energy, with the forest playing a key role on the climate issue through its absorption of carbon dioxide. Holmen’s environmental responsibility. Environmental and energy concerns play a natural role in Holmen’s planning of its pro- duction and investments. Operations are char- acterised by resource-efficient use of renewable raw material and energy, and protecting the environment, applying the precautionary prin- ciple. Energy, chemicals and fibre are recovered as far as possible, in order to minimise the environmental impact of production. The sec- tion on risk management on page 37 outlines Holmen’s preventive work on eco-related risks and how they are managed. Holmen’s environmental work is char- acterised by constant improvements, which is conducted within the remit of the certi- fied environmental and energy management systems. This ensures compliance with the 05 06 07 08 09 10 11 12 13 14 15 16 05 06 07 08 09 10 11 12 13 14 15 16 requirements set in legislation and by govern- ment agencies, which is assured via statutory official inspections. The main environmental impact from the industrial sites takes the form of emissions to air and water. Information on production and priority environmental parameters is presented on pages 80–81. Environmental targets for sustainable development. Holmen has been working on Group-wide environmental targets for sustain- able development for several years. Increased production and use of products made from renewable forest raw material is important for the production itself and for the climate. Holmen therefore has a target of increasing growth in Holmen’s forests by 25 per cent by 2050 compared with 2007. The Group’s target for fossil fuels is to reduce their use at the mills by 75 per cent by 2020 compared with 2005 levels. A reduction of 75 per cent has been achieved by 2016. Exten- sive investments in bio-based energy production at the paperboard mills, and the adjusted ener- gy strategy at the other mills have had a huge impact on fossil fuel use. The facility in Madrid was sold in mid-2016. Energy production at the mill is based on natural gas, a fossil fuel. The sale of the mill has thus resulted in a further drop in Holmen’s fossil carbon dioxide emissions. For this reason, the target has been revised and from 2017 use of fossil fuel is to be cut by 90 per cent from 2005 to 2020. The third climate-related sustainabili- ty target is to increase company-produced renewable electrical energy as a proportion of total electricity use by Holmen. The target for 2020 is for production to reach 50 per cent, compared with 31 per cent for the base year 2005. In 2016 self-generated renewable ener- gy accounted for 45 per cent of Holmen’s total electricity use. Access to water for the hydro power plants was slightly down in 2016 com- pared with 2015, leading to lower electricity production. The investment in a biofuel boiler makes the mill at Workington self-sufficient in electricity and heating. 24 HOLMEN ANNUAL REPORT 2016 / ENVIRONMENT Key figures for Holmen’s operations from a climate perspective 2016 Emissions of fossil carbon dioxide Forestry Input goods Production facilities Transport of raw materials and products1) Absorption of carbon dioxide In the growing volume of standing timber Net in forest land Captured in wood products -30 000 -70 000 -125 000 -240 000 650 000 130 000 640 000 Tonnes 3 000 000 2 000 000 1 000 000 0 Capture 2 620 000 Wood products that substitute for climate-negative materials 1 200 000 Net, capture of carbon dioxide and substitution effect 2 155 000 -1 000 000 Emissions -465 000 1) Includes emissions from transporting finished products to EU customers and incoming deliveries of wood, pulp and chemicals to Holmen’s facilities. Data also includes emissions from transporting products to countries outside the EU. The summary is based on internal data and calculations and on scientific articles published in recent years. Several independent sources show the positive climate impact of forestry and forest products. On the basis of this reference material, data has been obtained to calculate the substitution effect. • Lundblad, M. et al. Land Use, Land-Use Change and Forestry (CRF sector 4). In: National Inventory Report Sweden 2016 – Submitted under the United Nations Framework Convention on Climate Change. Swedish Environmental Protection Agency, pp.353–392. • Simplified reporting of carbon pool changes for Holmen’s forest and land holdings in line with the guidelines of the Convention on Climate Change, 2017. Swedish University of Agricultural Sciences. • Sathre, R. and O’Connor, J. Meta-analysis of greenhouse gas displacement factors of wood product substitution. Environmental Science Policy 2010, 13, 104–114. • Gustavsson, L. et al. Climate change effects of forestry and substitution of carbon-intensive materials and fossil fuels. Renewable and Sustainable Energy Reviews 2017, Volume 67, 612–624. • Cintas, O. et al. The potential role of forest management in Swedish scenarios towards climate neutrality by mid century. Forest Ecology and Management 2017, 383, 73–84. Holmen creates climate benefit Carbon dioxide is captured in the growing for- ests and in the products. The resource-efficient production is predominantly driven by renew- able energy. Investments in company-produced energy and the development of today’s prod- ucts and new products based on forest raw material mean the positive climate effects will be even greater in the future. The Group’s investments in research and development amounted to approximately SEK 95 million in 2016. The forest. Holmen’s forests have long been managed in such a way that they contain a greater quantity of wood every year. Based on growth data from the last five years, it is calculated that the volume of standing timber will increase by 1 per cent a year, and approximately 650 000 tonnes of carbon dioxide will be captured by this increase in volume. Over the foreseeable period, annual growth in Holmen’s forests is expected to exceed the harvests, and the Group’s forest growth target indicates that carbon dioxide storage will increase in the future. The production units. In recent years the production of renewable electricity and thermal energy has increased considerably through Holmen’s investments in biofuel-based energy production at several mills. In the past ten years, emissions of fossil carbon dioxide have fallen by over 75 per cent and amounted to 125 000 tonnes in 2016. Based on data for the past few years, annu- al emissions of fossil carbon dioxide from for- est machinery, manufacture of input goods and transport of raw materials and products are estimated at approximately 340 000 tonnes. These emissions, together with those from certain types of forest land, represent the negative climate impact of Holmen’s operations. The products and substitution effects. Wood products store carbon dioxide through- out their lifetime and this is only released when the products are incinerated. Holmen’s produc- tion of wood products in 2016 is equivalent to approximately 640 000 tonnes of carbon diox- ide stored in products with a lifetime of more than 50 years. Holmen’s wood products that are sold as joinery and construction timber also contribute a substitution effect when used to replace climate-negative construction mate- rials. For 2016 this substitution effect is esti- mated to amount to approximately 1 200 000 tonnes of carbon dioxide. Residual volumes from the sawmills are used in wood packaging, which also has a long life- time. Any substitution effect for these products has not been calculated. As paper and paperboard products have a relatively short lifetime, it is not meaningful to calculate the storage of carbon dioxide. Once the fibres in these products have been recycled several times as recovered fibre, however, they, like the end-of-life wood products, make excel- lent biofuels. Biofuels from Holmen’s forests and by-products from production, such as bark, provide renewable energy from incinera- tion. Under the parameters set, calculations show that Holmen’s business brings substan- tial climate benefits, as it reduces the amount of carbon dioxide in the atmosphere by over two million tonnes per year. Carbon dioxide vs. carbon dioxide? The biogenic carbon dioxide released when trees and plants rot or wood and paper are incinerated is already included in the car- bon cycle of the atmosphere. The fossil carbon dioxide released when oil is incinerated adds new amounts of carbon dioxide to the atmosphere, however. Fossil carbon dioxide is the major vil- lain of the piece in climate change. Holmen’s operations mean that a black carbon atom can be replaced with a green one. 25 HOLMEN ANNUAL REPORT 2016 / ENVIRONMENT Holmen helps to ensure that environmental goals are met Holmen’s Group-wide sustainability targets are in line with the sustainable development goals defined at global, European and nation- al level. In late 2015 the world’s leaders adopt- ed a global Agreement on Climate Change to address the climate issue at global level. The agreement that entered into force at the end of 2016 has the general target of keeping glob- al warming well below 2°C, and preferably limiting it to 1.5°C, by cutting emissions of greenhouse gases. The Agreement on Climate Change states that action must be taken to pre- serve and improve the capacity to capture and store greenhouse gases. The importance of the forests is specifically underlined in this context. Over the long term, Holmen will therefore be an important player in ensuring that the tar- get set out in the global Agreement on Climate Change can be achieved. Swedish environmental objectives. The over arching objective of the Swedish environ- mental policy is what is known as the genera- tional goal. The goal guides the values that must be protected and the transformation of society needed to attain the desired environ- mental quality. Attaining Sweden’s environ- mental objectives demands an ambitious environmental policy in Sweden, in the EU and in international contexts. The Swedish environmental quality system comprises 16 environmental quality objectives in areas such as climate impact, air pollution and bio- diversity. Swedish businesses are expected to contribute measures that show how systematic environmental work is profitable for society and for the companies. Holmen is constantly working on environment-related studies and measures both within forest operations and at production plants. Holmen is thus helping to ensure that several of the national environmen- tal quality objectives can be met. One of the world’s most sustainable companies 2017 The Global 100 list of the world’s most sustainable corporations is an- nounced each year at the World Economic Forum in Davos, Swit- zerland. The ranking has been carried out by the Canadian analy- sis company Corporate Knights since 2005 and is based on a total assessment of the company’s capacity to tackle issues of resource management, employees and financial management. Almost 5 000 companies were included in the assessment, with the hundred best featuring on the Global 100 index. Holmen secured 21st place and is the only forest industry sector company on this prestigious list. “We are both proud and pleased to be on the Global 100 list as one of the most sustainable companies in the world. Holmen has taken a focused approach to sustainability issues for many years now. Being recognised and ranked highly by leading analysts is an acknowledgement of this work,” says Lars Strömberg, Director of Sustainable and Environmental Affairs at Holmen. Reduced Climate Impact Clean Air A Non-toxic Environment Zero Eutrophication Flourishing Lakes and Streams Good Quality Groundwater A Balanced Marine Environ- ment, Flourishing Coastal Areas and Archipelagos Thriving Wetlands Sustainable Forests A Rich Diversity of Plant and Animal Life Illustrator: Tobias Flygar Source: www.miljomal.se Holmen’s climate work scores highly CDP’S CLIMATE CHANGE PROGRAM is the name of an international federation that in 2016 represented 827 institutional in- vestors with assets totalling around SEK 900 billion. CDP, which is a non-profit organisation, seeks to encourage companies around the world to reduce their impact on the climate and nature’s resources, and report annually on the outcome of its work. Using information from almost 5 800 listed companies, CDP has built up the world’s largest database of climate information. This information is made available to support strategic business and investment decisions. Holmen has reported to the CDP Climate Change Program since 2007. Holmen was highly ranked in CDP’s study of companies’ climate work 2016 and was placed in the good leadership group. Companies in this group represent best practice in regard to advanced environmental stewardship, with a good understanding of and active efforts to mitigate climate-related risks and capitalise on climate-related opportunities. CDP WATER PROGRAM. In 2016, CDP sent out a questionnaire to 1 250 companies around the world on the risks and opportunities associated with water use. Holmen was one of the approximately 500 companies that responded to the questionnaire. The assessment showed that Holmen is judged to handle water issues well. CDP FOREST PROGRAM. In 2016, CDP sent out a questionnaire to around 800 companies around the world on the risks and opportunities of silviculture from a climate perspective. Holmen is among the one quarter of companies that completed the questionnaire. Holmen was highly ranked in the survey and was placed in the good leadership group. Companies in this group show that they have introduced measures that ensure sustainable use of the forest’s resources. 26 HOLMEN ANNUAL REPORT 2016 / ENVIRONMENTEnvironmental permits for the Group’s production facilities Iggesund Mill, Environmental Code1) Workington Mill, IPCC2) Hallsta Paper Mill, Environmental Protection Act Braviken Paper Mill, Environmental Code Iggesund Sawmill, Environmental Code Braviken Sawmill, Environmental Code 2013 2002 2000 2002 2014 2010 1) In addition, operations subject to notification requirements take place at the production unit in Strömsbruk. Port activ- ity (at Skärnäs Terminal) alongside Iggesund Mill has held an environmental permit under the Environmental Code since 1999. An application for a new environmental per- mit was submitted for Iggesund Mill in 2016 (production increase). Operations at Skärnäs Terminal are included in this application. 2) IED permit from 2017. Management system certifications PRODUCTION FACILITIES1) Iggesund Mill2) Workington Mill Hallsta Paper Mill Braviken Paper Mill Iggesund Sawmill3) Braviken Sawmill3) ENVIRONMENT ISO 14001:2004 2001 2003 2001 1999 1999 2011 ENERGY ISO 50001:2011 2005 2015 2005 2006 2006 2011 QUALITY ISO 9001:2008 1990 1990 1993 1996 1997 2011 HEALTH AND SAFETY OHSAS 18001:2007 2016 2005 2012 2015 2017 2017 The years given in the table are the years when the certification was first issued. The certifications mean that procedures are in place for planning, implementation and follow-up, as well as measures to enable continuous improvement in the work on the various management systems. Certifications can be viewed at holmen.com/certificates. 1) Holmen’s forest operationsare certified in accordance with environmental management system ISO 14001:2004. Furthermore, forest operations are also certified under sustainable forestry criteria and have chain-of-custody certification, which means an assurance that non-certified wood also comes from controlled sources. All the facilities at which wood raw material is used have chain-of-custody certification. 2) The certifications include the production unit in Strömsbruk and operations at Skärnäs Terminal. 3) From 2011 the certification is a joint certification for the two sawmills. Permits At the end of 2016 Holmen was running production operations at six facilities that require environmental permits. The permits specify conditions regarding permitted production volumes and permitted emissions to air and water. Five of the facilities are located in Sweden and one is in Workington in the UK. The facilities have a total turnover amounting to almost 75 per cent of the Group’s net sales in 2016. The EU’s Industrial Emissions Directive (IED) entered into force in 2013. The legislation entails more stringent requirements for using the best available technology. Holmen has investigated the extent to which operations at the pulp, paper and paperboard mills need to be adapted in order to meet the tightened emission requirements by October 2018. The environmental status of the mills is good and all the mills except the one in Workington already largely meet the new requirements. The mill in Workington is investigating the process-related measures that in combination with a biological treatment plant will see the process water emissions requirements met. The environmental authorities have granted the mill an exemption whereby the mill is to have invested in measures to ensure that the emission requirements are met by 2021. An application for a new environmental permit for a production increase at Iggesund Mill was submitted in 2016. Operations at Skärnäs Terminal are included in this application. Braviken Sawmill intends to invest in a facility for wood preservation treatment. An environmental permit application for this was submitted in 2016. Holmen is monitoring the energy agreement that involves Sweden complying with the European Court of Justice’s rulings regarding operations involving watercourses. All power plants must have environmental conditions in place that involve assessing the balance between production and environmental issues. The process will be time-consuming and there are uncertainties regarding investments and production restrictions mainly for smaller power plants. Holmen’s power plants are generally of a good standard and are well placed for future environmental impact assessment. Holmen has all the permits to build approximately 500 GWh of wind power production in Västernorrland. An application to build an additional approximately 500 GWh of wind power in Västerbotten has been submitted to the environmental authorities. Due to the current market situation for this type of electricity production, with low prices for electricity and electricity certificates, the economic preconditions for investing in wind power are challenging. Emission allowances and electricity certificates Within the EU Emissions Trading Scheme, Holmen has been awarded emission rights up to 2020. As a result of extensive investments in bio-based energy production at several facil- ities, Holmen has been able to significantly reduce its need for fossil fuels in recent years. Consequently surplus allocated emission rights have been able to be sold. The Group has produced renewable elec- tricity for several years and electricity certifi- cate trading has generated revenues. In the UK, electricity distributors have to meet a certain quota for renewable electricity, and producers of renewable electrical energy receive green Renewables Obligation Certificates (ROCs) in proportion to the amount of electricity gener- ated. The biofuel boiler at the mill in Working- ton received such certificates in 2016, which were sold. Exceedances and complaints The environmental manager within each operation handles incoming complaints and any incidents that occur. During the year there were a number of cases of exceeded threshold values, as well as complaints and incidents in the industrial and forestry operations. Close dialogue with the mills’ local residents is important in order to identify any views on operations at an early stage. 44 industrial incidents were reported by the mills to the supervisory authorities during the year. The nonconformities were not of a significant nature in terms of environmental impact or impact on profits. Corrective measures were taken to deal with these cases, in line with the environmental management system of the operations concerned. During the autumn one incident took place at Holmen’s hydro power station in Norrköping. The water flow changed rapidly due to a technical fault. The fault was rectified within a few minutes. Despite this, the change in the water flow had consequences in that the lower limit of the water level at Grytsdammen was exceeded and a large number of pike- perch died downstream of the power plant. Measures have been put in place to prevent a recurrence. The incident is being investigated by the County Administrative Board. Discontinued operations In consultation with the environmental author- ities, studies are being conducted at contami- nated discontinued industrial sites where Holmen has operated in the past. Studies relat- ing to the sawmills at Stocka and Lännaholm, the sulphite mills at Strömsbruk, Domsjö and Loddby, the former ground wood mill in Bureå and a landfill site in Kvillsfors continued in 2016. In 2016, remediation of an underground waste oil site in Hudiksvall and remediation of land at the former industrial site of Håsta- holmen Sawmill were completed. Remediation of land and buildings at the former industrial site of a surface treatment plant in Iggesund will be completed in the first quarter of 2017. 27 HOLMEN ANNUAL REPORT 2016 / ENVIRONMENT Values and objectives drive devel­ opment Expectations of employees are made clear by the Code of Conduct, shared values and the manage- ment by objectives process. In total they contribute towards a culture in which the impetus is the desire for development. The Code of Conduct. The Code provides guidance on day-to-day operations and clari- fies what expectations are made of people who work at Holmen. Values. Holmen’s core values of couraged, com- mitment and responsibility combined with the Code of Conduct creates a framework for how employees should act and how leadership should be structured. Holmen’s values aim to create a culture driven by a desire for development. Management by objectives. Expectations concerning what the organisation and its employees should achieve are clarified through a process of management by objectives, under which success factors are identified and progress is monitored via key performance indicators. Use of a simple tool for continuous follow-up ensures that the organisation is applying appropriate priorities to attain the objectives established. Productivity. As the number of employees in the Group continues to fall, productivity, defined as production per employee per year, has increased over several years. This is due to organisational changes, investments and more efficient working practices and processes. A three-year programme is in progress at Iggesund Mill to improve the mill’s competitive- ness. In 2016, the focus was on reviewing skills and streamlining jobs. A new organisation was set up for forest operations, combining high for- est expertise with a stronger focus on business and the market. The mill in Madrid was sold to International Paper during the year. At that point the mill employed about 260 people. Talent management and skills development. To maintain competitiveness over time, attracting the right employees is of the utmost importance. The Group’s sustainability profile, combined with our AVERAGE NO. OF EMPLOYEES business area, % 0.3 4 12 8 29 47 Paperboard Paper Wood products Forest Renewable energy Group-wide Total: 2 989 1 406 861 225 364 10 122 products geared towards the future and a developing and innovative culture/workplace environment, gives Holmen’s brand a strong position in the job market. To ensure the development of good leader- ship, Holmen runs internal leadership pro- grammes for managers at all levels. There are also development programmes for specialists who do not have employees directly under them, but who drive change management. Holmen also takes a structured approach to identifying and developing talents in the organisation. Equality. Holmen aims to create a working environment which is based on the view that all human people are of equal value. All Holmen’s employees must have the same rights, obligations and opportunities irrespec- tive of their sex, transgender identity or expres- sion, ethnicity, religion or other belief, disabili- ty, sexual orientation, age, nationality, political opinion, union membership, social background, health status or family responsibilities. Holmen draws up action plans and pay surveys in line with the Equality Act and uses performance reviews and employee surveys as tools. The forest industry is a male-dominated sector. Holmen is working to achieve a better balance. Over 19 per cent of employees are women and the proportion of female managers is about the same. Employee surveys. Employee surveys are conducted to follow up working conditions and identify improvement measures. During the year it was decided that the surveys are to be carried out locally instead of centrally to produce results closer to operations, with a greater opportunity to put more appropriate measures in place. Union cooperation. A relationship with the union organisations that is based on trust is important and helps drive Holmen forward. Collaboration with trade unions internationally takes place in the Holmen European Works Council and in consultation groups at various levels in the company. The company’s employees are represented on the Group Board by three members and three deputy members. Almost a fifth of employees are women and the proportion of female managers is about the same. 28 HOLMEN ANNUAL REPORT 2016 / EMPLOYEES Linda Magnusson, business developer, Forest. Jonas Jonsson, Ann Mattsson and Sandra Kolar, Hallsta Paper Mill. Bo Larsson, Iggesund Mill. Daniel Norenius, head of hydro power. Safety and sick leave The aim of Holmen’s work on safety is to make the workplace free of injuries for employees. A safe work environment is always high on the agenda and the issue is monitored constantly at management level. All units are certified under OHSAS 18001, which means that the Group now runs joint, systematic health and safety work. In 2016, health and safety work focused on safety behaviours, shared rules and exchanging experiences. The number of industrial accidents per 1 million hours worked was the same in 2016 as it was in 2015, at 8.8 accidents. The cause of these were predominantly slips and trips. The target is zero accidents and several units have also been at this level for more than a year. The interim target is a maximum of 4.0 industrial accidents by the end of 2017 (base year 2012: 11.6). Sickness absence was 4.2 per cent in 2016, which is on a par with previous years. Long-term sick leave (more than 60 days) stands at 2.0 per cent. The good health index is a measure of the share of employees with no sick leave during the year. The figure for 2016 was 48 per cent, which is on a par with recent years. INDUSTRIAL ACCIDENTS with more than 8 hours of absence, per million hours worked 20 15 10 5 0 12 13 14 15 16 HOLMEN ANNUAL REPORT 2016 / EMPLOYEES 29 35 million seedlings are produced every year at Holmen’s two nurseries. A sustainable future With a history stretching back 400 years, Holmen has a long tradition of managing and processing natural resources. The foundation of Holmen’s operations has always been the same – making the most of nature’s assets and processing them to attain the greatest possible value. The products that are produced have changed over time, but the desire to develop and offer solutions to current challenges lives on. Carbon-positive operations Holmen has long operated sustainable forest- ry, whereby carbon dioxide is captured in the forest and its products. For more than a cen- tury, the Group’s forests have been managed with a sustainable perspective in which growth is higher than the harvest and where far-reach- ing nature considerations protect biodiversity. Capturing approximately two million tonnes of carbon dioxide a year, Holmen’s operations are climate-positive. At the same time, society can be supplied with paperboard, paper, wood products and other products made from for- est raw material that are capable of replacing fossil-based products. The assessment is that both forest growth and extraction of wood can increase by 25 per cent over a 40-year horizon, which means that an increasing amount of car- bon dioxide can be captured in the forests and products of the future. R&D in three areas To maximise the value and benefit of the forest, intensive work is also under way to develop today’s products while identifying future opportunities for renewable wood fibre. Holmen’s work on research and development is mainly focused on three areas – increased forest growth, more efficient production and developing existing and new products in the product areas of paperboard, paper and wood products. This work is largely done jointly with other players, often within the same industry sector, and through collaborations with univer- sities, colleges and research institutes. The Group is also working on identifying and developing new business opportunities, based on Holmen’s renewable wood raw material and the by-products that arise in production. Research is being conducted into the compo- nents that make up wood: cellulose, hemicellu- lose and the binding agent lignin, which can be used, for example, to produce light, strong and sustainable products for structural solutions in the construction industry. An important start- ing point for the work is that the new business opportunities must be linked to Holmen’s existing industrial sites. Ecocycles produce a circular economy The modern forest industry has a central role to play in the future bioeconomy, in which the resources of the forest must be used more effi- ciently and to an ever-increasing extent. The growing forest and the products it produces are an important cornerstone for the transition to an economy in which bio-based raw materi- als and products replace fossil-based ones. The circular economy is a concept that shares some DNA with a bio-economy. Being part of a circular economy means highlighting business opportunities from circular ecocycles, in which the added value of the products is preserved as far as possible and waste is minimised. End-of-life paperboard and paper products top up the recovered paper ecocycle with much-needed fresh fibre, for example. The wood fibre can be re-used up to seven times before it is finally used as biofuel. But without fresh fibre, there is no future recovered fibre. Increased resource-efficiency and a higher proportion of renewable material will be vital to realising a circular economy. Very nearly 100 per cent of the by-prod- ucts and waste that arise from Holmen’s opera- tions is collected and used for various purpos- es. The whole tree is utilised and the residual products are used either in Holmen’s own manufacturing or in another industry. With a renewable raw material plus products that allow material recovery or, once expended, are used in fossil-free energy production, and recovery of chemicals and energy in the pro- duction plants, Holmen is already part of a bio-based circular economy. Constantly improving Holmen’s operations help to combat climate change and create condition for sustainable development in many ways – partly through carbon dioxide being captured and stored in the forests and the products, and partly through resource-efficient production runned predominantly on renewable energy. Thanks to investments, including those in more efficient production processes and developing the products of today and of tomorrow with forest raw materials as a base, the positive climate effects will be reinforced in the future. 30 HOLMEN ANNUAL REPORT 2016 / A SUSTAINABLE FUTURE Work in line with global guidelines In autumn 2015, the member states of the UN adopted 17 global goals for achieving social, economic and sustainable development around the world. With a resource-efficient business model that contributes to- wards positive climate effects, Holmen is engaged and works actively within the remit of several of the global sustainable development goals. The many values of the forest The forest’s ecosystems are multi-functional and contribute towards several dif- ferent social functions. Sustainably managed forests are not only important from a climate-related and economic perspective, they are also important for people’s wellbeing and a place for recreation, hunting and fishing. Holmen gives particular consideration to forests that are valuable in terms of aesthetics and experiences, and that many people visit for outdoor pursuits, relaxation and exercise. The fundamental idea behind ecosystem services is making the value of nature clear to people. The forest provides several such services. The production of fibre raw material is one example that already has a market value. The forest’s capacity to capture carbon dioxide, improve biodiversity and offer social val- ue are other examples. Various processes are under way in Sweden and inter- nationally to survey, develop and value ecosystem services. Holmen monitors the area and in Holmen’s own forest holdings ecosystem services are identified that could lead to new business opportunities. Sustainability every step of the way Sustainability is about more than the climate and the environment. Sustainable development for employees, business partners and owners requires that companies show good profitability and have a strong financial position. As an employer, Holmen must work to ensure good leadership and safe working conditions, while also motivating and developing its personnel. It is also important for operations to be characterised by transparency and comply with rules on business ethics. The Group’s CEO has ultimate responsibility for driving progress towards sustainable development. The Group’s Director of Environmental and Sustainable Affairs has a coordinating role in this area and reports to Group management. Continuous improvement and regu- lar follow-up of the business lay the foundation for Holmen’s development in economic, social and environmen- tal terms. The substitution effect Forest that is growing absorbs green- house gases and captures them as carbon. This means that growing for- ests reduce the amount of carbon di- oxide in the atmosphere, a capacity on which the forests’ climate benefit rests. When wood is used as a substi- tute for materials and types of energy that have a negative climate impact, the impact is doubled. Emissions of greenhouse gases from manufactur- ing and using climate-negative mate- rials are avoided, while increased use of products from the forest captures more carbon dioxide. A managed forest is planted, cleaned, thinned and felled at regular intervals. A stock of wood is built up over about 70 years before the forest is ready to be harvested and a new growth cycle can begin. In unmanaged forest that develops freely, the stock of wood is built up once only and then changes insignificantly over time. The trees provide a benefit as a carbon sink but in unmanaged forest the substitution effect is lost. Holmen has been part of the UN Global Compact and its corre- sponding Nordic network since 2007. The Group reports its work on sustainability to the or- ganisation each year in line with the ten principles of the Global Compact, and sets out the pro- gress made. The initiative seeks to take active responsibility for ten recognised principles in the areas of the environment, hu- man rights, working conditions and anti-corruption. Informa- tion on how the Group complies with and works in line with the principles of the Global Compact is avail- able at holmen.com. Work on the ten principles also helps to attain the global sustainable development goals above. Recovered fibre grows on trees For technical reasons, paper and pa- perboard cannot be recycled again and again. After 5–7 times the fibres are exhausted. This means that the ecocycle needs a constant injection of fresh fibre from the forest. Without fresh fibre, there is no recovered fibre. HOLMEN ANNUAL REPORT 2016 / A SUSTAINABLE FUTURE 31 Corporate governance report Holmen AB is a Swedish public limited company, listed on the Stockholm Stock Exchange (Nasdaq Stockholm) since 1936. The preparation of a corporate governance report is a requirement under the Swedish Annual Accounts Act. This corporate governance report complies with the rules and instructions stipulated in the Swedish Code of Corporate Governance. Shareholders Holmen had 28 159 shareholders at year- end 2016. Private individuals with Swedish citizenship accounted for the largest category of owners with 26 032 shareholders. The largest owner at year-end, with 61.6 per cent of votes and 32.9 per cent of capital, was L E Lundbergföretagen AB, which means that a Group relationship exists between L E Lundbergföretagen AB (corporate ID number 556056-8817), whose registered office is in Stockholm, and Holmen. The Kempe Founda- tions constitute the second-largest owner and their holdings of Holmen shares amounted to 17.0 per cent of votes and 7.0 per cent of capi- tal at the same date. No other individual share- holder controlled as much as 10 per cent of the votes. Employees have no holdings of Holmen shares via a pension fund or similar system. There is no restriction on how many votes each shareholder may cast at the AGM. At the 2016 AGM, the Board’s author- isation to purchase up to 10 per cent of the company’s shares was renewed. No buy-backs took place during the period. As previously, the company holds 0.9 per cent of all shares. See pages 40–41 for further information on the shares and ownership structure. General meeting of shareholders The notice convening the Annual General Meeting (AGM) is sent no earlier than six and no later than four weeks before the meet- ing. The notice contains: a) information about registering intention to attend and entitle- ment to participate in and vote at the meet- ing; b) a numbered agenda of the items to be addressed; c) information on the proposed div- idend and the main content of other proposals. Shareholders or proxies are entitled to vote in respect of the full number of shares owned or represented. Registration to attend the AGM may be made by letter, telephone, email and at holmen.com. Notices convening an Extraor- dinary General Meeting (EGM) called to deal with changes to the company’s articles of asso- ciation shall be sent no earlier than six and no later than four weeks before the meeting. Proposals for submission to the AGM should be addressed to the Board and submitted in good time before the notice is distributed. Information about the rights of shareholders to have matters discussed at the meeting is provided at holmen.com. It was announced on 18 April 2016 that the 2017 AGM would take place in Stockholm on 27 March 2017. Nomination committee The AGM resolved to establish a nomination committee to consist of the chairman of the Board and one representative from each of the three shareholders in the company that control the most votes at 31 August each year. The composition of the nomination committee for the 2016 and 2017 AGMs is shown in the table on page 34. The nomination committee’s mandate is to submit proposals for the election of Board members and the Board chairman, for the Board fee and auditing fees and, where applicable, for the election of auditors. The committee’s proposals are presented in the notice convening the AGM. For the 2017 AGM the nomination com- mittee proposes that the Board consist of nine members elected by the AGM. The nomination committee proposes the re-election of the cur- rent Board members: Fredrik Lundberg (who is also proposed for re-election as chairman of the Board), Carl Bennet, Carl Kempe, Lars G Josefs- son, Lars Josefsson, Louise Lindh, Ulf Lundahl, Henriette Zeuchner and Henrik Sjölund. Composition of the Board The members of the Board are elected each year by the AGM for the period until the end of the next AGM. According to the company’s articles of association, the Board shall have 7–11 members, and they are to be elected at the AGM. The company’s articles of association contain no other rules regarding the appointment or dismissal of Board members, or regarding amendments to the articles, or restrictions on how long members can serve on the Board. The 2016 AGM re-elected Fredrik Lund- berg, Carl Bennet, Lars G Josefsson, Carl Kempe, Louise Lindh, Ulf Lundahl, Henriette Zeuchner and Henrik Sjölund to the Board and elected Lars Josefsson as a new Board member. Fredrik Lundberg was re-elected chairman. Göran Lundin had declined to stand for re- election. At the statutory first meeting of the new Board in 2016, Carl Kempe was elected deputy chairman and Lars Ericson, the compa- ny’s general counsel, was appointed secretary of the Board. Over and above the nine members elected by the AGM, the local labour organisations have a statutory right to appoint three mem- bers and three deputy members. Of the nine Board members elected by the AGM, eight are deemed independent of the company as defined by the Code. The CEO is the only Board member with an operational position in the company. Further information about the members of the Board is provided on pages 74–75. The Board’s activities The activities of the Board follow a plan that, among other things, aims to ensure that the Board obtains all requisite information. Each AGM 2016 The 2016 AGM and the material presented was in Swedish. The notice convening the meeting, the agenda, the CEO’s speech and the minutes are available at holmen.com. The meeting was attended by all AGM-elected Board members, Group management and the company’s auditors. During the AGM, the shareholders had the opportunity to ask and obtain answers to questions. The AGM adopted the income statement and balance sheet, decided on the appropriation of profits and granted the departing Board discharge from liability. The minutes of the meeting were checked by Ramsay Brufer of Alecta and Emma Otterhem of The Forth Swedish National Pension Fund (AP4). It was not possible to follow or participate in the meeting from other locations using communication technology. Similarly, no such possibility is planned for the 2017 meeting. Board meetings The Board held ten meetings in 2016, four of which were in connection with the company’s publication of its quarterly reports. A two-day meeting was dedicated to strategic operational planning. A meeting was held in connection with a forest excursion to the company’s land near Örnsköldsvik and a study visit to Holmen’s nursery at Gideå. One meeting dealt with the Group’s budget for 2017. Two meetings were held in connection with the company’s AGM. The Board also paid special attention to strategic, financial and accounting issues, monitoring of business operations, the sale of the business in Spain and major investment matters. On two occasions the company’s auditors reported directly to the Board, providing a presentation about their audit of the accounts and internal control. 32 HOLMEN ANNUAL REPORT 2016 / CORPORATE GOVERNANCE REPORT SHAREHOLDERS NOMINATION COMMITTEE GENERAL MEETING OF SHAREHOLDERS REMUNERATION COMMITTEE BOARD OF DIRECTORS CEO GROUP MANAGEMENT AUDITORS FIVE GROUP STAFFS FIVE BUSINESS AREAS year the Board decides on written working procedures and issues written instructions. The latter relate to the division of responsibilities between the Board and the CEO and the infor- mation that the Board is to receive continual- ly regarding financial developments and other key events. Employees of the company partici- pate in Board meetings to submit reports. An assessment is conducted each year to develop the activities of the Board. Each Board member responded to a questionnaire with relevant questions relating to the work of the Board and the members were also able to make proposals on how the work of the Board could be further developed. Their responses were presented and discussed at a Board meeting. The chairman of the Board prepared a report on the results of the 2016 assessment for the nomination committee, which will form the basis for the planning of the Board’s activities for the coming year. Remuneration The Board has appointed a remuneration committee consisting of Fredrik Lundberg and Carl Bennet. During the year, the committee prepared matters pertaining to the remunera- tion and other employment conditions of the CEO, as well as a share savings programme. Remuneration and other employment conditions for senior management who report directly to the CEO are decided by the latter in accordance with a pay policy established by the remuneration committee. The remunera- tion committee has evaluated the application of both this policy and the guidelines on the remuneration of senior management adopted by the AGM. The Group applies the principle that each manager’s manager must approve decisions on remuneration in consultation with the relevant personnel manager. At the 2016 AGM the Board set out its proposals regarding guidelines for remunera- tion of the CEO and other senior management, i.e. heads of business areas and heads of Group staffs who report directly to the CEO. The AGM adopted the guidelines in the proposal. The Board proposes unchanged guidelines to the 2017 AGM. These guidelines and informa- tion about remuneration are presented in Note 4 on page 54. The 2016 AGM approved the Board fee and payment of the auditors’ fee as invoiced. The 2016 AGM approved a targeted share savings programme for Group management employees, heads of the business areas and a number of key individuals in the Holmen Group. Further information about the share savings programme is provided in Note 4. Group management The Board has delegated operational responsi- bility for management of the company and the Group to the CEO. The Board annually decides on instructions covering the distribution of tasks between the Board and the CEO. Holmen’s Group management comprises the company’s CEO, the heads of four of the five business areas and the heads of the five Group staffs. Information about the CEO and other members of Group management is provided on page 76. Group management met on 10 occasions in 2016. Its meetings dealt with matters such as earnings trends and reports before and after Board meetings, business plans, budgeting, investments, internal control and reviews of market conditions, general development of the economy and other external factors affecting the business. Projects relating to business areas and Group staffs were also discussed and decided on. Audit KPMG, which has been Holmen’s auditor since 1995, was re-elected by the 2016 AGM as auditor for a period of one year. Authorised accountant Joakim Thilsted was appointed as the principal auditor. KPMG audits Holmen AB and almost all of its subsidiaries. The examination of internal procedures and control systems begins in the second quar- ter and continues thereafter until year-end. The interim report for January–September is sub- ject to review by the auditors. The examination Board members as of the 2016 AGM BOARD MEMBERS POSITION ELECTED ATTENDENCE FEE (SEK) COMPANY MAJOR SHAREHOLDERS INDEPENDENT OF THE: Fredrik Lundberg* Carl Kempe Carl Bennet* Lars G Josefsson Lars Josefsson Louise Lindh Ulf Lundahl Henriette Zeuchner Henrik Sjölund Total * Representatives of the remuneration committee Chairman Deputy chairman Member Member Member Member Member Member Member, President and CEO EMPLOYEE REPRESENTATIVES 1988 1983 2009 2011 2016 2010 2004 2015 2014 10/10 10/10 10/10 10/10 6/7 10/10 10/10 10/10 10/10 SEK 680 000 SEK 340 000 SEK 340 000 SEK 340 000 SEK 340 000 SEK 340 000 SEK 340 000 SEK 340 000 - Yes Yes Yes Yes Yes Yes Yes Yes No 8/9 No No No Yes Yes No Yes Yes Yes 5/9 Steewe Björklundh, member, elected 1998 Per-Arne Berg, deputy member, elected 2015 Kenneth Johansson, member, elected 2004 Daniel Hägglund, deputy member, elected 2014 Tommy Åsenbrygg, member, elected 2009 Martin Nyman, deputy member, elected 2010 HOLMEN ANNUAL REPORT 2016 / CORPORATE GOVERNANCE REPORT 33 STRATEGY AND TARGETS BUSINESS PLAN, BUDGET AND MANAGEMENT BY OBJECTIVES BUSINESS PROCESSES EARNINGS, REPORTING AND MONITORING CODE OF CONDUCT POLICIES GUIDELINES AUTHORITY VALUES CENTRAL & LOCAL INSTRUCTIONS AUTHORISATION RULES Internal management processes and audit of the final annual accounts and the annual report take place in January–February. Holmen allows the Board to perform duties that would otherwise be performed by an audit committee. The Board’s reporting instructions include requirements that the members of the Board shall receive a report each year from the auditors confirming that the company’s organisation is structured to enable satisfactory supervision of accounting, management of funds and other aspects of the company’s financial circumstances. In 2016 the auditors reported to the entire Board at two meetings. Over and above this, the auditors reported to the chairman of the Board and the CEO on one occasion and to the CEO/deputy CEO during their work. In addition to the audit assignment, Holmen has consulted KPMG on matters pertaining to taxation, accounting and for various investigations. The remuneration paid to KPMG for 2016 is stated in Note 5 on page 55. KPMG is required to assess its independence before making decisions on whether to provide Holmen with independent advice alongside its audit assignment. As a result of a change in legislation which results in an extension of duties relating to the audit, the Board has decided to establish an audit committee for future financial years. Internal management processes As part of the Group’s annual strategy review, each business area draws up a business plan and sets objectives for its operations, which it presents to the Board. The business plan forms the basis of the expectations made of the units in each respective business area. On the basis of the expectations, each unit sets objectives and identifies success factors for achieving them. Key performance indicators (KPIs) are linked to the success factors in order to measure and demonstrate changes in performance. The business plan also provides the basis for the budget, in which decisions are taken on the distribution of resources and targets for the coming year are set. The business areas guide the operating businesses towards these targets using process- es for purchasing, production and sales, and supported by HR, financial management, R&D, IT and environmental processes. Opera- tions are followed up through regular report- ing of financial performance and KPIs, along with additional qualitative analysis. The scope for this work is set by policies, guidelines and instructions, together with authority and authorisation rules. Management of sustainability and social responsibility. Holmen’s code of conduct provides guidance on day-to-day operations and clarifies what expectations are made of employees. The business ethics policy and its accompanying guidelines address matters such as anti-corruption measures and competition issues. Employees in departments at risk of encountering unauthorised behaviour receive special training on these issues. The code of conduct for suppliers covers the areas of anti- corruption measures, human rights, health and safety and the environment. Holmen is subject to the UK Modern Slavery Act and a report relating to this is available at holmen.com. Whistleblower function. A whistleblower function is available so that employees and other stakeholders can highlight any deficiencies in Holmen’s financial reporting or other possible areas of concern at the company. Internal control of financial reporting The Board’s responsibility for internal control and financial reporting is regulated by the Swedish Companies Act and the Swedish Corporate Governance Code. Under this code, the Board is also responsible for ensuring that the company is managed in a sustainable and responsible manner. Day-to-day responsibility for all these matters is delegated to the CEO. Purpose and structure. The purpose of inter- nal control is to ensure that Holmen lives up to its objectives for financial reporting (see box on page 35) and to minimise risk of the Group being subject to fraud. Group Finance coordi- nates and monitors the internal control process concerning financial reporting in the Group. This work adheres to guidelines issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in respect of internal control over financial reporting. The framework comprises five basic elements: control environment, risk assessment, control activities, information and communication, as well as monitoring activities. The framework has been modified to suit the estimated needs of Holmen’s various operations. Control environment. The control environ- ment provides the basis for internal control of financial reporting and is based in part on the company’s internal management process- es. The Board of Directors’ procedural rules and the instruction for the CEO establish the distribution of roles and responsibilities to Composition of the nomination committee NAME Mats Guldbrand Fredrik Lundberg Alice Kempe Hans Hedström REPRESENTING L E Lundbergföretagen* Chairman of the Board Kempe Foundations* Carnegie funds* BEFORE AGM: 2017 x (chairman) x x x 2016 x (chairman) x x x INDEPENDENT OF THE: COMPANY Yes Yes Yes Yes LARGEST SHAREHOLDER (IN TERMS OF VOTES) No No Yes Yes * At 31 August 2016, L E Lundbergföretagen controlled 61.6 per cent of the votes, the Kempe Foundations controlled 17.0 per cent and Carnegie funds (Sweden) controlled 1.7 per cent. 34 HOLMEN ANNUAL REPORT 2016 / CORPORATE GOVERNANCE REPORT ensure effective control and management of the business’ risks. Policies, guidelines and instructions contribute to making individuals aware of their role in establishing good internal control. These documents also ensure that financial reporting complies with the laws and rules that apply to companies listed on the Stockholm Stock Exchange and the local rules in each country where the company operates. Risk assessment. Risk assessment activities aim to identify and evaluate the risks that can result in the Group’s financial reporting objec- tives not being met. The results of these risk- related activities are compiled and assessed under the guidance of Group Finance. Holmen’s greatest risks regarding financial reporting are linked to the valuation of biologi- cal assets and property, plant and equipment, pension provisions, other provisions and to financial transactions. The risk assessment also involves identifying and assessing operational risks. For further information, see the Risk Management section on pages 36–39. Control activities. To ensure that Holmen’s financial reporting objectives are met, control requirements are incorporated into the process- es that are deemed relevant: sales, purchasing, investments, personnel, financial statements, payments and IT. Control activities aim to pre- vent, identify and rectify errors and discrepan- cies. Business-specific self-assessments that are completed by all Group units set out what con- trol requirements apply for each respective pro- cess and whether or not they are met. Information and communication. Holmen’s financial information provision, both external and internal, adheres to a communication poli- cy established by Group management. The pro- vision of financial information for Holmen’s shareholders and other stakeholders must be accurate, comprehensive, transparent and con- sistent, and must take place on equal terms and at the right time. Follow-up and evaluation. Control activities are assessed regularly to ensure that they are effective and appropriate. The results of self- assessments are followed up on a continual basis and discrepancies are reported to the steering group for internal control each quar- ter. The accuracy of self-assessments is subject to testing. The reporting of internal control to Group management takes place once a year. The com- pany’s auditors report their observations from the review of internal control to the Board dur- ing the year. Follow-up is an important tool to identify possible deficiencies within the Group and to address these through the development of new control requirements. Holmen’s financial reporting External financial reporting must: • be accurate and complete, and comply with applicable laws, regulations and recommendations • provide a true and fair description of the company’s business • support a reasoned and informed valuation of the business. Internal financial reporting must also support correct business decisions at all levels in the Group. Statement on internal audit. The Board of Directors does not believe that particular circumstances in the business or other condi- tions exist to justify an internal audit function. The internal control managed by the Group, together with the activities carried out by the external auditors, is deemed to be sufficient. Carl Bennet, Henrik Sjölund, Fredrik Lundberg and Carl Kempe. Lars Josefsson, new Board member since 2016. In May the Board visited Holmen’s forests outside Örnsköldsvik. HOLMEN ANNUAL REPORT 2016 / CORPORATE GOVERNANCE REPORT 35 Risk management The business areas are responsible for business operations and manage business risks such as credit risks in relation to the Group’s customers. They also take decisions regarding volumes and pricing with the aim of consistently generating a good return on invested capital. Group Finance manages the Group’s funding and financial risks, based on a financial policy that is established by the Board and is characterised by a low level of risk. The purpose is to minimise the Group’s cost of capital through suitable financing as well as effective management and control of the Group’s financial risks. Operational risks Risk Risk management Comment Demand and prices. Changes in demand and prices affect opportunities to achieve profitability targets. Commodity prices. Wood, electricity and chemicals are the most significant inputs for the industry and price changes affect the industry’s profitability. Facilities. Production equipment can be seriously damaged for example in the event of a fire, machine breakdown or power outage. This can lead to supply problems, unexpected costs and reduced customer confidence. Forest. Forest fires, grazing by wild animals and insect pests are risks in growing forests. Changes in prices and deliveries largely depend on the develop- ment of the European market. This in turn is influenced by several factors, such as demand, production among European producers and changes in imports into Europe, as well as the opportuni- ties for exporting profitably from Europe. Holmen has limited opportunities for making rapid significant changes to its range of products, but the company adapts its product focus, steering it towards the products and markets deemed to have the best long- term potential. Holmen aims to have a broad customer base and an offering that spans several product areas. This aim, combined with long-term customer relationships, reduces vulnerability to changes in the market. The size of the timber harvest from the company’s forests is essentially the same as consumption at the company’s saw mills, while pulpwood from own forests corresponds to approximately 40 per cent of industry consumption. The industry uses pulpwood to produce pulp, which is then turned into paperboard or paper. The Group is largely in balance in terms of pulp as a result of the integrated production process. The paperboard business generates almost all the electricity required at its own mills, while electricity for paper manufacturing is supplied from external pur- chases. The Group also sells electricity from its hydro power and wind power assets to the electricity grid. In net terms, the Group’s own electricity generation corresponds to around 50 per cent of its electricity consumption. The price risk in this consumption is managed through physical fixed price contracts and financial hedging. There is a significant need for thermal energy, but this is produced locally at each mill from residual products. Chemicals are a significant input, particularly in paperboard production, but the need is reduced by recycling used chemicals at the mill. Damage prevention measures, regular maintenance and continual upgrades can minimise the risk of damage to facilities. Training of employees promotes participation, knowledge and awareness about these risks and how they can be countered. Holmen insures its facilities to their replacement value against property damage and consequential loss. The excess varies from one facility to another, but the maximum is SEK 30 million for any one claim. The Group has liability insurance that also covers sudden and unforeseen environmental damage affecting ‘third parties’. The Group’s forest holdings are not insured. They are widely dispersed over large parts of Sweden and the risk of extensive damage being incurred simultaneously is deemed to be low. Insect pests such as pine weevils are countered by waxing seedlings. The continual development of the product offering is important in meeting changes in demand. In 2016, Holmen successfully increased sales of its new Holmen UNIQ prod- uct from Braviken Paper Mill. The decision was also taken in 2016 to invest in a treat- ment plant at Braviken Sawmill. This facility provides the opportunity to offer treated wood products to the Swedish construction market. Raw material prices have been stable in recent years. The price of net electricity consumption is 80–90 per cent hedged for 2017–2020 and 60 per cent hedged for 2021. No event causing significant damage occurred in 2016. The pulp mill in Hallsta was rebuilt following the major fire that occurred at the end of 2015. The loss of revenue during the shutdown and reconstruction costs are covered by insurance, with the exception of SEK 30 million excess. No event causing significant damage occurred in Holmen’s forests during 2016. 36 HOLMEN ANNUAL REPORT 2016 / RISK MANAGEMENT Customer credits. The risk of the Group’s customers being unable to fulfil their payment obligations gives rise to credit risk. The risk that the Group’s customers will not fulfil their payment obligations is limited by means of creditworthiness checks, internal credit limits per customer and, in some cases, by insuring trade receivables against credit losses. Credit limits are continual- ly monitored. Exposure to individual customers is limited. Health and safety. Incidents and accidents at the workplace pose a risk to human life and health. This could lead to production disruptions and increased costs. Environment. Production disruptions can cause breaches of emissions conditions set for the business by environmental authorities. This could have an environmental impact. Personnel. Holmen needs to attract and retain skilled and motivated employees so it can conduct long-term business operations with good profitability. Business ethics. Both nationally and internationally, customers and partners place requirements on Holmen as a stable and reliable supplier that has good business practices and clear sustainability principles. Deviations from principles and policies could have a negative impact on reputation and business relationships. Good health and safety is a priority at all levels of management in the Group. The health and safety policy was revised in 2016. Certified management systems, Group-wide targets relating to work accidents, continual training of personnel to increase risk awareness, procedures for incident and accident reporting, and risk assessment of work by contractors are examples of activities to maintain a high level of safety in the workplace. Environmental measures are organised and conducted in accord- ance with an environmental and energy policy. In the event of process disruptions, the environment takes precedence over pro- duction. Risks are prevented and managed through regular own checks, checks by authorities and environmental risk analyses, as well as through the use of certified environmental and energy management systems and environmental and chain-of-custody certification. Issues regarding management by objectives, responsibility, participation, safety and skills development are prioritised in day- to-day work and personnel training. Holmen’s Code of Conduct and core values provide a basis for how employees should operate and how leadership should be formed. The Group works systematically to give employees opportunities to influence and develop the business through ongoing feedback and dialogue between managers and workers. Employee representatives have seats on Holmen’s Board. A whistleblower function is in place if employees and other stakeholders wish to report improper conduct within Holmen. Holmen’s business ethics policy and associated guidelines provide clear guidance on how to maintain good business practices when dealing with external contacts in various markets. Training on business ethics is provided for management groups and for employees deemed to encounter issues covered by the business ethics policy, such as marketing and sales departments and purchasers. Suppliers. Deficiencies in the supply chain for inputs in terms of security of supply and quality can lead to production disruptions. Suppliers that do not meet Holmen’s sustainability requirements can also have a negative effect on operations. Holmen endeavours to have at least two approved suppliers per area of use. In addition, Holmen’s Code of Conduct for suppliers is included in all new contracts. It contains requirements on sustainable development, including by respecting internationally recognised principles on anti-corruption measures, human rights, health and safety and the environment. In 2017, a third party will be used for risk classification and supplier assessment work. IT systems. Sales and purchasing require efficient IT support in order to manage and plan production. Disruptions in IT support and unauthorised access to information can have significant negative effects on the business. Operating disruptions and unauthorised access are prevented by security measures and preventive measures in the form of ap- propriate physical protection, reliable server operation and secure networks. Measures and procedures are in place to minimise the risk of interruption and to manage situations if interruptions occur. Political decisions. Laws and rules in coun- tries in which the Group operates affect how business activities can be conducted. Rules on how forests may be managed could affect future growth and harvests. Stimulus meas- ures to use bio-based products can affect demand for paperboard and wood products, as well as wood from our forests. Rules on the use of fresh fibre versus recovered fibre also have an impact. Holmen participates in national and international industry organisations whose purpose is to handle the monitoring of social trends, advocacy and political lobbying. Contact is established with local representatives in areas where the Group has operations. Political decisions are influenced by public opinion. Contact with the general public offers opportunities to contribute knowledge and facts. This takes place, for example, through consultation and information meetings and through debate in the media. At 31 December 2016 the Group’s trade receivables totalled SEK 2 174 million, of which 46 per cent (42) were insured against credit losses. During the year, credit losses on trade receivables had a SEK -5 million (-27) impact on earnings. Sales to the five largest customers accounted for 14 per cent of the Group’s total sales in 2016. The figure in 2016 was 8.8 industrial accidents per 1 million hours worked (2015: 8.8). The overwhelming cause of these were slips and trips. See also page 29. Holmen represents best practice in regard to advanced environmental stewardship, with active efforts to mitigate climate-related risks and capitalise on climate-related opportunities. This was a finding of the annual survey conducted by CDP. See also pages 24–27. No cases regarding breaches of the Code of Conduct were reported in 2016. A preliminary investigation is currently underway regarding hunting events arranged by Holmen. In January 2017, the prosecutor in the case communicated that he believes there is reasonable suspicion of bribery in connection with some of these hunting events. Holmen’s understanding is that the applicable rules have not been breached in any of the cases in question. No cases regarding breaches of the Code of Conduct for suppliers were reported in 2016. By the end of 2016, suppliers accounting for around 75 per cent of the Group’s purchasing volumes had signed up to the Code of Conduct for suppliers. Holmen is subject to the UK Modern Slavery Act and a report relating to this is available at holmen.com. Operations have not been affected by IT inci- dents in 2016. The right to manage forests and conditions for hydro power were focal issues in 2016. During the year, the Swedish government announced a reduction in the property tax on hydro power plants. HOLMEN ANNUAL REPORT 2016 / RISK MANAGEMENT 37 Financial risks Risk Risk management Comment Currency. The Group’s earnings are affected by fluctuations in exchange rates. Transaction exposure risk arises due to a significant portion of the Group’s sales income being in different currencies than costs. The translation exposure risk arises from the translation of foreign subsidiaries’ assets, liabilities and earnings into Swedish kronor. Transaction exposure. In order to reduce the impact on profit from changes in exchange rates, net flows are hedged using forward foreign exchange contracts. Net flows in euros, US dollars and sterling for the coming four months are always hedged. These normally correspond to trade receivables and outstanding orders. The Board can decide to hedge flows for a longer period if this is deemed suitable in light of the products’ profitability, competitiveness and the currency situation. Currency exposure arising when investments are paid for in foreign currency is distinguished from other transaction exposure. Normally, 90–100 per cent of the currency exposure associated with major investments is hedged. Translation exposure. Hedging exposure that arises when subsidiaries’ assets and liabilities are translated into Swedish kronor (known as equity hedging) is assessed on a case-by-case basis and is arranged based on the value of net assets upon consolidation. The hedges take the form of foreign currency loans or forward foreign exchange contracts. Exposure that arises when the earnings of foreign subsidiaries are translated into Swedish kronor is not normally hedged. For the next two years, 90 per cent of expected flows in EUR/SEK are hedged at an average of 9.50, for EUR/GBP 90 per cent of the next year’s expected flows are hedged at 0.86 and for USD/SEK 70 per cent of the next year’s flows are hedged at 8.93. For other currencies, 4 months of flows are hedged. Hedging of net assets in euros amounted to EUR 13 million at year-end, which essentially corresponds to the Group’s total assets in euros. Hedging in pounds sterling amounted to GBP 5 million at year-end. Net assets in other currencies are very limited and are not hedged. SEKm 8 000 6 000 4 000 2 000 0 EUR/SEK USD/SEK GBP/SEK EUR/GBP CNH/SEK Transaction exposure, 12 months Hedged transaction exposure Interest rates. Risks that arise when changes in the market interest rate affect the Group’s interest income and expense. The fixed interest periods for the Group’s financial assets and liabilities are normally short. The Board can decide to lengthen these periods in order to limit the effect of a rise in interest rates. Derivatives in the form of interest rate swaps are used to manage fixed interest periods without altering underlying loans. The Group’s average interest rate on borrowing was 1.1 per cent in 2016 and 0.9 per cent at year-end. The table below shows the Group’s fixed interest agreements by currency. SEK EUR GBP Other items YEAR 1 YEAR 1–3 YEAR 3–5 >YEAR 5 PENSION PROVISIONS -2 311 -20 -457 43 -2 744 -400 0 0 0 -400 -600 0 0 0 -600 0 0 0 0 0 -23 -8 -170 0 -201 TOTAL -3 334 -28 -626 43 -3 945 Credit risk from financial counterparties. The risk of financial transactions giving rise to credit risks in relation to financial counterparties. A maximum credit risk and settlement risk are established for each financial counterparty and are monitored continually. Holmen’s financial counterparties are assessed using reputable credit rating agencies or, where a counterparty has no credit rating, the company’s own analyses. This calculation is based on the maturity and historical volatility of different types of derivatives. The maximum credit risk for other financial assets is estimated to their nominal amount. At 31 December 2016, the Group had outstanding derivative contracts with a nominal amount of about SEK 15 billion and a net fair value of SEK -194 million. Holmen’s total credit risk in derivative transactions amounted to SEK 1 405 million at year- end 2016. This calculation is based on the maturity and historical volatility of different types of derivative. 38 HOLMEN ANNUAL REPORT 2016 / RISK MANAGEMENT Liquidity and refinancing. The risk of the need for future funding and refinancing of maturing loans being required at a high cost. Holmen’s strategy specifies that its financial position should be strong to ensure that it has the freedom to take long-term business decisions. The goal is to not exceed a debt-to-equity ratio of 0.5. Holmen’s financing mainly comprises bond loans and the issue of commercial paper. Holmen reduces the risk of future funding becoming difficult or expensive by using long-term contractually agreed credit facilities. The Group plans its financing by forecasting financing needs over the coming years based on the Group’s multi-year business plan, budget and profit forecasts that are regularly updated. Net financial debt decreased in the year by SEK 854 million and amounted at 31 December 2016 to SEK 3 945 million, SEK 201 million of which comprised pension provisions. The Group has contracted a credit facility of EUR 400 million (SEK 3 824 million) with a syndicate of nine banks which expires in 2020 and 2021. The credit facility remained unutilised at year-end. It is available for use provided that the Group’s debt/equity ratio is below 1.25. At year-end, the Group’s debt/equity ratio was 0.19. SEKm 4 000 3 000 2 000 1 000 0 2017 2018 2019 2020 2021 Financial liabilities Credit facility Sensitivity analysis Operational risks A one per cent change in deliveries and price of the Group’s products or significant inputs is deemed to affect Group operating profit as per the table to the right. Earnings are relatively evenly spread over the year. The clearest seasonal effects are lower personnel costs in the third quarter and the fact that electricity production at the hydro power plants is normally higher in the first and fourth quarters. Financial risks The table to the right shows the extent of the impact from a change in the Swedish krona, the market interest rate and the price of electricity on Group operating profit and equity, taking account of hedging. Impact on operating profit Paperboard Printing paper Wood products Wood from company forests Hydro and wind power Inputs Wood* Electricity* Chemicals Other variable costs Delivery costs Employees Other fixed costs Change +/-1% +/-1% +/-1% +/-1% +/-1% +/-1% +/-1% +/-1% +/-1% +/-1% +/-1% +/-1% Prices 51 54 13 12 3 Deliveries 29 18 3 8 3 26 12 11 11 12 23 16 * Taking account of harvesting of company forests and generation of own electricity, net earnings sensitivity for the Group is SEK 14 million for wood and SEK 10 million for electricity. Earnings before tax Exchange rates SEK/EUR SEK/USD SEK/GBP SEK/other currencies Borrowing rate Electricity price Equity Transaction hedging Investment hedging Equity hedging Interest rate hedging Electricity hedging Change +/-1% +/-1% +/-1% +/-1% +/-1% +/-1 percentage point +/-1% Change +/-1% +/-1% +/-1% +/-1 percentage point +/-1% SEKm 18 4 4 8 3 21 1 SEKm 98 0 13 20 13 HOLMEN ANNUAL REPORT 2016 / RISK MANAGEMENT 39 Shareholder information In 2016, the price of Holmen’s class B shares increased by SEK 65 or 25 per cent. Earnings per share excluding items affecting comparability was SEK 19.7. It is proposed that the dividend is to be raised to SEK 12 (10.5). Stock exchange trading Holmen was listed on the Stockholm Stock Exchange in 1936, but was called Mo och Domsjö AB at that time. Holmen’s two series of shares are listed on Nasdaq Stockholm, Large Cap. During the year, the price of Holmen’s class B shares increased by SEK 65 or 25 per cent, to SEK 327. The Stockholm Stock Exchange rose by 6 per cent over the same period. Holmen’s market capitalisation of SEK 27.4 billion (22.3) represents some 0.4 per cent of the total value of the Stockholm Stock Exchange. The highest closing price for Holmen’s class B shares was SEK 327, on 30 December. The lowest closing price was SEK 227, on 20 January. The daily average number of class B shares traded was 192 000, which corresponds to a value of SEK 53 million. The daily average number of class A shares traded was 500. Nearly 70 per cent of trading took place on Nasdaq Stockholm. The Holmen shares have also been traded on other trading platforms, such as BATS Europe, Chi-X and Turquoise. Earnings per share Diluted earnings per share excluding items affecting comparability was SEK 19.7. Includ- ing items affecting comparability, diluted earn- ings per share was SEK 16.9 (6.7). Dividend Decisions on dividends are based on an appraisal of the Group’s profitability, future investment plans and financial position. The Board proposes that the AGM, to be held on 27 March 2017, approve a dividend of SEK 12 (10.5) per share. The proposed dividend corresponds to 4.7 per cent of equity. Over the past five years the dividend has averaged 4 per cent of equity. • The final date for trading in Holmen shares including right to dividend: 27 March 2017. • Record date for dividend: 29 March 2017. • Payment date for dividend: 3 April 2017. Share structure Holmen has 83 996 162 shares outstanding, of which 22 623 234 are class A shares and 61 372 928 are class B shares. The company also has 760 000 repurchased class B shares held in treasury. Each class A share carries 10 votes, and each B share one vote. In other respects, the shares carry the same rights. Nei- ther laws nor the company’s articles of associa- tion place any restrictions on the transferabili- ty of the shares. Ownership structure Holmen had a total of 28 159 shareholders at year-end 2016. In terms of numbers, Swedish private individuals account for the largest owner category with 26 032 shareholders. Shareholders registered in Sweden own 83 per cent (81) of the share capital. Among foreign shareholders, the largest proportion of shares are held in the US and Luxembourg, accounting for 7 per cent and 3 per cent of the capital, respectively. The largest owner at the turn of 2016/2017, with 61.6 per cent of votes and 32.9 per cent of capital, was L E Lundbergföretagen AB. Share savings programme The 2016 AGM decided on a targeted share savings programme for around 40 key indi- viduals in the Holmen Group. The purpose of the programme is to strengthen the interests between the owners and the management of the company and to create long-term commit- ment to Holmen. The programme involves previously repur- chased shares being transferred to programme participants at the end of the term. The num- ber of shares to be transferred depends on the return generated over the 2016–2018 period. In the event of maximum allocation, 100 000 shares will be transferred from the company to programme participants. Share buy-backs The company has no specific target for share buy-backs. There is a mandate to repurchase up to 10 per cent of all the company’s shares. Any buy-backs are regarded as a complement to dividend payments to adjust the capital structure when circumstances are deemed favourable. The 2016 AGM renewed the Board’s mandate to decide on the acquisition of up to 10 per cent of the company’s shares through the acquisition of class B shares. No shares were repurchased during the year. As previously, the company holds 0.9 per cent of all shares. The Board proposes that the 2017 AGM also authorise the Board to repurchase and transfer up to 10 per cent of all shares in the company through the acquisition of class B shares. Communication with shareholders Holmen regularly provides information to the stock market via press conferences in connection with the publication of quarterly reports and on the occasion of the AGM. It also delivers information that is important to the stock market by publishing press releases. The holmen.com website offers financial information in the form of reports, presentations and compiled financial data. The holmen.com website also has recordings of the latest press conferences, together with information on the company’s shares, owners, insider trading and more. Analysts Analysts at 14 brokerage firms and banks monitor Holmen’s development. This means that they publish analyses of Holmen on an ongoing basis. A list of these analysts is available at holmen.com. SHARE PRICE PERFORMANCE, HOLMEN CLASS A, HOLMEN CLASS B AND GENERAL INDEX TOTAL SHAREHOLDER RETURN FOR HOLMEN CLASS B AND GENERAL INDEX Incl. reinvested dividend excluding tax SEK 400 300 200 100 0 Number of shares (thousands) Index 12 000 250 9 000 6 000 200 150 3 000 100 0 50 12 13 14 15 16 12 13 14 15 16 Holmen A Holmen B Affärsvärlden General Index Total number of class B shares traded (thousands) Holmen B General index (SIX Return Index) Source: Macrobond 40 HOLMEN ANNUAL REPORT 2016 / SHAREHOLDER INFORMATION SHAREHOLDER CATEGORIES Percentage of capital SHAREHOLDER STRUCTURE AT 31 DECEMBER 2016 % of capital % of votes L E Lundbergföretagen Kempe Foundations Carnegie funds (Sweden) Lannebo funds Alecta Nordea funds DFA funds (US) Swedbank Robur Fonder Norges Bank Investment Management SHB funds Total Other Total* * Of which non-Swedish shareholders. 32.9 7.0 5.4 3.3 2.9 2.5 2.2 1.7 1.5 1.0 60.4 39.6 100.0 17.1 61.6 17.0 1.6 1.0 0.8 0.7 0.6 0.5 0.4 0.3 84.5 15.5 100.0 5.2 The 10 identified shareholders with the largest holdings in terms of capital. Some large shareholders may have their holdings registered under nominee names, in which case they are included among ‘Other’. Swedish institutions Swedish equity funds Swedish private individuals Foreign shareholders 56% 17% 10% 17% OWNERSHIP STRUCTURE SHARE STRUCTURE No. of shares 1–1 000 1 001–100 000 100 001– Total Share- holders 26 165 1 927 67 28 159 Share of capital, % 6 13 81 100 Share Votes No. of shares No. of votes Quotient value Class A Class B Total no. of shares Holding of own class B shares repurchased Total number of shares outstanding 10 1 22 623 234 62 132 928 84 756 162 -760 000 83 996 162 226 232 340 62 132 928 288 365 268 -760 000 287 605 268 50 50 SEKm 1 131 3 107 4 238 CHANGES IN SHARE CAPITAL 2000–2016 Change in no. of shares Total no. of shares Change in share capital, SEKm Total share capital, SEKm 2001 Cancellation of shares repurchased 2004 Conversion and subscription -8 885 827 4 783 711 79 972 451 84 756 162 -444 239 3 999 4 238 DATA PER SHARE Diluted earnings per share, SEK1) Dividend, SEK Dividend as % of: Equity Closing listed price Profit/loss for the year Return, equity, %1) Return, capital employed, %6) Equity per share, SEK Closing listed price, B, SEK Average listed price for year, B, SEK Highest listed price for year, B, SEK Lowest listed price for year, B, SEK Total closing market capitalisation, SEK ’000 m P/E ratio2) EV/EBITDA3) 6) Closing beta value (48 months), B4) Number of shareholders at year-end 2016 16.9 125) 2015 6.7 10.5 5 4 71 7 9 253 327 281 327 227 27.4 19 11 0.8 28 159 4 4 158 3 6 248 262 264 306 219 22.3 39 10 0.7 28 176 2014 10.8 10 4 4 93 4 6 250 266 236 272 209 22.3 25 10 0.8 27 788 2013 8.5 9 4 4 106 3 5 248 234 198 235 173 19.7 28 11 0.7 27 692 2012 22.1 9 4 5 41 9 7 248 192 186 204 169 16.2 9 9 0.9 28 440 2011 47.1 8 3 4 17 23 9 235 198 201 251 156 16.6 4 7 0.8 28 899 2010 8.4 7 3 3 83 4 6 201 221 195 226 173 18.5 26 10 0.8 28 339 2009 12.0 7 4 4 58 6 7 196 183 180 206 135 15.4 15 7 0.7 30 425 2008 7.6 9 5 5 118 4 6 186 194 203 242 170 16.2 25 9 0.5 29 745 2007 17.8 12 6 5 67 9 10 200 240 277 316 228 20.6 13 8 0.9 30 499 1) See page 82: Definitions and glossary. 2) Closing listed price divided by diluted earnings per share. 3) Market capitalisation plus net financial debt at year-end (EV) divided by EBITDA. 4) Measures the sensitivity of the yield on class B shares in relation to the yield on the Affärsvärlden General Index over a period of 48 months. 5) Board proposal. 6) Excl. items affecting comparability. HOLMEN ANNUAL REPORT 2016 / SHAREHOLDER INFORMATION 41 41 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME INCOME STATEMENT GROUP, SEKm Net sales Other operating income Change in inventories Raw materials and consumables Personnel costs Other operating costs Depreciation and amortisation according to plan Impairment losses Change in value of biological assets Profit/loss from investments in associates and joint ventures Operating profit/loss Finance income Finance costs Profit/loss before tax Tax Profit/loss for the year Attributable to: Owners of the parent company Earnings per share (SEK) basic diluted Average number of shares (million) basic diluted NOTE 2 3 4 5, 20 9, 10 10 11 12 6 6 7 8 8 2016 15 513 1 559 203 -8 801 -2 268 -3 432 -1 018 -122 315 -18 1 930 13 -84 1 859 -436 1 424 1 424 16.9 16.9 84.0 84.0 2015 16 014 1 203 -187 -8 661 -2 335 -3 689 -1 240 -555 267 -46 769 1 -91 679 -120 559 559 6.7 6.7 84.0 84.0 Operating profit amounted to SEK 1 930 million (769). Operating profit was negatively affected by SEK 350 million in connection with the sale of the mill in Madrid and positively affected by SEK 118 million with regard to insurance compensation for reconstruction following the fire at Hallsta Paper Mill, which together amount to a net total of SEK -232 million which has been treated as an item affecting comparability. Operating profit for 2015 was negatively affected by items affecting comparability in an amount of SEK 931 million with regard to impairment losses on non-current assets, provisions for costs and the effects of a fire. Operating profit excluding items affecting comparability amounted to SEK 2 162 million (1 700). Earnings were positively affected mainly as a result of a better product mix within paper, the sale of the mill in Spain and reduced costs and higher prices within forestry operations. Net financial items for 2016 totalled SEK -71 million (-90). The average cost of borrowing declined to 1.1 per cent (1.5), and average net debt was lower than in the preceding year. Tax recognised totalled SEK -436 million (-120) in 2016. Recognised tax corresponds to 23 percent of profit before tax. STATEMENT OF COMPREHENSIVE INCOME GROUP, SEKm Profit/loss for the year OTHER COMPREHENSIVE INCOME Revaluations of defined benefit pension plans Tax attributable to items that will not be reclassified to profit/loss for the year Total items that will not be reclassified to profit/loss for the year Cash flow hedging Revaluation Transferred from equity to the income statement Transferred from equity to non-current assets Translation difference on foreign operations Hedging of currency risk in foreign operations Share in joint ventures’ other comprehensive income Tax attributable to items that will be reclassified to profit/loss for the year Total items that will be reclassified to profit/loss for the year Total other comprehensive income Total comprehensive income Attributable to: Owners of the parent company 42 NOTE 17 7 7 2016 1 424 -159 29 -130 96 126 -12 -165 1 -21 -52 -26 -157 1 267 1 267 2015 559 208 -44 165 -111 67 10 8 22 3 3 1 166 724 724 HOLMEN ANNUAL REPORT 2016 / FINANCIAL STATEMENTSBALANCE SHEET BALANCE SHEET GROUP AT 31 DECEMBER, SEKm NOTE 2016 2015 NON-CURRENT ASSETS Non-current intangible assets Property, plant and equipment Biological assets Investments in associates and joint ventures Other shares and participating interests Non-current financial receivables Deferred tax assets Total non-current assets CURRENT ASSETS Inventories Trade receivables Current tax receivable Other operating receivables Current financial receivables Cash and cash equivalents Total current assets Total assets EQUITY Share capital Other contributed capital Reserves Retained earnings incl. profit/loss for the year Total equity attributable to the owners of the parent company NON-CURRENT LIABILITIES Non-current financial liabilities Pension provisions Other provisions Deferred tax liabilities Total non-current liabilities CURRENT LIABILITIES Current financial liabilities Trade payables Current tax liability Provisions Other operating liabilities Total current liabilities Total liabilities Total equity and liabilities 9 10 11 12 12 13 7 14 15 7 15 13 13 16 13 17 18 7 13 19 7 18 19 87 9 387 17 448 1 773 2 39 4 28 740 2 981 2 174 132 564 89 210 6 151 34 891 4 238 281 -236 16 960 21 243 882 201 673 5 613 7 368 3 200 1 766 6 228 1 079 6 279 13 648 34 891 107 10 321 17 173 1 914 4 43 6 29 567 3 089 1 987 12 519 61 221 5 889 35 456 4 238 281 -209 16 543 20 853 2 295 130 585 5 508 8 519 2 698 1 916 53 157 1 259 6 085 14 603 35 456 43 HOLMEN ANNUAL REPORT 2016 / FINANCIAL STATEMENTSCHANGES IN EQUITY CHANGES IN EQUITY GROUP, SEKm Opening equity balance 1 Jan 2015 Profit/loss for the year Other comprehensive income Revaluation of defined benefit pension plans Cash flow hedging Translation difference on foreign operations Hedging of currency risk in foreign operations Share in joint ventures’ other comprehensive income Tax attributable to other comprehensive income Total other comprehensive income Total comprehensive income Dividend paid Closing equity balance 31 Dec 2015 Profit/loss for the year Other comprehensive income Revaluation of defined benefit pension plans Cash flow hedging Translation difference on foreign operations Hedging of currency risk in foreign operations Share in joint ventures’ other comprehensive income Tax attributable to other comprehensive income Total other comprehensive income Total comprehensive income Dividend paid Share savings programme Closing equity balance 31 Dec 2016 RESERVES SHARE CAPITAL OTHER CONTRIBUTED CAPITAL TRANSLATION RESERVE HEDGE RESERVE RETAINED EARNINGS INCL. PROFIT/LOSS FOR THE YEAR 4 238 - - - - - - - - - - 4 238 - - - - - - - - - - - 4 238 281 - - - - - - - - - - 281 - - - - - - - - - - - 281 51 - - - 8 22 - -5 25 25 - 76 - - - -165 1 - -6 -170 -170 - - -95 -261 - - -34 - - 3 7 -24 -24 - -284 - - 211 - - -21 -46 144 144 - - -141 16 660 559 208 - - - -44 165 723 -840 16 543 1 424 -159 - - - - 29 -130 1 294 -882 5 16 960 TOTAL EQUITY 20 969 559 208 -34 8 22 3 -41 166 724 -840 20 853 1 424 -159 211 -165 1 -21 -24 -157 1 267 -882 5 21 243 44 HOLMEN ANNUAL REPORT 2016 / FINANCIAL STATEMENTSCASH FLOW STATEMENT GROUP, SEKm OPERATING ACTIVITIES Profit/loss before tax Adjustments for non-cash items Depreciation and amortisation according to plan Impairment losses Change in value of biological assets Change in provisions Other* Income tax paid Cash flow from operating activities before changes in working capital CASH FLOW FROM CHANGES IN WORKING CAPITAL Change in inventories Change in trade receivables and other operating receivables Change in trade payables and other operating liabilities Cash flow from operating activities INVESTING ACTIVITIES Acquisition of property, plant and equipment Disposal of property, plant and equipment Acquisition of non-current intangible assets Acquisition of biological assets Disposal of biological assets Increase in non-current financial receivables Acquisition of shares and participating interests Disposal of shares and participating interests Cash flow from investing activities FINANCING ACTIVITIES Raised long-term borrowings Repayments of long-term borrowings Change in current financial liabilities Change in current financial receivables Dividend paid to owners of the parent company Cash flow from financing activities CASH FLOW FOR THE YEAR Cash and cash equivalents at beginning of year Exchange gains/losses on cash and cash equivalents Cash and cash equivalents at end of year NOTE 25 25 * Other adjustments primarily consist of currency effects and the marking to market of financial instruments, profit from associates, as well as gains on the sale of non-current assets. CHANGE IN NET FINANCIAL DEBT Opening net financial debt Cash flow Operating activities Investing activities (excl. non-current financial receivables) Dividend paid Revaluations of defined benefit pension plans Foreign exchange effects and changes in fair value Closing net financial debt 2016 -4 799 1 961 -123 -882 -158 56 -3 945 CASH FLOW STATEMENT 2016 2015 1 859 1 018 122 -315 170 -31 -504 2 320 -62 -189 -109 1 961 -766 440 -5 -4 95 - -10 127 -123 - -400 -560 -6 -882 -1 848 -10 221 -1 210 679 1 240 555 -267 236 37 -398 2 083 123 275 45 2 526 -826 24 -12 -36 26 -8 - - -832 300 -326 -792 0 -840 -1 659 35 187 0 221 2015 -5 907 2 526 -824 -840 206 40 -4 799 45 HOLMEN ANNUAL REPORT 2016 / FINANCIAL STATEMENTSCASH FLOW STATEMENT, SEKm NOTE 2016 2015 OPERATING ACTIVITIES Profit/loss after financial items Adjustments for non-cash items Depreciation and amortisation according to plan Change in provisions Other* Income tax paid Cash flow from operating activities before changes in working capital CASH FLOW FROM CHANGES IN WORKING CAPITAL Change in inventories Change in operating receivables Change in operating liabilities Cash flow from operating activities INVESTING ACTIVITIES Shareholders’ contribution paid Acquisition of property, plant and equipment Disposal of property, plant and equipment Increase in external non-current financial receivables Disposal of shares and participating interests Cash flow from investing activities FINANCING ACTIVITIES Raised external long-term borrowings Repayments of external long-term borrowings Change in other financial liabilities Change in other financial receivables Dividend paid to owners of the parent company Group contributions received Group contributions paid Cash flow from financing activities CASH FLOW FOR THE YEAR Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 25 1 094 161 26 -59 502 -464 1 100 -61 -146 -271 622 -10 -29 28 - 2 -9 - -400 -531 450 -882 700 0 -663 -51 155 104 26 258 107 -420 133 159 178 19 490 0 -48 11 -9 0 -46 300 -326 -732 709 -840 493 -7 -404 40 115 155 25 * Other adjustments primarily consist of impairment losses on the value of shares in Group companies, currency effects and the marking to market of financial instruments as well as gains/losses on the sale of non-current assets. PARENT COMPANY PARENT COMPANY INCOME STATEMENT, SEKm NOTE Net sales Other operating income Change in inventories Raw materials and consumables Personnel costs Other external costs Depreciation and amortisation according to plan Operating profit/loss 2 3 4 5, 20 9, 10 Profit/loss from investments in Group companies 6, 23 Profit/loss from investments in associates Interest income and similar income Impairment losses on other shares and participating interests Interest expense and similar costs Profit/loss after financial items 6 6 6 6 Appropriations Profit/loss before tax Tax Profit/loss for the year 24 7 2016 13 794 822 205 -8 086 -1 827 -4 547 -26 335 780 0 30 0 -52 1 094 404 1 499 -301 1 197 2015 13 989 696 -186 -8 057 -1 814 -4 278 -26 324 -118 0 38 - -83 161 821 982 -244 738 STATEMENT OF COMPRE- HENSIVE INCOME, SEKm Profit/loss for the year Other comprehensive income Cash flow hedging Revaluation Transferred from equity to the income statement Transferred from equity to non-current assets Tax attributable to other comprehensive income Total items that will be reclassified to profit/loss for the year Total comprehensive income 7 NOTE 2016 2015 1 197 738 133 90 -12 -46 164 1 362 -134 94 10 7 -23 715 The parent company includes Holmen’s Swedish operations with the exception of the majority of the non-current assets, which are recognised in Holmens Bruk AB. As part of the sale of the Spanish operations, Holmen AB has paid compensation of SEK 643 million to Holmen Paper Madrid SL in connection with the termination of a sales agreement (see Note 22 for further information). This post is included in the income statement under the item ‘Other external costs’. The item ‘Interest expense and similar costs’ in the income statement includes the result of SEK 1 million (22) from hedging equity in foreign subsidiaries. 46 HOLMEN ANNUAL REPORT 2016 / FINANCIAL STATEMENTSPARENT COMPANY NOTE 2016 2015 BALANCE SHEET At 31 December, SEKm NOTE 2016 2015 BALANCE SHEET At 31 December, SEKm ASSETS Non-current assets Non-current intangible assets Property, plant and equipment Non-current financial assets Shares and participations Non-current financial receivables Total non-current assets Current assets Inventories Operating receivables Current tax receivable Current investments Cash and cash equivalents Total current assets Total assets 9 10 12, 23 13 14 15 7 13 13 8 2 925 11 519 3 202 17 653 2 396 2 254 106 89 104 4 950 22 602 8 2 922 12 018 3 214 18 163 2 336 2 026 - 61 155 4 578 22 741 EQUITY AND LIABILITIES Equity Restricted equity Share capital Statutory reserve Revaluation reserve Non-restricted equity Retained earnings incl. hedge reserve Profit/loss for the year Total equity Untaxed reserves Provisions Pension provisions Tax provisions Other provisions Deferred tax liability Total provisions Liabilities Non-current financial liabilities Current financial liabilities Current tax liability Operating liabilities Total liabilities Total equity and liabilities 16 24 17 18 18 7 13 13 7 19 CHANGES IN EQUITY, SEKm RESTRICTED EQUITY Opening equity balance 1 Jan 2015 Appropriation of profits Profit/loss for the year Other comprehensive income Cash flow hedging Tax on other comprehensive income Total other comprehensive income Total comprehensive income Dividend paid Closing equity balance 31 Dec 2015 Appropriation of profits Profit/loss for the year Other comprehensive income Cash flow hedging Tax on other comprehensive income Total other comprehensive income Total comprehensive income Dividend paid Share savings programme Closing equity balance 31 Dec 2016 SHARE CAPITAL 4 238 - - - - - - - 4 238 - - - - - - - - 4 238 STATUTORY RESERVE REVALUATION RESERVE 1 577 - - - - - - - 1 577 - - - - - - - - 1 577 100 - - - - - - - 100 - - - - - - - - 100 NON-RESTRICTED EQUITY RETAINED EARNINGS PROFIT/LOSS FOR THE YEAR 2 954 1 870 - - - - 1 870 -840 3 985 738 - - - - 738 -882 5 3 847 1 870 -1 870 738 - - - -1 132 - 738 -738 1 197 - - - 459 - - 1 197 HEDGE RESERVE -264 - - -30 7 -23 -23 - -287 - - 211 -46 164 164 - - -123 4 238 1 577 100 3 724 1 197 10 836 4 238 1 577 100 3 698 738 10 351 2 290 1 994 12 45 833 612 1 503 2 328 3 200 - 2 445 7 974 22 602 5 45 892 569 1 512 3 295 2 698 53 2 837 8 884 22 741 TOTAL EQUITY 10 476 - 738 -30 7 -23 715 -840 10 351 - 1 197 211 -46 164 1 362 -882 5 10 836 47 HOLMEN ANNUAL REPORT 2016 / FINANCIAL STATEMENTSNOTE 1 NOTES TO THE FINANCIAL STATEMENTS Amounts in SEKm, unless otherwise stated 1. Accounting policies 2. Operating segment reporting 3. Other operating income 4. Employees, personnel costs and remuneration to senior management 5. Auditors’ fee and remuneration 6. Net financial items and income from financial instruments 7. Tax 8. Earnings per share 9. Non-current intangible assets 10. Property, plant and equipment 11. Biological assets 12. Investments in associates, joint ventures and other shares and participating interests 13. Financial instruments 48 52 53 54 55 55 56 57 57 58 59 60 61 14. Inventories 15. Operating receivables 16. Equity, parent company 17. Pension provisions 18. Other provisions 19. Operating liabilities 20. Operating leases 21. Collateral and contingent liabilities 22. Related parties 23. Investments in Group companies 24. Untaxed reserves 25. Cash flow statement 26. Critical accounting estimates and judgements 64 64 64 65 66 66 66 67 67 68 69 69 69 NOTE 1. ACCOUNTING POLICIES The accounting policies for the Group presented below have been applied consistently to all periods included in the Group’s financial statements except where otherwise stated below. The Group’s accounting policies have been applied consistently to the reporting by and the consolidation of the parent company, subsidiaries, associates and joint ventures. COMPLIANCE WITH STANDARDS AND STATUTORY REQUIREMENTS The consolidated accounts are prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB), as adopted by the EU. The Swedish Financial Reporting Board’s recommendation (RFR 1 Supplementary Accounting Rules for Groups) has also been applied. See also Note 26 ‘Critical accounting estimates and judgements’. CHANGES IN ACCOUNTING POLICIES New and amended accounting policies applicable as of 2016 No new accounting policies with a material effect on the Group’s accounting have been applied since 1 January 2016. Changes in the Swedish Annual Accounts Act and IAS 1 have, to a limited extent, affected the preparation of the financial statements. New and amended accounting policies not yet applied The following new standards have been published by the IASB, but have either not yet come into force or have not yet been adopted by the EU. The parent company applies the same accounting policies as the Group except in the cases that are commented on separately under each section. The parent company’s accounts are prepared in accordance with RFR 2 Accounting for Legal Entities. The differences between the policies applied by the parent company and those applied by the Group are due to restrictions in the parent company’s ability to apply IFRS as a consequence of the Swedish Annual Accounts Act, the Swedish Pension Obligations Vesting Act, and in some cases for tax reasons. IFRS 15 Revenue from Contracts with Customers is a new revenue standard with associated disclosure requirements which will replace IAS 18, IAS 11 and IFRIC 13. This new standard will come into force on 1 January 2018. During the year, analysis of the Group’s revenue flows was undertaken, and an evaluation of the effects was initiated. The initial assessment is that application of this new standard will not result in any material effect on accounting of the Group’s revenue. Since IFRS 15 contains additional disclosure requirements, its application will probably result in increased note disclosures regarding revenue. VALUATION PRINCIPLES APPLIED IN PREPARING THE FINANCIAL STATEMENTS OF THE PARENT COMPANY AND THE GROUP Assets and liabilities are stated at cost, except for biological assets and certain financial assets and liabilities, which are valued at fair value. In the parent company, biological assets are not valued at fair value. Investments in Group companies and associates are recognised in the parent company at the lower of cost and fair value. FUNCTIONAL CURRENCY AND REPORTING CURRENCY The functional currency is the currency used in the primary financial environments in which the companies conduct their business. The parent company’s functional currency is the Swedish krona (SEK), which is also the reporting currency of the parent company and the Group. This means that the financial statements are presented in Swedish kronor. ESTIMATES AND JUDGEMENTS IN THE FINANCIAL STATEMENTS Preparing the financial statements in accordance with IFRSs requires the company’s management to make estimates and judgements, as well as to make assumptions that affect the application of the accounting policies and the recognised amounts for assets, liabilities, income and costs. The actual outcome may deviate from these assessments and estimates. These estimates and judgements are reviewed regularly. Changes in estimates are recognised in the accounts for the period in which the change is made if the change only affects that period, or in the period the change is made and in later periods if the change affects current and future periods. IFRS 9 Financial Instruments addresses the accounting of financial instruments and will replace IAS 39. This standard encompasses classification, valuation and impairment of financial instruments and hedge accounting. This standard will come into force on 1 January 2018. The initial assessment is that application of this new standard will not result in any material effect on accounting of the Group’s financial instruments. IFRS 16 Leasing replaces the previous IAS 17 Leases and the related interpretations IFRIC 4, SIC-15 and SIC-27. This standard requires assets and liabilities attributable to all leases, with some exceptions, to be recognised in the balance sheet. In the income statement, amortisation must be recognised separately from interest expense attributable to leasing liabilities. This standard will come into force on 1 January 2019. The potential impact of this standard on the Group’s financial statements is currently being assessed. SEGMENT REPORTING The Group’s operations are divided into operating segments, based on which parts of the operations are monitored by the company’s highest executive decision-maker, known as the management approach. The segmentation criterion is based on the Group’s business areas. This corresponds to the Group’s operating structure and the internal reporting to the CEO and the Board. The items in the profit, assets and liabilities of the operating segment are recognised in accordance with the profit (operating profit), assets and liabilities that are monitored by the company’s highest executive decision-maker. See Note 2 for more details of the classification and presentation of operating segments. CLASSIFICATION Essentially, non-current assets, non-current liabilities and provisions consist solely of amounts that are expected to be recovered or paid more than 12 months after the balance sheet date. Current assets, current liabilities and provisions essentially consist of amounts that are expected to be recovered or paid within 12 months of the balance sheet date. 48 HOLMEN ANNUAL REPORT 2016 / NOTESCONSOLIDATION PRINCIPLES Subsidiaries A subsidiary is a company over which the parent company, Holmen AB, exercises a controlling influence. Controlling influence exists if Holmen AB has control over an investment object, is exposed or entitled to variable returns on its involvement and can exercise its control of the investment to influence the size of return. In determining whether one company has control over another, potential shares with an entitlement to vote and whether de facto control exists are taken into account. The consolidated accounts are prepared using the acquisition method. The acquisition method entails the parent company indirectly acquiring the subsidiary’s assets and assuming the liabilities of the subsidiary, valued at fair value. The difference between the cost of the shares and the fair value of the acquired identifiable net assets is treated as goodwill. The subsidiary companies’ income and expenses, and their assets and liabilities, are stated in the consolidated accounts as of the date when the Group gains control (acquisition date) until such time as the Group no longer has control. Intra-Group receivables and liabilities, transactions between companies in the Group and related unrealised gains are eliminated in their entirety. Holdings recognised in accordance with the equity method Associates. Shareholdings in associates, in which the Group controls a minimum of 20 per cent and a maximum of 50 per cent of the votes, or otherwise exercises a significant influence, are stated in the consolidated accounts in accordance with the equity method. Jointly owned companies/joint ventures. In accounting, joint ventures are those companies for which the Group, through cooperation agreements with one or more parties, has joint control whereby the Group has rights to the net assets instead of direct rights to assets and commitments in liabilities. Holdings in joint ventures are consolidated in the consolidated accounts using the equity method. Holmen’s jointly owned companies are such that the holding has previously been recognised using the equity method and financial reporting consequently complies with IFRS 11 Joint Arrangements. The equity method. The equity method means that the carrying amount of the shares in the associates and joint ventures stated in the consolidated accounts corresponds to the Group’s interest in the associates’ equity and any consolidated surplus and deficit values. The Group’s share of the net earnings of associates and joint ventures after tax attributable to parent company owners adjusted for any amortisation or reversal of acquired surplus and deficit values, respectively, is stated in the consolidated income statement as ‘Share of profits of associates and joint ventures’. Dividends received from an associate or joint venture reduce the carrying amount of the investment. Unrealised gains arising as a consequence of transactions with associates and joint ventures are eliminated in relation to the owned proportion of equity. When the Group’s share of the recognised losses of an associate and joint venture exceeds the carrying amount of the investments stated in the consolidated accounts, the value of the investments is written down to zero. Losses are also offset against unsecured long-term financial balances that, in financial terms, comprise part of the owning company’s net investment in the associate and joint venture. Any further losses are not recognised unless the Group has provided guarantees to cover losses incurred by the associate or joint venture. The equity method is applied until such time as the significant influence no longer exists or the jointly owned company ceases to be jointly owned. FOREIGN CURRENCY Transactions denominated in foreign currencies Transactions in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities in foreign currencies are translated into the functional currency at the exchange rate prevailing on the balance sheet date. Exchange differences arising on such translations are stated in the income statement. Non-monetary assets and liabilities that are stated at historical cost are translated at the exchange rate prevailing on the transaction date. Financial statements of foreign operations The assets and liabilities of foreign operations, including goodwill and other consolidated surplus and deficit values, are translated in the consolidated accounts, from the foreign operation’s functional currency, to the Group’s reporting currency (Swedish kronor) at the balance sheet date. The income and expenses of foreign operations are translated into Swedish kronor at an average rate that is an approximation of the exchange rates prevailing at the date of each transaction. Differences arising during the currency translation of foreign operations and the related effects of hedging net investments are recognised in other comprehensive income and are accumulated in a separate component of equity called the translation reserve. In the disposal of a foreign operation, the accumulated translation differences attributable to the business are realised, less any currency hedging, in the consolidated income statement. COMPANIES OPERATING ON BEHALF OF THE PARENT COMPANY The parent company’s business is largely conducted through companies operating on its behalf: Holmen Paper AB, Iggesund Paperboard AB, Holmen Timber AB, Holmen Skog AB and Holmen Energi AB. The parent company is liable for all commitments entered into by these companies. All income, expenses, assets and liabilities, which arise in the operations conducted by the companies, are recognised in Holmen AB’s accounts, except for the majority of investments made as well as some sales of forest properties, which are instead recognised in some of the Group’s subsidiaries. INCOME Net sales Net sales refers to invoiced sales (excluding value added tax) of products, wood and energy. The amount recognised is reduced by discounts, and similar reductions in income, and also includes NOTE 1 exchange differences related to the sales. Sales are recognised after the critical risks and benefits associated with ownership of the sold goods have been transferred to the buyer, and there is no remaining right of disposal or possibility to retain actual control over the sold goods. Other operating income Income from activities not forming part of the company’s main business is stated as other operating income. This item mainly comprises sales of by-products, renewable energy certificates, rent and land lease income, emission allowances, insurance compensation and gains/losses on sales of non-current assets. Renewable energy certificates Certificates are issued in relation to production of renewable energy according to a quota system introduced in order to promote electricity generation using renewable sources of energy. Income from allocated certificates is recognised as other operating income in the same period in which generation occurs. Certificates sold on forward contracts are measured at their net realisable value. Unsold certificates are measured at the lower of cost or fair value. State grants State grants are recognised in the balance sheet as accrued income when it is reasonably certain that the grant will be received and that the Group will satisfy the conditions associated with the grant. State grants linked to a non-current asset reduce the asset’s recognised cost. State grants, such as road grants, intended to cover costs are recognised as other operating income. Grants are distributed systematically in the income statement in the same way and over the same periods as the costs the grants are intended to cover. Exchange transactions In some cases, forest land is exchanged for other forest land of similar type and value. Such exchange is recognised in the consolidated accounts as an exchange of one asset for another, i.e. without any form of revenue recognition as the exchange does not constitute a revenue-generating transaction. In the parent company, however, this type of transaction is recognised as a sale of forest land, with recognition of revenue as other operating income and an acquisition of a new asset. FINANCE INCOME AND COSTS Finance income and costs consist of interest income and interest costs, dividend income and revaluations of financial instruments valued at fair value, as well as unrealised and realised currency gains and losses. Interest income on receivables and interest costs on liabilities are calculated by using the effective interest method. Interest costs include transaction costs for loans, which have been distributed over the duration of the loan; this also applies to any difference between the funds received and the repayment amount. Dividend income is recognised when the dividend is established and the right to receive payment is judged to be certain. Interest costs normally affect profit/loss in the period to which they relate. Borrowing costs attributable to the purchase, construction or production of qualifying assets are capitalised in the consolidated accounts as part of the asset’s cost. A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use and that is relevant for the Group in connection with major investment projects. TAXES Income taxes comprise current tax and deferred tax. Income taxes are recognised in the income statement except when underlying transactions are recognised in other comprehensive income or directly in equity, in which case the associated tax effect is also recognised in other comprehensive income or directly in equity. Current tax is the tax to be paid or received for the year in question, using the tax rates that have been decided on, or to all intents and purposes have been decided on at the balance sheet date. This also includes any adjustment to current tax attributable to previous periods. Deferred tax is calculated using the balance sheet method on the basis of temporary differences between carrying amounts and values for tax purposes of assets and liabilities, applying the tax rates and rules that have been approved or announced at the balance sheet date. Temporary differences are not taken into account in goodwill arising upon consolidation, nor in temporary differences attributable to investments in subsidiaries and associates that are not expected to become liable to taxation in the foreseeable future. In the parent company’s accounts, untaxed reserves are recognised inclusive of deferred tax liability. Deferred tax assets in respect of tax-deductible temporary differences and loss carry-forwards are recognised only to the extent that it is likely they will be utilised and entail lower tax payments in the future. Deferred tax assets and deferred tax liabilities in the same country are recognised net to the extent that a right of set-off applies. EARNINGS PER SHARE The calculation of earnings per share (EPS) is based on the Group’s profit for the year attributable to the parent company’s owners and the weighted average number of shares outstanding during the year. In calculating diluted EPS, the earnings and the average number of shares are adjusted to take account of the effects of any potential ordinary shares having a diluting effect, which during reported periods stem from convertible bonds and options issued to employees. FINANCIAL INSTRUMENTS Financial instruments are measured and recognised according to IAS 39. Recognition in and derecognition from the balance sheet A financial asset or liability is stated in the balance sheet when the company becomes a party in accordance with the contractual conditions of the instrument. A financial asset is removed from the balance sheet when the rights referred to in the contract have been realised or mature, or when the company no longer has control over them. A financial liability is removed from the balance sheet when the undertaking in the contract is performed or expires in some other way. 49 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 1 Spot transactions are stated in accordance with the trade date principle. Trade receivables are recognised in the balance sheet when an invoice has been sent. Liabilities are recognised when the counterparty has provided a product or service and there is a contractual obligation to pay, even if an invoice has not yet been received. A financial asset and a financial liability are only offset and recognised at a net amount where a legal right to offset the amounts exists and there is an intention to settle the items at a net amount or simultaneously realise the asset and settle the liability. Financial assets, excluding shares, and financial liabilities have been classified as current if the amounts are expected to be recovered or paid within 12 months of the balance sheet date. Shares have been classified as non-current if they are intended to be held in the operation permanently. Measurement of financial instruments Financial assets at fair value through profit/loss. This category consists of financial assets held for trading. Financial instruments in this category are measured on a current basis at fair value, with changes of value recognised in profit/loss. Loan receivables and trade receivables. Bank balances, loan receivables and trade receivables are measured at amortised cost. Impairment testing is performed continually, using objective criteria for these assets. If impairment is established, the receivable is derecognised. However, a provision for doubtful trade receivables is made if the impairment is anticipated. Available-for-sale financial assets. The category of available-for-sale financial assets includes financial assets not classified in any other category or financial assets that the company initially chose to classify in this category. The assets are valued on a current basis at fair value with the changes in value for the period recognised in other comprehensive income, and the accumulated changes in value in a separate component of equity, although not such value changes that are attributable to impairment losses (see below), nor interest on financial instruments receivable and dividend income as well as exchange differences on monetary items, which are recognised in profit/loss for the year. When the asset is disposed of, accumulated profit/loss – which was previously recognised in other comprehensive income – is recognised in profit/loss for the year. Shares and interests not related to Group companies or associates are measured at cost. Measurement at fair value could not be applied, because reliable fair values could not be established. Financial liabilities at fair value through profit/loss. Financial liabilities are measured initially at the value of funds received after deduction of any transaction costs. Normally, the liabilities are measured on a current basis at amortised cost using the effective interest method. In those cases where funds received fall short of the repayment amount, the difference is allocated over the duration of the loan using the effective interest method. Profit/loss from financial instruments is recognised in net financial items or operating profit/loss, depending on the purpose of the holding. Other financial liabilities. These liabilities are measured at amortised cost. Amortised cost is determined on the basis of the effective interest that was calculated at the time of acquisition. Trade payables and loan liabilities are recognised in this category. Loans hedged against changes in value are initially recognised including any transaction costs and on a current basis at fair value. Derivatives and hedge accounting. All derivatives, such as currency forward contracts, electricity derivatives and interest rate swaps, are measured at fair value and recognised in the balance sheet. More or less all derivatives are held for hedging purposes. Where hedge accounting is applied, the changes in value are recognised as stated below. In the case of derivatives that do not fulfil the criteria for hedge accounting, the changes in value are recognised within operating profit/loss or within net financial items, depending on the purpose of the holding. Cash flow hedging. The effective portion of changes in value is recognised in other comprehensive income and accumulated in equity until such time as the hedged item influences the income statement, when the accumulated changes in value are transferred from equity via other comprehensive income to the income statement to meet and match the hedged transaction. In the hedging of investments, the cost of the hedged item is instead adjusted when it occurs. The ineffective portion of hedges is recognised directly in the income statement. Forward foreign exchange contracts and foreign exchange swaps are used as cash flow hedges to safeguard against fluctuations in exchange rates. Interest rate swaps are used as a cash flow hedge to safeguard against changes in interest rates. Net investments. Changes in the value of hedges relating to net investments in foreign businesses are recognised in other comprehensive income for the Group. Accumulated changes in value are recognised as a component in the Group’s equity until the business is disposed of, at which point the accumulated changes in value are recognised in the income statement. In the parent company, changes in value are recognised in the income statement, as hedge accounting is not applied. Calculation of fair value. The fair value of financial instruments traded on an active market is based on listed market prices and belongs to measurement level 1 as per IFRS 13. Where there are no listed market prices, fair value has been calculated using discounted cash flows. In calculating discounted cash flows, all variables used for the calculations, such as discount rates and exchange rates, are taken from market listings where possible. In calculating discounted cash flows, the mean of exchange rates and discount rates is used. These valuations belong to measurement level 2. Other valuations, for which a variable is based on own assessments, belong to measurement level 3. Holmen’s measurement of financial instruments belongs exclusively to measurement level 2. Currency options are valued using the Black & Scholes formula, when appropriate. NON-CURRENT INTANGIBLE ASSETS Non-current intangible assets such as patents, licences and IT systems are recognised at cost after deduction of accumulated depreciation and any impairment losses. The Group’s non-current intangible assets are amortised over periods of between 5 and 20 years, except for goodwill. Any goodwill is allotted to cash-generating units. Both goodwill and other non-current intangible assets are tested for impairment annually. Any impairment losses may be reversed via exceptions from goodwill. The Group does not currently recognise any goodwill. Non-current intangible assets in the parent company are amortised over five years. Goodwill represents the difference between the cost of business combinations and the fair value of the acquired assets, assumed liabilities and contingent liabilities. Goodwill is valued at cost less any 50 accumulated impairment losses. Goodwill arising in connection with the acquisition of associates is included in the carrying amount of the participating interest in such companies. Research costs are expensed when they are incurred. Development costs are only capitalised in the case of major projects to the extent that their future financial benefits can be reliably assessed. The recognised value includes all directly attributable expenses, for example in connection with materials and services, wages/salaries to employees, registration of a legal right, amortisation of patents and licences and borrowing costs in accordance with IAS 23. Other development expenditure is recognised in the income statement as costs when incurred. Development expenditures recognised in the balance sheet are stated at cost less accumulated amortisation and impairment losses. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost after deduction of accumulated depreciation and any impairment losses. Property, plant and equipment that consist of parts with different useful lives are treated as separate components of property, plant and equipment. Additional expenditure is capitalised only if it is estimated to generate financial benefits for the company. The key factor determining whether or not additional expenditure is capitalised is if it relates to the replacement of identified components or parts thereof, in which case the expenditure is capitalised. The cost is also capitalised in cases where a new component is created. Any undepreciated carrying amounts for replaced components or parts of components are retired and expensed in connection with the replacement. The carrying amount of an item of property, plant or equipment is removed from the balance sheet in connection with retirement or disposal of the asset or when no future financial benefits can be expected from the use of the asset. The gain or loss arising on the retirement or disposal of an asset consists of the difference between any selling price and the carrying amount of the asset, less any direct selling costs. Gains and losses are recognised in the accounts as other operating income/costs. Depreciation according to plan is based on original acquisition cost less any impairment losses. Depreciation takes place on a straight-line basis over the estimated useful life of the asset. Land is not depreciated. The following useful lives (years) are used: Machinery for hydro power production 10–40 Administrative and warehouse buildings, residential properties 10–33 Production buildings, land installations and machinery for pulp, paper and paperboard production Machinery for sawmills Other machinery Forest roads Equipment 10–20 10–12 10 10 4–10 If there is any indication that the carrying amount is too high, an analysis is made in which the recoverable value of single or inherently related assets is determined at the higher of the net selling price and the utility value. The net realisable value is the estimated selling price after deduction of the estimated cost of selling the asset. The utility value is measured as expected future discounted cash flow. The discount rate applied takes account of the risk-free rate and the risk associated with the asset. An impairment loss consists of the amount by which the recoverable amount falls short of the carrying amount. Impairment loss is reversed if there has been any positive change in the circumstances upon which the determination of the recoverable amount is based. A reversal may be made up to, but not exceeding, the carrying amount that would have been recognised, less depreciation, if there had been no impairment. Borrowing costs attributable to the purchase or construction of qualifying assets are to be capitalised in the consolidated accounts as part of the asset’s cost. A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use and that is relevant for the Group in connection with major investment projects. LEASING In the consolidated accounts, lease agreements are classified as finance leases or operating leases. The leasing of non-current assets for which the Group is substantially exposed to the same risks and benefits as if the asset were directly owned is classified as finance leases. The leasing of assets over which the lessor substantially retains ownership is classified as operating leases. Costs relating to operating leases are recognised in profit/loss for the year on a straight-line basis spread over the term of the lease. Variable charges are expensed in the periods in which they are incurred. Within the Group, all lease agreements are classified as operating leases. BIOLOGICAL ASSETS The Group divides all its forest assets for accounting purposes into growing forests, which are recognised as biological assets at fair value, and land, which is stated at cost. Any changes in the fair value of the growing forests are recognised in the income statement. Holmen’s assessment is that there are no relevant market prices available that can be used to value forest holdings as extensive as Holmen’s. Valuation is therefore carried out by estimating the present value of expected future cash flows (after deduction of selling costs) from the growing forests. See Note 11. In the parent company, biological assets are valued in accordance with RFR 2. This means that biological assets classified as non-current assets are recognised at cost adjusted for revaluations taking into account the need, if any, for impairment in value. Felling rights are stated as inventories. They are acquired with a view to securing Holmen’s raw material requirements through harvesting. No measurable biological change occurs between the acquisition date and harvesting. HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 1 INVENTORIES Inventories are valued at the lower of cost and production cost after deduction for necessary obsolescence, or net realisable value. The cost of inventories is calculated by using the First in, First out method (FIFO). The net realisable value is the estimated selling price in operating activities after deduction of the estimated costs of completion and effecting the sale. The cost of finished products manufactured by the company comprises direct production costs and a reasonable share of indirect costs. Emission allowances received are initially recognised at market price when allotted among inventories and as deferred income. During the year the allocation is recognised as income at the same time as an interim liability, corresponding to emissions made, is expensed. Certificates received for renewable energy sold on forward contracts are recognised at net realisable value. Unsold certificates are measured at the lower of cost or fair value. Recognition takes place, in line with production, as inventories or accrued income. period runs from 20 May 2016 through the date of publication of Holmen’s interim report for the first quarter of 2019. Termination benefits Termination benefits in connection with the termination of employment contracts are recognised in the accounts if it is shown that the Group has an obligation, without any reasonable possibility of withdrawing, as a result of a formal, detailed plan to terminate an employment contract before the normal date. When benefits are paid in the form of an offer to encourage voluntary redundancy, a cost is recognised if it is likely that the offer will be accepted and the number of employees who will accept the offer can be reliably estimated. Short-term benefits Short-term benefits to employees are calculated without being discounted and are recognised as a cost when the related services are provided. EMPLOYEE BENEFITS Pension costs and pension obligations Obligations to pay premiums to defined contribution plans are recognised as a cost in the income statement as and when they are earned. The Group’s net obligation regarding defined benefit plans is calculated separately for each plan by estimating future benefits earned by employees through their employment in both current and previous periods. This benefit is discounted to present value and unrecognised costs relating to employment in previous periods and the fair value of any plan assets are deducted. The discount rate is the interest rate at the balance sheet date for a high-quality corporate bond with a duration corresponding to the Group’s pension obligations. If there is no active market for such corporate bonds, the market interest rate for government bonds with a corresponding duration is used instead. The calculation is performed by a qualified actuary using the projected unit credit method for the portion of the pension obligations that is defined benefit. Establishment of the obligation’s present value and the fair value of plan assets may give rise to actuarial gains and losses. These arise either through the actual outcome deviating from previously made assumptions or through changes in assumptions. Actuarial gains and losses are recognised directly in other comprehensive income. If the benefits provided by a plan are improved, the proportion of the improvement in the benefit that is attributable to the employees’ employment during earlier periods is recognised as a cost in the income statement and is distributed on a straight-line basis over the average period until the benefits have been fully earned. If the benefit has been earned in full, a cost is recognised directly in the income statement. If any changes occur to a defined benefit plan, these are recognised when the change to the plan occurs. If the change occurs in conjunction with restructuring, this is recognised when the company recognises the associated restructuring costs. The changes are recognised directly in profit/loss for the year. The interest cost on defined benefit obligations is recognised in profit/loss for the year under financial items. This is calculated as the net total of the upward adjustment of interest on the pension obligation and expected income on plan assets calculated according to the same interest factor (discount rate). Other components are recognised in operating profit/loss. The revaluation effects consist of actuarial gains and losses and the difference between the actual return on plan assets and the amount included in net interest. Revaluation effects are recognised in other comprehensive income. Payroll tax constitutes part of the actuarial assumptions and is therefore recognised as part of net obligations. Policyholder tax is recognised as it is incurred in profit/loss for the period to which the tax relates and is consequently not included in the calculation of liabilities. In the case of funded plans, this tax is levied on the return on plan assets and is recognised in other comprehensive income. In the case of unfunded plans or partially unfunded plans, this tax is levied on profit for the year. In the parent company’s accounts, different grounds are used for computation of defined benefit pension plans from those referred to in IAS 19. The parent company complies with the provisions of the Swedish Pension Obligations Vesting Act and the Swedish Financial Supervisory Authority’s regulations, because this is a condition for the right to make deductions for tax purposes. The main differences in relation to the rules in IAS 19 relate to how the discount rate of interest is established, the calculation of the defined benefit obligation on the basis of the current pay level without any assumption regarding pay increments in the future, and the recognition of all actuarial gains and losses in the income statement when they arise. When there is a difference between how the pension cost is arrived at in the legal entity and in the Group, a provision or a receivable is recognised in the consolidated accounts in respect of payroll tax based on this difference. The present value of the provision or receivable is not calculated. Share-based payments The outstanding share programme savings is recognised in accordance with IFRS 2 Share- based Payments and is paid through equity instruments. Recognition of share-based payment programmes paid through equity instruments entails the fair value of the instrument at the dividend date being recognised in the income statement as a cost over the vesting period, with a corresponding adjustment of equity. At the end of each vesting period, an estimate is made of the expected number of allocated shares and the effect of any change in previous estimates are recognised in the income statement with a corresponding adjustment of equity. In addition, a provision is made for estimated social security costs relating to the share programme. Estimates are based on the value of the shares at the allocation date, which is defined as the period when the agreement was concluded between the parties. Holmen’s share savings programme was open to relevant employees between 27 April and 20 May 2016. The average share price during this period was used as the basis for the valuation of the shares at the allocation date. The vesting EQUITY Consolidated equity comprises share capital, other contributed capital, translation and hedge reserves and retained earnings, including profit/loss for the year. Other contributed capital refers to premiums paid in conjunction with share issues. The translation reserve consists of all exchange differences that arise in the translation of foreign operations’ financial statements that are prepared in a currency other than Swedish kronor. It also includes exchange differences arising in connection with the revaluation of liabilities and derivatives that are classified as instruments for hedging a net investment in a foreign operation, including tax. The hedge reserve comprises the effective proportion of the accumulated net change in the fair value of a cash flow hedging instrument attributable to underlying transactions that have not yet occurred, including tax. Retained earnings comprise all other parts of equity, including profit/loss for the year. Holdings of shares bought back are stated as a reduction in retained earnings. Acquisitions of the company’s own shares are stated as a deduction, and proceeds from the disposal of the company’s own shares are stated as an increase. Transaction costs are charged directly to retained earnings. The parent company’s equity comprises share capital, statutory reserves, revaluation reserves, retained earnings and profit/loss for the year. The parent company’s statutory reserve consists of previous compulsory provisions to the statutory reserve plus amounts added to the share premium reserve before 1 January 2006. The parent company’s revaluation reserve contains amounts set aside in connection with the revaluation of property, plant and equipment or non-current financial assets. Retained earnings comprise all other parts of equity, such as hedge reserves and transactions as a result of share buy-backs. The parent company applies the same accounting policies as the Group for these items, see above. PROVISIONS A provision is recognised in the balance sheet when the Group has a legal or informal commitment as a consequence of a past event and it is likely there will be an outflow of financial resources to settle the commitment and a reliable estimate of the amount can be made. A provision to cover restructuring is recognised once the Group has established a detailed and formal restructuring plan and the restructuring process has either begun or been publicly announced. Provisions are made for environmental measures that relate to earlier activities when contamination arises or is discovered, it is likely that a payment obligation will arise, and the amount can be estimated reliably. Reserves to cover future silvicultural fees are calculated on the basis of interpretations of the applicable forestry laws and regulations whenever it is likely that a payment obligation will arise and once the amount can be assessed to a reasonable extent. CONTINGENT LIABILITIES A contingent liability is recognised when there is a potential commitment that originates from past events, the existence of which will be confirmed only by one or more uncertain future events, or when there is a commitment that is not recognised as a liability or provision because it is unlikely that an outflow of resources will be required. GROUP CONTRIBUTIONS AND SHAREHOLDER CONTRIBUTIONS FOR LEGAL ENTITIES Group contributions are recognised in the parent company in accordance with RFR 2’s alternative rule, i.e. Group contributions paid or received are recognised as appropriations. Shareholder contributions are recognised as an increase in the item ‘Investments in Group companies’. In addition, a review is conducted as to whether an impairment loss on the value of the shares is necessary. This review complies with standard rules on the valuation of this asset item. Shareholder contributions received are recognised directly in non-restricted equity. OTHER The figures presented are rounded off to the nearest whole number or equivalent. The absence of a value is indicated by a dash (-). 51 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 2 NOTE 2. OPERATING SEGMENT REPORTING 2016 FOREST PAPERBOARD PAPER WOOD PRODUCTS RENEWABLE ENERGY GROUP-WIDE AND OTHER ELIMINATIONS TOTAL GROUP Net sales External Internal Other operating income Operating costs Depreciation and amortisation according to plan Impairment losses Change in value of biological assets Share of profits of associates Operating profit/loss Operating profit/loss excluding items affecting comparability* Operating margin excluding items affecting comparability, % Return on operating capital excluding items affecting comparability, % Operating assets Operating liabilities Operating capital Investments 2 572 2 730 206 -4 792 -29 - 315 - 1 001 1 001 19 6 18 989 1 191 17 798 30 5 252 - 823 -4 693 -479 - - - 903 903 17 14 7 185 759 6 426 413 5 431 - 505 -5 374 -380 -122 - -1 58 289 5 9 3 454 639 2 815 259 1 342 - 261 -1 514 -82 - - -9 -3 -3 0 neg 1 031 138 892 52 314 - 14 -180 -23 - - -5 120 120 38 4 3 475 64 3 412 23 602 2 196 -922 -24 0 - -3 -149 -148 - - 807 1 351 -544 9 - -2 732 -466 3 178 - - - - - - - - -392 -392 - - 15 513 - 1 559 -14 299 -1 018 -122 315 -18 1 930 2 162 14 7 34 550 3 752 30 799 785 * Items affecting comparability refers to the sale of the mill in Madrid and insurance compensation of SEK -232 million for reconstruction following a fire at Hallsta Paper Mill. 2015 FOREST PAPERBOARD PAPER WOOD PRODUCTS RENEWABLE ENERGY GROUP-WIDE AND OTHER ELIMINATIONS TOTAL GROUP Net sales External Internal Other operating income Operating costs Depreciation and amortisation according to plan Impairment losses Change in value of biological assets Share of profits of associates Operating profit/loss Operating profit/loss excluding items affecting comparability* Operating margin excluding items affecting comparability, % Return on operating capital excluding items affecting comparability, % Operating assets Operating liabilities Operating capital Investments 2 814 2 667 179 -4 992 -29 - 267 - 905 905 17 5 18 790 1 202 17 589 31 5 472 - 739 -4 866 -499 - - - 847 847 15 12 7 409 787 6 622 324 6 148 - 238 -6 312 -588 -555 - -45 -1 115 -74 -1 neg 4 459 901 3 558 347 1 314 - 251 -1 479 -77 - - -1 9 9 1 1 1 081 157 924 103 268 91 32 -196 -22 - - 2 176 176 49 5 3 462 111 3 351 18 -3 - 196 -219 -25 - - -3 -53 -163 - - 254 1 142 -888 8 - -2 757 -434 3 191 - - - - - - - - -330 -330 - - 16 014 - 1 203 -14 872 -1 240 -555 267 -46 769 1 700 11 5 35 126 3 971 31 155 832 * Items affecting comparability relate to impairment loss on non-current assets, a provision for costs and the effects of a fire totalling SEK -931 million. 52 HOLMEN ANNUAL REPORT 2016 / NOTESNON-CURRENT ASSETS PER COUNTRY Sweden UK Spain Other Total NET SALES BY PRODUCT AREA Paperboard Printing paper Pulp Wood products Wood Energy Other Total NET SALES BY MARKET Sweden Germany UK Spain Italy Netherlands France Rest of Europe Rest of the world Total NOTE 2–3 GROUP PARENT COMPANY 2016 26 871 1 820 - 5 28 695 2015 26 817 2 044 648 6 29 515 2016 14 450 - - - 14 450 2015 14 948 - - - 14 948 GROUP PARENT COMPANY 2016 5 071 5 879 169 1 337 2 572 314 170 15 513 2015 5 248 5 956 211 1 311 2 812 268 206 16 014 2016 3 404 5 879 268 1 341 2 569 314 20 13 794 2015 3 340 5 925 326 1 313 2 806 268 12 13 989 GROUP PARENT COMPANY 2016 3 660 1 974 1 719 1 009 857 694 661 2 963 1 977 15 513 2015 3 598 1 981 2 223 1 109 846 626 710 2 753 2 167 16 014 2016 3 632 1 766 1 124 969 807 624 588 2 388 1 896 13 794 2015 3 575 1 774 1 431 911 795 542 621 2 264 2 076 13 989 The Forest business area manages the Group’s forests, which cover just over one million hectares. Annual wood harvested in company forests is normally about 3.0 million m3sub. The Renewable energy business area is responsible for the Group’s hydro power and wind power assets. Generation in a normal year amounts to 1.2 TWh of electricity. The business areas are also responsible for sup- plying the Group with wood and electricity, respectively, in Sweden. operating capital. Operating capital in each segment includes all assets and liabilities used by the business area such as non-current assets, inventories and operating receivables and operating liabilities. Financing and tax issues are managed at Group level, so financial assets and liabilities – including pension liabilities – and current and deferred tax assets and tax liabilities are not allocated to the business areas. The Paperboard business area produces paperboard for consumer packaging and graphical printing at one Swedish and one UK mill. The Paper business area manufactures printing paper for magazines, product catalogues, direct mail, books and daily newspapers at two mills in Sweden. The Wood products business area has manufacturing operations at two sawmills in Sweden. In 2016, the Group produced 0.5 million tonnes of paperboard, 1.1 million tonnes of printing paper and 0.8 million m3 of wood products. Intra-Group sales between segments are founded on an internal market-based price. The ‘Group- wide and other’ segment comprises Group staffs and Group-wide functions that are not allocated to other segments. In June 2016, Holmen sold its newsprint mill in Madrid. Holmen has an undertaking to sell the newsprint produced by the mill up to the second half of 2017. During this period, income and costs from this will be recognised in the Group-wide segment. No profit items after operating profit/loss are allotted to the business areas. The business areas are responsible for management of operational assets and liabilities. Group management monitors the business at operating profit level, and in terms of how earnings relate to Income from external customers is allocated to individual countries according to the country in which the customer is based. NOTE 3. OTHER OPERATING INCOME Sales of by-products Certificates, renewable energy Emission allowances Sales of non-current assets Rent and land lease income Silviculture contracts Other Total GROUP 2016 364 415 25 75 42 57 581 1 559 2015 358 435 48 37 42 67 215 1 203 PARENT COMPANY 2015 194 130 44 28 25 67 208 696 2016 226 59 21 27 28 57 404 822 Of the sales of by-products in the Group, SEK 141 million (123) relates to rejects from production, SEK 96 million (104) to sawdust, bark, chips etc., and SEK 127 million (130) to external sales of energy. Income from renewable energy certificates received from the production of renewable energy at the Group’s mills amounted to SEK 415 million (435). The Group has been allotted emission allowances that have been used partly within its own production. The surplus resulted in a gain of SEK 25 million (48). The increase for the year in the item ‘Other’ mainly relates to insurance compensation following the fire at Hallsta Paper Mill and a refund from a dispute over the cost of water in Workington which was settled in Holmen’s favour. 53 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 4 NOTE 4. EMPLOYEES, PERSONNEL COSTS AND REMUNERATION TO SENIOR MANAGEMENT WAGES, SALARIES AND SOCIAL SECURITY COSTS Wages, salaries and other remuneration Social security costs GROUP PARENT COMPANY 2016 1 589 619 2015 1 665 633 2016 1 233 556 2015 1 233 534 AGM’S GUIDELINES FOR DETERMINING SALARIES AND OTHER REMUNERATION FOR SENIOR MANAGEMENT The 2016 AGM decided on the following guidelines for determining the salaries and other remuneration of the CEO and other senior management, namely the heads of the business areas and heads of Group staffs who report directly to the CEO. The guidelines apply to agreements entered into after the AGM’s resolution. Salary and other benefits The remuneration of the CEO and the senior management shall consist of a fixed market-based salary. Other benefits, mainly car and accommodation, shall, insofar as they are provided, represent a limited part of the remuneration. No variable remuneration shall be paid other than possible share-related incentive programmes determined by the AGM. Pension The retirement age is normally 65 years. Pension benefits are based on defined contributions and comply with the ITP plan. Additional defined-contribution pension solutions may occur. Notice and severance pay The period of notice is six months, regardless of whether notice is given by the company or the member of senior management. In the event of notice being given by the company, severance pay can be paid corresponding to no more than 18 months’ salary. Remuneration committee A remuneration committee appointed from among the members of the Board shall handle matters pertaining to the CEO’s salary and other conditions of employment and submit proposals on such issues to the Board for decision. Detailed principles for determining the salaries, pension rights and other remuneration for senior management shall be laid down in a pay policy adopted by the remuneration committee. Deviations in individual cases The Board shall be entitled to depart from these guidelines in individual cases should special reasons exist. In the event of such a deviation, information thereon and the reasons therefor shall be submitted to the next AGM. SHARE SAVINGS PROGRAMME The 2016 AGM decided on a targeted share savings programme for around 40 key individuals in the Holmen Group. The purpose of the programme is strengthen the interests between the owners and the management of the company and to create long-term commitment to Holmen. Participation in the programme required the relevant employees to have invested in Holmen shares (known as ‘savings shares’) during the period 27 April to 20 May 2016. For each savings share invested, half a matching share will be assigned after the end of the vesting period. In addition, a number of performance shares may be assigned to each participant. These are linked to the Group’s return on capital employed. The allocation of the number of performance shares may vary, depending on the employee’s position within the Group, up to a maximum of 3–6 shares per savings share. The assignment of matching and performance shares requires participants to have been full time employee within the Holmen Group and to have held the savings shares for the entire vesting period. The vesting period runs from 20 May 2016 through the date of publication of Holmen’s interim report for the first quarter of 2019. Total costs for the programme are estimated at SEK 18 million. Costs corresponding to SEK 5 million have been recognised for 2016. Senior management Salary and other benefits for the CEO in 2016 amounted to SEK 8 001 168 (7 198 063). The total pension cost for the CEO, calculated in accordance with IAS 19, amounted to SEK 4 340 722 (3 616 009). No variable remuneration was paid. In 2016, the salaries and other benefits of other senior management, i.e. the heads of the four (four) business areas and the heads of the five (four) Group staffs who report directly to the CEO, totalled SEK 21 297 113 (18 883 727). The total pension cost for this group, calculated in accordance with IAS 19, amounted to SEK 10 606 250 (9 856 250) in 2016. No variable remuneration was paid. For senior management, employed from 2011, a mutual notice period of six months applies. In the event of notice being given by the company, deductible severance pay corresponding to 18 months’ salary is paid. These terms apply to six people. For four senior management employment contracts, signed before 2011, the employee is required to give six months’ notice and the company must give 12 months’ notice. In the event of notice being given by the company, severance pay corresponding to between one and two years’ salary is paid, depending on age. All members of senior management are employed by the parent company. Pension obligations in respect of senior management Holmen’s pension obligations over and above the ITP plan for the CEO amounted to SEK 14 million (9) at 31 December 2016 and for other members of senior management to SEK 32 million (24), calculated in accordance with IAS 19. The pension obligations are secured using plan assets managed by an independent pension fund. AVERAGE NUMBER OF FULL-TIME EQUIVA- LENTS AVERAGE NUMBER OF FULL-TIME EQUIVA- LENTS OF WHICH WOMEN 2016 2015 OF WHICH WOMEN 2 369 11 8 13 23 5 8 2 77 7 1 1 6 - 3 443 12 609 2 989 448 5 2 6 10 1 3 - 38 6 - 1 3 - 1 49 5 125 578 2 422 11 8 13 20 6 7 - 104 7 1 1 6 268 3 429 9 882 3 315 467 6 2 5 10 1 3 - 37 4 - 1 3 50 1 50 3 170 643 Parent company Sweden Spain Group companies Estonia France Germany Hong Kong Italy Japan Netherlands Poland Portugal Russia Singapore Spain Switzerland UK US Total Group companies Total Group The reduction in the number of employees in the Group during the year was mainly due to the sale of the paper mill in Madrid, but also to implemented restructurings. REMUNERATION OF BOARD AND SENIOR MANAGEMENT Board A fixed Board fee shall be paid to the members of the Board elected by the AGM. The CEO, however, does not receive any Board fee. For 2016, fees to the Board amounted to SEK 3 060 000 (2 925 000). The chairman received a fee of SEK 680 000 (650 000), and each of the other seven (seven) mem- bers received SEK 340 000 (325 000). PROPORTION OF WOMEN, % Board (excl. deputy members) Senior management Total GROUP 2016 17 30 23 2015 17 22 19 PARENT COMPANY 2015 17 22 19 2016 17 30 23 54 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 5–6 The income from financial instruments included in operating profit/loss is shown in the following table: GROUP 2016 2015 PARENT COMPANY 2016 2015 Exchange gains/losses on trade receivables and trade payables Net gain/loss on derivatives stated in working capital 15 99 1 -126 -67 -102 Interest income on trade receivables Interest costs on trade payables 1 0 1 -1 1 0 69 -82 1 -1 The derivatives included in operating profit/loss relate to currency hedging of trade receivables and trade payables as well as financial electricity derivatives. Gains and losses on currency hedging are recognised in operating profit/loss when the hedged item is recognised and in 2016 amounted to SEK -73 (-73) million, with the remainder being recognised in other comprehensive income as hedge accounting is applied. The fair value of outstanding transaction hedges at 31 December 2016 was SEK -26 million (82). Gains on financial electricity hedges are recognised in the income statement when they expire; for 2016 they totalled SEK -53 million (6). The fair value of outstanding financial electricity hedges at 31 December 2016 was SEK -57 million (-365). This is recognised in other comprehensive income as hedge accounting is applied. The change in the fair value of hedges for investment purchases is recognised in other comprehen- sive income until expiry, at which point the gain/loss is added to the cost of the non-current asset that was hedged. The fair value of outstanding hedges for investment purchases amounted to SEK 0 million at 31 December 2016. During the period, the cost of hedged items increased by SEK 12 million. Gains on equity hedges amounted to SEK 1 million (14) in 2016 and are recognised in other comprehensive income as hedge accounting is applied. In the parent company accounts, this gain is recognised in the income statement. The translation of net foreign assets had an impact of SEK 192 million (-8) on consolidated equity. The fair value of outstanding equity hedges at 31 December 2016 was SEK 16 million (25) and relates to financial derivatives. The fair value of the derivatives used to manage the fixed interest periods amounted to SEK -74 million (-82) at 31 December 2016, which was recognised in other comprehensive income as hedge accounting is applied. This value is expected to be recognised in the income statement from 2017 onwards. NOTE 5. AUDITORS’ FEE AND REMUNERATION The audit firm KPMG was elected by the 2016 Annual General Meeting as Holmen’s auditors for a period of one year. KPMG audits Holmen AB and almost all of its subsidiaries. REMUNERATION TO KPMG Audit assignments Tax advice Other services Total Other auditors Total GROUP 2016 6 3 - 9 1 9 2015 6 3 0 10 1 11 PARENT COMPANY 2015 4 1 - 5 2016 4 1 - 5 - 5 - 5 ‘Audit assignments’ refers to the statutory examination of the annual report and accounting records, the administration by the Board and the CEO, and auditing and other assessment performed as agreed or in accordance with contracts. This includes other duties that are incumbent on the company’s auditors and the provision of advice or other assistance resulting from observations in connection with such assessment or the performance of such other duties. ‘Tax advice’ refers to all consultation in the field of taxation. NOTE 6. NET FINANCIAL ITEMS AND INCOME FROM FINANCIAL INSTRUMENTS FINANCE INCOME Dividend income from Group companies Gains on sales of Group companies Net profit/loss Assets and liabilities measured at fair value through profit/loss for the year - Held for financial risk management* Other financial receivables Interest income Total finance income FINANCE COSTS Impairment losses on value of shares in Group companies Net profit/loss Assets and liabilities measured at fair value through profit/loss for the year - Held for financial risk management* Cash and cash equivalents Other financial liabilities Total net profit/loss Interest costs** Finance costs Net financial items PARENT COMPANY 2015 GROUP 2016 - 12 - - 1 13 2015 - - - - 1 1 2016 1 288 12 - - 17 1 317 8 - 15 7 16 46 - - -508 -126 36 3 -65 -27 -57 -84 -71 -10 5 3 -2 -89 -91 -90 47 3 -40 -499 -59 -559 759 -12 5 3 -130 -79 -209 -163 * Refers to the held-for-trading category in accordance with IAS 39. ** SEK -37 million (-38) in the Group and parent company refers to interest costs on derivatives measured at fair value through profit/loss for the year. Other interest income and interest costs are related to financial items not measured at fair value. Earnings from investments in Group companies amount to SEK 780 million, of which SEK 1 288 million relates to dividends from Group companies and SEK -508 million relates to impairment losses on shares in Group companies. The net gains and losses stated in net financial items mainly relate to currency revaluations of internal loans and hedging of internal lending. They also include the revaluation of interest rate swaps used to hedge loans at fixed rates of interest. The parent company’s net financial items also include currency revaluation of external loans and forward contracts that hedge net investment in foreign operations, which are recognised in the Group under other comprehensive income. The fair value of the interest component in forward foreign exchange contracts as well as value changes in accrued interest and realised interest in fixed-interest-rate swaps is recognised on an ongoing basis in net interest items. Information on financial risks is provided on pages 36–39. 55 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 7 NOTE 7. TAX TAXES STATED IN INCOME STATEMENT Current tax Deferred tax Total GROUP 2016 -331 -105 -436 PARENT COMPANY 2015 -252 9 -244 2016 -305 4 -301 2015 -134 14 -120 Tax recognised totalled SEK -436 million, corresponding to 23 per cent of profit before tax. Recognised profit/loss before tax Tax at applicable rate Difference in tax rate in foreign operations Non-taxable income and non-deductible costs Standard interest on tax allocation reserve Effect of unstated loss carry-forwards and temporary differences Tax attributable to previous periods Change to tax rate on deferred tax assets/liabilities Other Effective tax GROUP PARENT COMPANY 2016 SEKm 1 859 -409 3 -27 -2 3 -1 0 -3 -436 % 22.0 -0.2 1.5 0.1 -0.2 0.1 0.0 0.2 23.4 2015 SEKm 679 -149 4 -16 -3 4 19 21 0 -120 % 22.0 -0.5 2.3 0.4 -0.6 -2.8 -3.1 0.0 17.7 2016 SEKm 1 499 -330 0 29 -2 0 0 0 1 -301 % 22.0 0.0 -1.9 0.1 0.0 0.0 0.0 -0.1 20.1 2015 SEKm 982 -216 0 -25 -3 0 0 0 0 -244 % 22.0 0.0 2.5 0.3 0.0 0.0 0.0 0.0 24.8 TAX ATTRIBUTABLE TO OTHER COMPREHENSIVE INCOME Cash flow hedging Share in joint ventures’ other comprehensive income Translation difference on foreign operations Hedging of currency risk in foreign operations Revaluations of defined benefit pension plans Other comprehensive income TAXES AS STATED IN BALANCE SHEET GROUP AFTER TAX BEFORE TAX BEFORE TAX TAX 2016 211 -21 -165 1 -159 -133 -46 - - -6 29 -24 164 -21 -165 -5 -130 -157 -34 3 8 22 208 207 TAX 2015 7 - - -5 -43 -41 AFTER TAX BEFORE TAX -26 3 8 17 165 166 211 - - - - 211 TAX 2016 -46 - - - - -46 PARENT COMPANY BEFORE TAX AFTER TAX 164 - - - - 164 -30 - - - - -30 AFTER TAX TAX 2015 7 - - - - 7 -23 - - - - -23 Deferred tax asset Current tax receivable Total tax receivables Deferred tax liabilities Non-current assets Biological assets* Property, plant and equipment Tax allocation reserve Transactions subject to hedge accounting Other, including deferred tax assets stated net among deferred tax liabilities Total deferred tax liabilities Current tax liability Total tax liabilities * For the parent company this relates to forest land. GROUP 2016 4 132 136 PARENT COMPANY 2015 - - - 2016 - 106 106 2015 6 12 18 GROUP 2016 2015 PARENT COMPANY 2015 2016 3 854 1 319 502 -35 -27 5 613 6 5 618 3 788 1 363 438 -81 0 5 508 53 5 561 634 -1 - -35 13 612 - 612 634 -1 - -81 18 569 53 622 56 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 7–9 CHANGE IN THE NET OF DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES GROUP STATED IN OTHER COMPRE- HENSIVE INCOME - - - -46 29 -17 GROUP STATED IN OTHER COMPRE- HENSIVE INCOME - - - 7 -44 -36 PARENT COMPANY TRANSLATION DIFFERENCES AND OTHER - 19 - - -2 16 CLOSING BALANCE -3 854 -1 319 -502 35 32 -5 608 OPENING BALANCE -634 1 - 81 -18 -569 STATED IN THE INCOME STATEMENT -1 0 - - 4 4 STATED IN OTHER COMPRE- HENSIVE INCOME - - - -46 - -46 PARENT COMPANY TRANSLATION DIFFERENCES AND OTHER - -10 - - 9 -1 CLOSING BALANCE -3 788 -1 363 438 81 5 -5 502 OPENING BALANCE -632 2 - 74 -29 -585 STATED IN THE INCOME STATEMENT -2 -1 - - 11 9 STATED IN OTHER COMPRE- HENSIVE INCOME - - - 7 - 7 CLOSING BALANCE -634 1 - 35 -13 -612 CLOSING BALANCE -634 1 - 81 -18 -569 OPENING BALANCE -3 788 -1 363 -438 81 5 -5 502 STATED IN THE INCOME STATEMENT -66 25 -64 - 0 -105 OPENING BALANCE -3 718 -1 361 -512 74 39 - 5 479 STATED IN THE INCOME STATEMENT -69 8 74 - 1 14 2016 Biological assets* Property, plant and equipment Tax allocation reserve Transactions subject to hedge accounting Other Deferred net tax liability 2015 Biological assets* Property, plant and equipment Tax allocation reserve Transactions subject to hedge accounting Other Deferred net tax liability * For the parent company this relates to forest land. For information on biological assets see Note 11. Deferred tax liability in respect of property, plant and equipment is primarily attributable to depreciation in excess of plan. For information concerning provisions for taxes see Note 18. The deferred tax income recognised in the consolidated income statement relates primarily to changes in temporary differences. The amount recognised in other comprehensive income in- cludes deferred tax related to changes of SEK -46 million (7) in hedging reserves and an impact of SEK 29 million (-44) from the revaluation of defined benefit pension plans. The Group sold essentially all its operations in Spain in 2016 and is planning to discontinue these operations entirely. The parent company has requested an advance ruling on the entitlement to group relief for tax losses in the Group’s Spanish operations when the operations are discontinued. The Swedish tax authority has opposed this. The case is being reviewed by the Supreme Adminis- trative Court and a ruling is expected in 2017. If the Group is entitled to group relief, it is estimated this would result in a deduction in the parent company corresponding to approximately SEK 400 million in tax. No deferred tax asset has been recognised in connection with a possible entitlement to relief. NOTE 8. EARNINGS PER SHARE NOTE 9. NON-CURRENT INTANGIBLE ASSETS Total number of shares outstanding, 1 January Buy-back of company’s own shares during the year Total number of shares outstanding, 31 December GROUP 2016 2015 83 996 162 83 996 162 - - 83 996 162 83 996 162 Weighted average number of shares during the year, basic 83 996 162 83 996 162 Effect of share savings programme - Weighted average number of shares during the year, diluted 83 996 162 83 996 162 - Shareholders’ share of profit for the year, SEKm Basic average number of shares, million Basic EPS for the year, SEK Shareholders’ share of profit for the year, SEKm Diluted average number of shares, million Diluted EPS for the year, SEK 1 424 559 83 996 162 83 996 162 6.7 16.9 1 424 559 83 996 162 83 996 162 6.7 16.9 In previous years 760 000 class B shares were repurchased, which corresponds to approximately 0.9 per cent of the total number of shares outstanding, and to approximately 0.3 per cent of the total number of votes. Holmen introduced a share savings programme during the year. The programme involves previ- ously repurchased shares being transferred to programme participants at the end of the term. The number of shares to be transferred depends on the Group’s return on capital employed over the 2016–2018 period. In the event of maximum allocation, 93 000 shares will be transferred from the company to programme participants. The allocation of repurchased shares in order to meet these undertakings results in dilution effects. The effects on key ratios and profit per share are marginal. See Note 4 for further information about the share savings programme. ACCUMULATED ACQUISITION COST Opening balance Investments Disposal and retirement of assets Translation differences Total AMORTISATION AND IMPAIRMENT LOSSES, ACCUMULATED Opening balance Amortisation for the year Impairment losses for the year Disposal and retirement of assets Translation differences Total Residual value according to plan at end of year GROUP 2016 225 5 -36 0 194 118 17 1 -28 0 107 87 PARENT COMPANY 2015 26 - - - 26 2016 26 - - - 26 2015 215 12 -1 -1 225 101 19 - -1 -1 118 107 18 1 - - - 19 8 17 1 - - - 18 8 Intangible non-current assets mostly consist of IT systems of SEK 64 million (80). These assets were largely acquired from external sources. They have determinable useful lives and are amor- tised over 5–20 years. No goodwill applies for the Group. 57 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 10 NOTE 10. PROPERTY, PLANT AND EQUIPMENT GROUP Accumulated acquisition cost Opening balance Investments Reclassifications Disposal and retirement of assets Translation differences Total Amortisation and impairment losses, accumulated Opening balance Depreciation and amortisation according to plan for the year Impairment losses for the year Disposal and retirement of assets Translation differences Total Residual value according to plan at end of year PARENT COMPANY Accumulated acquisition cost Opening balance Investments Disposal and retirement of assets Total BUILDINGS, OTHER LAND AND LAND INSTALLATIONS 2015 2016 2015 MACHINERY AND EQUIPMENT 2016 2015 WORK IN PROGRESS AND ADVANCE PAYMENTS TO SUPPLIERS 2016 2015 FOREST LAND 2016 167 - - -14 -6 146 - - - - - - 165 - - - 2 167 - - - - - - 7 003 37 - -1 420 -27 5 593 6 970 60 - -5 -22 7 003 31 260 729 92 -4 192 -317 27 572 30 964 811 4 -526 8 31 260 4 247 3 822 23 992 23 166 118 81 -1 212 -6 3 229 142 306 -4 -19 4 247 882 41 -3 994 -181 20 740 1 080 249 -477 -25 23 992 130 18 -92 -1 -11 44 - - - - - - 153 -17 -4 -3 0 130 - - - - - - TOTAL 2016 2015 38 560 784 - -5 627 -362 33 355 38 252 854 - -533 -13 38 560 28 239 26 988 1 000 122 -5 205 -187 23 968 1 222 555 -481 -45 28 239 146 167 2 365 2 756 6 832 7 268 44 130 9 387 10 321 BUILDINGS, OTHER LAND AND LAND INSTALLATIONS 2015 2016 2015 FOREST LAND 2016 MACHINERY AND EQUIPMENT 2016 2015 TOTAL 2016 2015 461 3 0 464 - - - - 434 26 0 461 - - - - 2 390 -1 2 389 2 853 2 401 -12 2 390 2 850 139 - 0 139 129 1 0 130 1 - 1 10 139 - 0 139 128 1 0 129 1 - 1 11 232 26 -38 220 172 24 -38 158 - - - 62 248 23 -39 232 184 24 -36 172 - - - 60 832 29 -38 823 301 25 -38 288 822 49 -39 832 312 25 -36 301 2 391 -1 2 389 2 925 2 402 -12 2 391 2 922 Accumulated depreciation and amortisation according to plan Opening balance Depreciation and amortisation according to plan for the year Disposal and retirement of assets Total Accumulated revaluations Opening balance Disposal and retirement of assets Total Residual value according to plan at end of year In 2016, the Spanish operations in the Paper business area were sold, which reduced property, plant and equipment by SEK 527 million, SEK 122 million of which was the result of an impairment loss in connection with the signing of the sales agreement. The Group’s impairment losses on property, plant and equipment are stated in the income statement in the line item ‘Impairment losses’. The Group’s investment commitments for approved and ongoing projects amounted to SEK 250 million (776) at 31 December 2016. In 2016, the company’s capitalised borrowing costs to- talled SEK 3 million (3). An interest rate of 1.5 per cent (1.8) was used to determine the amount. 58 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 11 The net effect of the change in fair value and the change as a result of harvesting is stated in the in- come statement as a change in value of biological assets. In 2016, this amounted to SEK 315 mil- lion (267). The table below shows how the value of forest assets would be affected by changes in the most sig- nificant valuation assumptions. Change in value GROUP Annual change, +0.1% per year Rate of harvesting Price inflation Cost inflation Change in level, +1% Harvesting Prices Costs Discount rate, +0.1% BEFORE TAX AFTER TAX 740 1 120 -600 250 390 -220 -480 580 870 -470 200 300 -170 -370 Annual change refers to the annual rate of change used in the valuation of each parameter. For example, an increase of 0.1 per cent means that the annual price inflation will be increased from 2.0 per cent to 2.1 per cent in the calculations. Change in level means that the level for each parameter and year changes. For example, a 1 per cent price increase means that the wood prices in the calculations are raised by 1 per cent for all years (change in level). NOTE 11. BIOLOGICAL ASSETS Forest assets are recognised in the consolidated accounts as growing forest, which is stated as a biological asset at fair value, and land, which is stated at cost. Holmen’s assessment is that no relevant market prices are available that can be used to value forest holdings as extensive as Holmen’s. The valuation is therefore made by calculating the present value of future expected cash flows from the growing forests. Fair value measurement is based on measurement level 3. This calculation of cash flows is made for the coming 100 years, which is regarded as the forests’ harvesting cycle. The cash flows are calculated on the basis of harvesting volumes according to Holmen’s current plan and assessments of future price and cost changes. The cost of re-planting has been taken into account, as re-planting after harvesting is a statutory obligation. The cash flows are discounted using an interest rate of 5.5 (5.5) per cent. In total, Holmen owns 1 042 000 hectares of productive forest land, with a volume of standing forest totalling 120 million m3 growing stock, solid over bark. According to the harvesting plan, valid from 2011, harvesting will amount to 3.1 million m3sub per year, of which 0.1 million m3sub will be biofuel in the form of branches and treetops. It is believed that this level will remain largely unchanged until 2030. Thereafter, harvesting is expected to increase gradually to over 4 million m3sub per year by 2110. Around 45 per cent of the wood harvested consists of pulpwood that is sold to the pulp and paper industry, 50 per cent is logs sold to sawmills and the remainder mainly consists of forest fuel. The valuation is based on a long-term trend price that is adjusted upwards annually by 2 per cent infla- tion. The trend price for 2017 is 424 kr/m3sub, which is in line with applicable market prices. The cost forecast is based on present-day levels and is adjusted upwardly by just over 2 per cent per year. Holmen’s forest holdings are reported at SEK 17 448 million (17 173) before tax. A deferred tax li- ability of SEK 3 854 million (3 788) is stated in relation to that figure. This represents the tax that is expected to be charged against earnings from harvesting in the future. On that basis, the growing forest, net after tax, is stated at SEK 13 594 million (13 385). The change in the value of the growing forests can be broken down as follows: GROUP Carrying amount at start of year Acquisition of growing forest Sales of growing forest Change due to harvesting Unrealised change in fair value Other changes Carrying amount at end of year 2016 17 173 4 -27 -587 902 -17 17 448 2015 16 867 36 -2 -540 807 5 17 173 HARVESTING ’000 m3sub/yr PRICES SEK/m3sub 4 000 3 000 2 000 1 000 0 2001-2010 2011-2016 2017-2020 2021-2030 2031-2040 2041-2050 2051-2060 2061-2070 2071-2080 2081-2090 2091-2100 2101-2110 Average harvest Planned harvest 600 500 400 300 200 1999 2003 2007 2011 2015 2019 2024 Real Nominal Price used in valuation (nominal) The Nominal price series shows the average selling price for Holmen. The Real series shows nominal prices recalculated at 2016 monetary value using historical Swedish CPI. 59 HOLMEN ANNUAL REPORT 2016 / NOTES NOTE 12 NOTE 12. INVESTMENTS IN ASSOCIATES, JOINT VENTURES AND OTHER SHARES AND PARTICIPATING INTERESTS Profit/loss from associates and joint ventures Recognised in profit/loss for the year Other comprehensive income from joint venture Recognised in comprehensive income JANUARY–DECEMBER 2016 -18 -18 -21 -21 2015 -46 -46 3 3 The combined value of Holmen’s share in the profits of associates amounted to SEK -14 million (10) for the Group and to SEK -9 million (4) for the parent company. The combined value of Holmen’s share in the profits of joint ventures amounted to SEK -8 million (-3) for the Group and to SEK -8 million (-3) for the parent company. ASSOCIATES Carrying amount at start of year Investments Share of earnings Disposals Dividends received Translation difference Impairment losses Carrying amount at end of year GROUP 2016 1 772 5 -16 -105 -12 4 -2 1 646 2015 1 828 - -46 - - -3 -7 1 772 PARENT COMPANY 2015 125 - - - - - - 125 2016 125 - - -2 - - - 123 During the year, investments in associates that manage logistics, energy and recycling of recovered paper were sold, primarily in connection with the sale of the Spanish operations. JOINT VENTURE Carrying amount at start of year Investments Share of earnings Other Carrying amount at end of year GROUP 2016 141 10 -30 6 127 PARENT COMPANY 2015 82 - - - 82 2016 82 10 - - 92 2015 142 - -1 - 141 PARENT COMPANY AND GROUP HOLDINGS OF SHARES AND INVESTMENTS IN ASSOCIATES AND JOINT VENTURES CORPORATE ID NO. REGISTERED OFFICE NO. OF INVEST- MENTS INTEREST %* VALUE OF HOLDING IN CONSOLIDAT- ED ACCOUNTS 2016 CARRYING AMOUNT IN THE PARENT COMPANY VALUE OF HOLDING IN CONSOLIDAT- ED ACCOUNTS 2015 CARRYING AMOUNT IN THE PARENT COMPANY INTEREST %* 556017-6678 556016-0953 556036-9398 556594-6984 556504-2826 556713-5172 ASSOCIATES Brännälvens Kraft AB Gidekraft AB Harrsele AB Uni4 Marketing AB Vattenfall Tuggen AB VindIn AB Melodea Ltd, Israel Baluarte Sociedade de Recolha e Recuperação de Desperdicios, Lda, Portugal SAS Saica Natur sud, France Peninsular Cogeneración S.A., Spain Other associates Arbrå Örnsköldsvik Vännäs Stockholm Lycksele Stockholm Tel Aviv Alcochete Lorp-Sentaraille Madrid 5 556 990 9 886 1 800 683 200 119 2 678 4 500 13.9 9.9 49.4 36 6.8 17.7 46.7 - - - JOINT VENTURE Varsvik AB Total 556914-9833 Stockholm 250 50.0 36 0 1 465 12 75 55 2 - - - 0 1 646 127 1 773 - 0 - 2 75 46 - - - - 0 123 92 215 13.9 9.9 49.4 36.0 6.8 17.7 42.4 50.0 24.0 50.0 50.0 36 0 1 467 21 75 57 2 37 20 55 2 1 772 141 1 914 - 0 - 2 75 46 - - - - 2 125 82 208 * The percentage of ownership corresponds to the percentage of votes for the total number of shares. The holdings in Brännälvens Kraft AB, Gidekraft AB, Harrsele AB and Vattenfall Tuggen AB refer to hydro power assets, and the holdings in VindIn AB refer to wind power assets. The holdings entitle the Group to buy electricity produced at cost price, so the associate only earns a very limited profit. Purchased electricity is sold to external customers at market price, and the earnings are stated in the consolidated accounts within the Renewable energy business area. The holding in associate Harrsele AB is recognised in the Group at SEK 1 465 million (1 467). Holmen purchased 416 (564) GWh of electrical power from Harrsele AB in 2016, giving Holmen an operating profit of SEK 76 million (95) from market sales. Harrsele AB owns power assets that generate 950 GWh of electrical power in a normal year. These assets were originally constructed in 1957–58 and the carrying amount of the non-current assets in Harrsele AB amounts to SEK 114 million (115). The company has non-current liabilities to its owner of SEK 25 million (25). Ownership in remaining associates relates to activities in the areas of sales, research and development. The interests in Brännälvens Kraft AB, Gidekraft AB, Vattenfall Tuggen AB and VindIn AB are classified as associates even though the holdings are less than 20 per cent, since shareholder agreements provide significant influence over each company’s activities. Ownership in the joint venture, Varsvik AB, relates to wind power operations. 60 HOLMEN ANNUAL REPORT 2016 / NOTESOTHER SHARES AND PARTICIPATING INTERESTS Carrying amount at start of year Disposals Translation difference Impairment losses Carrying amount at end of year NOTE 12–13 GROUP 2016 4 - 0 -2 2 PARENT COMPANY 2015 1 0 - - 1 2016 1 - - - 1 2015 4 0 0 - 4 NOTE 13. FINANCIAL INSTRUMENTS Non-current financial receivables consist of interesting-bearing financial receivables to other companies, prepayments for credit facilities and the fair value of non-current derivatives. The parent company’s receivables from Group companies include a significant share of interest- free receivables between Swedish wholly owned Group companies. Current financial receivables are recognised as fixed income investments and lending for durations of up to one year, accrued interest income and unrealised exchange gains. Current financial receivables essentially have fixed interest periods of under three months, and thus involve a very limited interest rate risk. Cash and cash equivalents refers to bank balances and investments that can be readily converted into cash for a known amount and with a duration of no more than three months from the date of acquisition, which also means that the interest rate risk is negligible. Cash and cash equivalents are placed in bank accounts or as current deposits at banks. Loan liabilities, accrued interest costs, unrealised exchange losses and fair values of derivatives are stated as financial liabilities. Financial liabilities are largely interest-bearing. The parent company’s liabilities to Group companies include a significant amount of interest-free liabilities between Swedish wholly owned Group companies. The maturity structure and average interest for the Group’s liabilities are stated in the administra- tion report on pages 38–39. SEK -3 151 million of the parent company’s liabilities are due for pay- ment within one year. In addition to the financial assets and liabilities identified above, the pension liability (see Note 17) is also included in net financial debt. All of the Group’s derivatives are covered by ISDA or FEMA agreements, which entails a right for Holmen to offset assets and liabilities in relation to the same counterparty in the case of a credit event. Taking into account the terms of the netting agreement, the net exposure is SEK -172 million. Assets and liabilities are not offset in the report. Recognised derivatives totalled SEK 213 million (138) on the asset side and SEK -385 million (-466) on the liabilities side. Items measured at fair value belong to measurement level 2 pursuant to IFRS 13. Fair value in the tables is calculated on the basis of discounted cash flows and all variables, such as discount rates and exchange rates, are taken from market listings for calculations. The difference between fair value and carrying amount arises because certain liabilities are not measured at fair value in the balance sheet, and are instead stated at their amortised cost. For loans recognised at amortised cost, fair value is calculated on the basis of discounted cash flows and belongs to measurement level 2. All variables are taken from market listings for calculations. The Group has no loans that are recognised at fair value in profit/loss. In the case of trade receivables, trade payables and other items not affected above, the carrying amount is stated as the fair value, as this is judged to be a good reflection of the fair value. Since it has not been possible to determine a reliable fair value for shares and interests, they have been excluded from the tables. For further information on financing, see the section on Risk, on pages 36–39. MATURITY STRUCTURE, UNDISCOUNTED AMOUNTS* 2018 2017 2019 2020 2021– FINANCIAL LIABILITIES Derivatives Other financial liabilities FINANCIAL RECEIVABLES Derivatives Other financial receivables -93 -3 151 -23 -310 -17 -501 -16 - 55 245 - 4 - 4 - 1 - - - 0 * Refers to financial instruments included in Group net financial debt, excluding provisions for pensions. 61 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 13 NOTE 13. FINANCIAL INSTRUMENTS, CONT. DERIVATIVES RECO GNISED AT FAIR VALUE THROUGH PROFIT/LOSS 2016 2015 DERIVATIVES WITH HEDGE ACCOUNTING 2016 2015 TRADE RECEIVABLES AND LOAN RECEIVABLES 2016 2015 AVAILABLE-FOR- SALE ASSETS 2016 2015 OTHER LIABILITIES 2015 2016 TOTAL CARRYING AMOUNT 2016 2015 FAIR VALUE 2016 2015 - 0 - 55 - 55 - - - - - - - - - - -53 - - - - -53 - - 8 - -23 -14 - 0 - 37 - 37 - - - - - - - - - - -8 - - - - -8 - - 11 - -2 - - - - - - - - - - - - - - - - - - - - - -75 - -75 - -83 - -83 - - - - - - - - - - - - - - - - - - - - 39 39 1 - 34 34 43 43 0 - 24 24 0 210 210 0 221 221 - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 174 - 1 987 150 - 89 - -233 -375 - - - - - - 39 -158 -368 2 457 2 275 - - - - - - - - - - - - - - - - - - - - - - 2 - - - - 2 - - - - - - - - - - - - - - - - - - - - - - 4 - - - - - - - - - - - - - - - - - - - - - - - 39 39 1 55 34 89 43 43 0 37 24 61 39 39 1 55 34 89 43 43 0 37 24 61 0 210 210 0 221 221 0 210 210 0 221 221 -700 - -700 - -700 -800 - -8 -808 -1 709 -26 - -12 -700 -700 - -3 147 -1 500 - -13 -2 213 -2 144 -27 - -13 -500 - -7 -2 691 -800 -75 -8 -882 -1 709 -26 -53 -12 -700 -700 - -3 200 -1 500 -83 -13 -2 295 -2 144 -27 -8 -13 -500 - -7 -2 698 -800 -75 -8 -882 -1 709 -26 -53 -12 -700 -700 - -3 200 -1 500 -83 -13 -2 295 -2 144 -27 -8 -13 -500 - -7 -2 698 - - - - - - 2 2 174 4 1 987 2 2 174 - 1 987 158 100 158 100 -1 766 -1 916 -1 766 -1 916 -1 766 -1 916 - - -257 -377 -257 -377 4 -5 721 -6 820 -3 433 -4 871 -3 433 -4 875 Group FINANCIAL INSTRUMENTS INCLUDED IN NET FINANCIAL DEBT NON-CURRENT FINANCIAL RECEIVABLES Other financial receivables CURRENT FINANCIAL RECEIVABLES Accrued interest Derivatives Other financial receivables CASH AND CASH EQUIVALENTS Current deposit of cash and cash equivalents Bank balances NON-CURRENT LIABILITIES MTN loans Loans from banks and other credit institutions Derivatives Other non-current liabilities CURRENT LIABILITIES Commercial paper programme Bank account liabilities Derivatives Accrued interest MTN loans Other bond loans Other current liabilities FINANCIAL INSTRUMENTS NOT INCLUDED IN NET FINANCIAL DEBT Other shares and participating interests Trade receivables Derivatives (recognised among operating receivables) Trade payables Derivatives (recognised among operating liabilities) Total financial instruments 62 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 13 Parent company FINANCIAL INSTRUMENTS INCLUDED IN NET FINANCIAL DEBT NON-CURRENT FINANCIAL RECEIVABLES Receivables from Group companies Other financial receivables CURRENT FINANCIAL RECEIVABLES Accrued interest Derivatives Other financial receivables CASH AND CASH EQUIVALENTS Bank balances NON-CURRENT LIABILITIES MTN loans Loans from banks and other credit institutions Liabilities to Group companies Derivatives CURRENT LIABILITIES Commercial paper programme Bank account liabilities Derivatives Accrued interest MTN loans Other bond loans Other current liabilities FINANCIAL INSTRUMENTS NOT INCLUDED IN NET FINANCIAL DEBT Other shares and participating interests Trade receivables Derivatives (recognised among operating receivables) Trade payables Derivatives (recognised among operating liabilities) Total financial instruments DERIVATIVES RECOGNISED AT FAIR VALUE THROUGH PROFIT/ LOSS 2016 2015 DERIVATIVES WITH HEDGE ACCOUNTING 2016 2015 TRADE RECEIVABLES AND LOAN RECEIVABLES 2016 2015 AVAILABLE-FOR- SALE ASSETS 2016 2015 OTHER LIABILITIES 2015 2016 TOTAL CARRYING AMOUNT 2016 2015 FAIR VALUE 2016 2015 - - 0 - 55 - 55 - - - - - - - - - -53 - - - - -53 - - 13 - -24 -10 - - 0 - 37 - 37 - - - - - - - - - -8 - - - - -8 - - 12 - -3 - - - - - - - - - - - - - - - - - - - - - - -75 -75 - - -83 -83 - - - - - - - - - - - - - - - - - - - - 3 104 98 3 202 3 119 95 3 214 1 - 34 34 104 104 0 - 24 24 155 155 - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 874 - 1 645 151 - 90 - -234 -376 - - - - - - 39 -157 -368 5 214 5 039 - - - - - - - - - - - - - - - - - - - - - - 0 - - - - 0 - - - - - - - - - - - - - - - - - - - - - - 1 - - - - - - - - - - - - - - - - - - - - - - - 3 104 98 3 202 3 119 95 3 214 3 104 98 3 202 3 119 95 3 214 1 55 34 89 104 104 0 37 24 61 155 155 1 55 34 89 104 104 0 37 24 61 155 155 -700 - -700 - -700 -800 - 1 500 -1 013 - -3 213 -1 454 - -2 254 -1 709 -26 - -12 -700 -700 - -3 147 -2 144 -27 - -13 -500 - -6 -2 690 -800 -1 454 -75 -2 328 -1 709 -26 -53 -12 -700 -700 - -3 200 -1 500 -1 013 -83 -3 295 -2 144 -27 -8 -13 -500 - -6 -2 698 -800 -1 454 -75 -2 328 -1 709 -26 -53 -12 -700 -700 - -3 200 -1 500 -1 013 -83 -3 295 -2 144 -27 -8 -13 -500 - -6 -2 698 - - - - - - 0 1 874 1 1 645 0 1 874 - 1 645 164 102 164 102 -1 576 -1 845 -1 576 -1 845 -1 576 -1 845 - - -258 -379 -258 -379 1 -6 976 -7 748 -1 929 -3 038 -1 929 -3 039 63 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 14–16 NOTE 14. INVENTORIES NOTE 16. EQUITY, PARENT COMPANY Raw materials and consumables Logs and pulpwood Finished products and work in progress Felling rights Electricity certificates and emission allowances Total GROUP 2016 831 233 1 431 431 54 2 981 2015 971 299 1 237 526 56 3 089 PARENT COMPANY 2015 645 272 858 508 2016 637 206 1 077 423 54 2 396 52 2 336 During the year, impairment losses on inventories affected profit by SEK -2 million (18) for the Group and SEK -5 million (9) for the parent company. NOTE 15. OPERATING RECEIVABLES Trade receivables Group companies Associates Other Total trade receivables Current receivables Group companies Associates Other Derivatives Prepayments and accrued income Total other operating receivables Total operating receivables GROUP 2016 2015 PARENT COMPANY 2015 2016 - 38 2 137 2 174 - 5 226 158 175 564 2 738 - 52 1 935 1 987 - 4 219 100 196 519 2 505 50 38 1 786 1 874 - 5 129 164 82 380 2 254 83 51 1 511 1 645 - 4 191 102 84 381 2 026 Trade receivables are recognised at the amount expected to be received, based on an individual assessment of each customer. The Group’s trade receivables mainly relate to European customers. Trade receivables denominated in foreign currencies were valued at the balance sheet date. Following an individual assessment of all trade receivables, a provision for anticipated credit losses of SEK 37 (38) million has been made and recognised, net, together with trade receivables. During the year, the provision was changed by SEK -3 million (-6) as a result of actual credit losses, and by SEK 2 million (12) as a result of changes in the provision for anticipated credit losses. At 31 December 2016, SEK 44 million (87) of trade receivables were past due for more than 30 days. The credit quality of financial assets that are neither past due nor impaired is deemed to be good. The fair values of derivatives relate to hedges of future cash flows. Customer credit risks related to the Group’s customers are managed by the relevant business areas and are described on page 37. SHARE CAPITAL Registered share capital Class A Class B Total no. of shares Repurchased class B shares Total number of shares outstanding SHARE CAPITAL Registered share capital Class A Class B Total no. of shares Repurchased class B shares Total number of shares outstanding 31 Dec 2016 NUMBER QUOTIENT VALUE SEKm 50 50 1 131 3 107 4 238 22 623 234 62 132 928 84 756 162 -760 000 83 996 162 31 Dec 2015 NUMBER QUOTIENT VALUE SEKm 50 50 1 131 3 107 4 238 22 623 234 62 132 928 84 756 162 -760 000 83 996 162 The company’s share capital consists of shares issued in two classes: class A, each of which carries 10 votes, and class B, each of which carries one vote. In other respects, there are no restrictions between classes of shares. At 31 December 2016 the Group’s own shareholding was 760 000 shares (760 000). None of the Group’s own shares were sold during the year. Assets and liabilities measured at fair value according to Chapter 4 Section 14a of the Swedish Annual Accounts Act had an impact of SEK -167 million (-330) on parent company equity. In the consolidated accounts, valuation of derivatives and other financial instruments had an impact of SEK -172 million (-330) on equity. Holmen’s profitability target is for forests and power to generate a return of 5 per cent and for its industrial operations to generate a return of over 10 per cent. Taken together this means that the Group’s return on capital employed should exceed 7 per cent. Decisions on dividends are based on an appraisal of the Group’s profitability, future investment plans and financial position. The aim is to have a robust financial position with a debt/equity ratio at a maximum of 0.5. The AGM has at its disposal the company’s earnings amounting to SEK 4 921 232 735. The Board proposes that the AGM on 27 March 2017 approve a dividend of SEK 12 per share. The proposed dividend totals SEK 1 008 million. The Board also proposes that the remaining amount of SEK 3 913 277 791 be carried forward. For the previous year, the dividend paid was SEK 10.5 per share (SEK 882 million). The debt/equity ratio was 0.19 (0.23). Neither the parent company nor any of the subsidiaries are subject to external capital requirements. For further details about the Group’s capital management and risk management, see pages 36–39. 64 HOLMEN ANNUAL REPORT 2016 / NOTES NOTE 17 NOTE 17. PENSION PROVISIONS Holmen provides defined-benefit pension plans for some office-based employees in Sweden. Most of these commitments are secured by means of insurance policies with Alecta. As Alecta cannot provide sufficient information to permit the ITP plan to be stated in the accounts as a defined benefit plan, it is stated in accordance with statement UFR 10 of the Swedish Financial Reporting Board as a defined contribution plan. Some defined benefit obligations over and above the ITP plan are available for Group management and secured by means of a pension fund. Occupational pensions for other office-based employees and all collective agreement workers in Sweden are defined contribution plans. Defined benefit plans in the UK have been closed to new pension accruals since 2015. These obligations are recognised in the consolidated accounts as defined benefit plans in accordance with IAS 19. COST RECOGNISED IN PROFIT/LOSS FOR THE YEAR Defined benefit plans Personnel costs Finance costs Curtailment gain Total defined benefit plans stated in profit/loss for the year Defined contribution plans Personnel costs Total recognised in profit/loss for the year GROUP PARENT COMPANY 2016 2015 2016 2015 -7 -2 - -9 -23 -12 36 2 -21 1 - -21 -12 1 - -10 -129 -138 -129 -127 -106 -127 -110 -120 COST RECOGNISED IN OTHER COMPREHENSIVE INCOME Return on plan assets excl. recognised interest income Actuarial gains and losses from changes in demographic assumptions Actuarial gains and losses from changes in financial assumptions Actuarial gains and losses from experiential adjustments Payroll tax Total recognised in other comprehensive income 2016 241 33 -418 -13 -1 -159 2015 -43 45 47 157 2 208 The change in the defined benefit obligations and the change in plan assets are specified in the tables below. Some 90 per cent of the obligations relate to the pension plans in the UK. The obligations arising out of the pension schemes in the UK are placed in a trust. These are governed by a board consisting of representatives from Holmen and the beneficiaries. Holmen’s UK subsidiary has a commitment to cover the deficit that exists over a period of time as established between the trust and the company in consultation with its actuary. This period is currently just over 4 years and is subject to review every 3 years. OBLIGATIONS Obligations at 1 January Current service cost Payroll tax Interest costs Actuarial gains/losses Contribution by plan participants Benefits paid Transferred from provisions Settlements Exchange differences Obligations at 31 December GROUP 2016 -2 374 -7 2 -77 -399 - 212 - - 230 -2 414 2015 -2 565 -23 3 -93 249 -3 101 -1 36 -79 -2 374 PARENT COMPANY 2015 -159 -12 - -1 - - 20 -1 - - -153 2016 -153 -21 - -7 - - 13 - - - -167 Of the Group’s total obligations, SEK 11 million (14) refers to those that are not funded, while the rest are wholly or partially funded obligations. Of the parent company’s obligations, SEK 12 million (5) are secured under the Swedish Pension Obligations Vesting Act. The weighted average duration is 18 years. PLAN ASSETS Fair value of assets at 1 January Interest income Expected return excl. recognised interest income Real return (parent company) Administration fees Contribution by employer Contribution by plan participants Benefits paid Exchange differences Fair value of assets at 31 December Pension provisions, net Plan assets by type are as shown below: PLAN ASSETS Equities Bonds Current fixed income investments GROUP 2016 2 244 75 241 - -5 73 - -197 -218 2 213 -201 2015 2 165 82 -43 - -4 65 3 -84 59 2 244 -130 PARENT COMPANY 2015 148 - 2016 148 - - 7 - - - - - 155 -12 - 3 - - - -3 - 148 -5 GROUP 2016 1 130 1 063 20 2 213 2015 1 127 1 101 17 2 244 PARENT COMPANY 2015 57 90 1 148 2016 71 80 3 155 The plan assets do not include any financial instruments issued by Group companies or assets used by the Group. Of equities, 49 per cent relate to the UK, 47 per cent to the rest of Europe and the US and 4 per cent to the rest of the world. Of bonds, 44 per cent relate to government bonds and 56 per cent to corporate bonds. KEY ACTUARIAL ASSUMPTIONS, GROUP (WEIGHTED AVERAGE), % Discount rate Rate of salary increase Rate of price inflation 31 Dec 2016 2.7 3.0 3.1 31 Dec 2015 3.7 3.0 2.9 The discount rate for pension obligations was established on the basis of high-quality corporate bonds. A discount rate of 0.8 per cent (1.9) and salary levels at the balance sheet date were used for calculating the amount of the parent company’s pension obligation. The table below shows how the obligation would be affected in the event of a change in key actuarial assumptions (- reduces debt, + increases debt). SENSITIVITY ANALYSIS Discount rate (+ 0.5%) Rate of salary increase (+ 0.5%) Rate of price inflation (+ 0.5%) Mortality (+ 1 year in life expectancy) 31 Dec 2016 -203 2 178 82 31 Dec 2015 -188 2 164 72 The Group’s payments into the funded defined benefit plans in 2017 are expected to amount to SEK 31 million. Multi-employer plans The year’s premiums for pension insurance policies taken out with Alecta’s ITP 2 plan amounted to SEK 33 million (33) and are included among personnel costs in the income statement. Holmen’s share of the total number of active members in the plan amounted to 765 active members, which corresponds to 0.15 per cent. Premiums to Alecta are expected to amount to SEK 32 million in 2017. Alecta’s surplus can be allocated to policyholders and/or the persons insured. If Alecta’s collective consolidation falls below 125 per cent or exceeds 155 per cent, measures will be taken to create the conditions to ensure the level of consolidation returns to the normal range. In the event of low consolidation, one measure may be to raise the agreed price for new policy subscriptions and an increase in existing benefits. In the event of high consolidation, one measure may be to introduce reductions in premiums. At the end of 2016, Alecta’s collective consolidation level was 148 per cent (153). 65 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 18–20 NOTE 18. OTHER PROVISIONS GROUP Carrying amount at start of year Provisions during the year Utilised during the year Unutilised amount reversed during the year Translation differences Carrying amount at end of year Of which non-current portion of the provisions Of which current portion of the provisions PARENT COMPANY Carrying amount at start of year Provisions during the year Utilised during the year Unutilised amount reversed during the year Carrying amount at end of year Of which non-current portion of the provisions Of which current portion of the provisions PROVISIONS FOR TAXES OTHER PROVISIONS TOTAL 2016 45 - - - - 45 45 - 45 - - - 45 45 - 2015 140 - - -95 0 45 45 - 45 - - - 45 45 - 2016 697 335 -163 -15 2 856 627 228 892 228 -274 -13 833 572 261 2015 463 410 -59 -117 0 697 540 157 630 524 -147 -115 892 608 284 2016 742 335 -163 -15 2 901 673 228 937 228 -274 -13 878 617 261 2015 603 410 -59 -212 0 742 585 157 676 524 -147 -115 937 653 284 Other provisions mainly relate to uncertainties associated with the sale of the business in Spain, obligations for environmental restoration and for fixed price electricity supply contracts. The increase during the year mainly relates to provisions as a result of the sale of the mill in Madrid. A provision is included in the parent company for future measures for reforestation after harvesting for SEK 197 million. NOTE 19. OPERATING LIABILITIES NOTE 20. OPERATING LEASES Trade payables Group companies Associates Other Total trade payables Current liabilities Group companies Associates Other Derivatives Accruals and deferred income Total other operating liabilities Total operating liabilities GROUP 2016 2015 PARENT COMPANY 2015 2016 - - 1 766 1 766 - 11 251 257 561 1 079 2 845 - 14 1 903 1 916 - 7 199 377 676 1 259 3 176 116 - 1 460 1 576 0 11 158 258 443 870 2 445 265 - 1 579 1 845 0 7 165 379 441 993 2 837 In 2016, the Group’s lease payments amounted to SEK 54 million (70), and the parent company’s to SEK 38 million (37). The Group’s leases mainly relate to trucks, cars and rental agreements. No new leases of any significance for the business were entered into during the 2016 financial year. No leased equipment was subleased. The breakdown of future lease payments is as follows: GROUP 2018 –2022 50 2017 40 PARENT COMPANY 2023– 0 2017 26 2018 –2022 27 2023– - 40 50 0 26 27 - Future lease payments Present value of future lease payments The contracts have remaining durations ranging from 1 to 7 years. The Group’s future lease payments for existing lease agreements amounted to SEK 119 million at the end of the previous year. Those in the parent company amounted to SEK 65 million. Apart from lease agreements, Holmen has two time charter contracts in respect of ships that are used to distribute the company’s products. These two agreements were extended in 2015 and have a remaining duration of one year from 1 January 2017. All trade payables are due for payment within one year. Accruals and deferred income in the parent company principally consist of personnel costs of SEK 196 million (195), discounts of SEK 42 million (48) and goods delivered but not yet invoiced of SEK 36 million (38). Fair values of derivatives essentially relate to the hedging of future cash flows. See Note 13. 66 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 21–22 CONTINGENT LIABILITIES Surety on behalf of Group companies Other contingent liabilities Total GROUP 2016 - 86 86 PARENT COMPANY 2015 34 55 89 2016 34 68 102 2015 - 122 122 Other contingent liabilities for the Group largely comprise ongoing legal processes and guarantee undertakings for third parties. Holmen has environmentally related contingent liabilities that cannot currently be quantified but that could result in future costs. L E Lundbergföretagen AB is a major shareholder in Holmen (see page 41). Holmen rents office premises for SEK 8 million (7) from Fastighets AB L E Lundberg, which is a group company within L E Lundbergföretagen AB. In 2016, Fredrik Lundberg, who is CEO and principal shareholder in L E Lundbergföretagen, received a fee of SEK 680 000 (650 000) as Board chairman of Holmen. Louise Lindh, who is the CEO of Fastighets AB L E Lundberg and who is also a party related to Fredrik Lunberg, received a Board fee of SEK 340 000. Transactions with related parties are priced on market terms. The equity holdings in associates that produce hydro and wind power entitle the Group to buy the electricity produced at cost price in relation to the shareholding, which means that the associate only earns a limited profit. Purchased electricity is sold to external customers at market price, and the earnings are stated in the consolidated accounts within the Renewable energy business area. In Spain, until the sale of the Spanish business, energy and recovered paper was purchased from associates. NOTE 21. COLLATERAL AND CONTINGENT LIABILITIES GROUP For own liabilities Financial liabilities Total PARENT COMPANY For own liabilities Financial liabilities Total PROPERTY MORTGAGES OTHER COLLATERAL - 6 6 - 6 6 - 127 127 - 127 127 TOTAL COLLATERAL 2016 - 134 134 TOTAL COLLATERAL 2015 - 148 148 - 134 134 - 148 148 The holding in a jointly owned company, Varsvik AB, is pledged and amounted to SEK 127 million (141) at the end of the year. NOTE 22. RELATED PARTIES Of the parent company’s net sales of SEK 13 794 million (13 989), 99 (114) per cent relates to deliveries to Group companies. The parent company’s purchases from Group companies amounted to SEK 1 479 million (1 630). There are significant financial receivables and liabilities between the parent company and its Swedish subsidiaries, which do not carry interest. The parent company has a related party relationship with its subsidiaries (see Note 23). Holmen Paper AB has contractually committed to purchase products on a continuous basis from Holmen Paper Madrid SL at a price calculated at production cost plus tied-up capital, for onward sale to end-customers. The aim is to optimise operations within this business area. Holmen Paper AB’s purchases from Holmen Paper Madrid SL in 2016 amounted to SEK 1 371 million (1 510). As Holmen Paper AB is acting on a commissioned basis for Holmen AB, these transactions are accounted for via Holmen AB. As part of the sale of the Spanish business, the agreement was terminated early in 2016, which led to Holmen Paper AB paying compensation of SEK 643 million to Holmen Paper Madrid SL for loss of profit over the term of the agreement. Transactions with related parties GROUP Associates Joint ventures PARENT COMPANY Subsidiaries Associates Joint ventures SALE OF PRODUCTS TO RELATED PARTIES 2016 280 - 99 280 2015 208 - 115 208 - PURCHASE OF PRODUCTS FROM RELATED PARTIES 2015 242 - 2016 172 - OTHER (E.G. INTEREST, DIVIDEND) 2016 0 5 2015 0 0 1 479 99 - 1 630 112 - 1 299 0 5 18 0 0 LIABILITY TO RELATED PARTIES RECEIVABLE FROM RELATED PARTIES 2016 61 - 1 571 57 - 2015 91 - 1 280 77 - 2016 82 17 3 160 82 79 2015 89 12 3 203 88 68 For fees and remuneration paid to members of the Board, see Note 4. 67 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 23 NOTE 23. INVESTMENTS IN GROUP COMPANIES ACCUMULATED ACQUISITION COST Carrying amount at start of year Shareholder’s contribution Closing balance at 31 December PARENT COMPANY 2016 17 141 1 17 141 2015 17 141 0 17 141 ACCUMULATED IMPAIRMENT LOSSES Carrying amount at start of year Impairment losses for the year Closing balance at 31 December Carrying amount at end of year PARENT COMPANY 2016 5 330 508 5 838 11 303 2015 5 204 126 5 330 11 810 The parent company’s impairment losses on investments in Group companies are stated in the income statement in the line item for ‘Profit/loss from investments in Group companies’ and do in 2016 relate to holdings in Spanish companies. Parent company’s direct holdings of investments in subsidiaries CORPORATE ID NO. REGISTERED OFFICE NO. OF SHARES CARRYING AMOUNT IN THE PARENT COMPANY CARRYING AMOUNT IN THE PARENT COMPANY INTEREST %* 2015 INTEREST %* 2016 Holmen Skog AB Iggesund Paperboard AB Holmen Paper AB Holmen Timber AB Holmen Energi AB Holmens Bruk AB Holmen Holding AB MoDo Capital AB Holmen Energi Elnät AB Stavro Vind AB Other Swedish Group companies Total Swedish holdings 556220-0658 556088-5294 556005-6383 556099-0672 556524-8456 556537-4286 516406-0062 556499-1668 556878-3905 556953-6153 Holmen France S.A.S., France Holmen UK Ltd, UK Holmen Paper Ltd** Iggesund Paperboard (Workington) Ltd** Holmen GmbH, Germany Holmen Suecia Holding S.L., Spain Holmen Paper Madrid S.L.** Cartón y Papel Reciclado S.A. (Carpa), Spain** Iggesund Paperboard Asia Pte Ltd, Singapore Holmen B.V., Netherlands AS Holmen Mets, Estonia Iggesund Paperboard Inc, US Iggesund Paperboard Asia (HK) Ltd, China Other non-Swedish Group companies Total non-Swedish holdings Total Örnsköldsvik Hudiksvall Norrköping Hudiksvall Örnsköldsvik Stockholm Stockholm Stockholm Örnsköldsvik Stockholm Paris Workington London Workington Hamburg Madrid Madrid Madrid Singapore Amsterdam Tallinn Lyndhurst Hong Kong 1 000 1 000 100 1 000 1 000 1 000 10 000 1 000 500 500 10 000 1 197 100 - - - 9 448 557 - - 800 000 35 500 1 000 4 000 000 * The percentage of ownership corresponds to the percentage of votes for the total number of shares. ** Indirect holdings. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 0 0 0 0 0 8 868 0 72 0 7 1 8 948 0 1 519 - - 1 808 - - 4 9 - 7 5 2 2 355 11 303 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 0 0 0 0 0 8 868 45 72 0 7 1 8 993 0 1 519 - - 1 1 270 - - 4 9 - 7 5 2 2 817 11 810 68 HOLMEN ANNUAL REPORT 2016 / NOTESNOTE 24–26 NOTE 24. UNTAXED RESERVES PARENT COMPANY NOTE 26. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS ACCUMULATED DEPRECIATION AND AMORTISATION IN EXCESS OF PLAN Non-current intangible assets Property, plant and equipment Total TAX ALLOCATION RESERVE Assessment of tax 2011 Assessment of tax 2012 Assessment of tax 2013 Assessment of tax 2014 Assessment of tax 2015 Assessment of tax 2016 Assessment of tax 2017 Total 31 Dec 2016 APPROPRIATIONS 31 Dec 2015 1 4 4 0 10 10 -1 6 6 - 560 - 280 610 370 460 2 280 2 290 -170 460 290 296 170 560 - 280 610 370 - 1 990 1 994 Group contributions received amounted to SEK 700 million (493) and Group contributions paid amounted to SEK 0 million (7). Total appropriations of profit amounted to SEK 404 million. NOTE 25. CASH FLOW STATEMENT INTEREST PAID AND DIVIDENDS RECEIVED Dividends received Interest received Interest paid Total GROUP PARENT COMPANY 2016 0 1 -49 -48 2015 0 1 -70 -70 2016 1 288 17 -72 1 233 2015 8 35 -72 -30 The change in current liabilities mostly relates to borrowing within the Group’s commercial paper programme. In 2016, a number of different short-term loans totalling SEK 7 192 million (8 737) were raised within the Group’s commercial paper programme, and SEK 7 630 million (9 339) was repaid. For a specification of cash and cash equivalents, see Note 13. When preparing financial reports the company’s management is required to make estimates and judgements that have an effect on the stated amounts. The estimates and judgements that, in the view of the company’s management, are of importance for the amounts stated in the annual report, and that are at significant risk of being altered by future events and new information, mainly include the following. BIOLOGICAL ASSETS Holmen’s assessment is that no relevant market prices are available that can be used to value forest holdings as extensive as Holmen’s. The valuation is therefore made by calculating the present value of future expected cash flows from the growing forests. The most material estimates made relate to how much harvesting can be increased in the future, what changes there will be in pulpwood and log prices, how high inflation will be, and what discount rate is used. Note 11 provides a sensitivity analysis for the valuation of changes in these estimates. The carrying amount of biological assets at 31 December 2016 was SEK 17 448 million and the attributable deferred tax liability was SEK 3 854 million, giving a net value of SEK 13 594 million. TAX Holmen has requested an advance ruling on the entitlement to apply group relief in the parent company’s tax declaration for tax losses incurred in the Group’s Spanish operations. The Swedish tax authority has opposed such entitled to group relief. The case is being reviewed by the Supreme Administrative Court and a ruling is expected in 2017. In the event of a ruling in Holmen’s favour, it could result in deductions corresponding to approximately SEK 400 million in tax. No deferred tax asset has been recognised. See Note 7. PENSION OBLIGATIONS The Group has defined benefit obligations valued at SEK 2 414 million and plan assets of SEK 2 213 million provided to cover them, which together are recognised as pension provisions of SEK 201 million. The value of pension obligations is estimated on the basis of assumptions regarding discount rates, inflation, future salary increases, and demographic factors. These commitment are usually updated annually, which affects the Group’s comprehensive income and the recognised pension provision. See Note 17. OTHER PROVISIONS Obligations that may result in costs for Holmen are evaluated on an ongoing basis to assess the need for a provision. Uncertainty in the assessment mainly relates to the date and size of the future cost. The Group mainly has provisions for uncertainty related to the sale of the Spanish business, obligations for environmental restoration, fixed price electricity supply contracts and corporation tax risks. See Note 18. IMPAIRMENT TESTING Impairment testing is carried out annually on the Group’s non-current assets. If profitability for a business is weak and a potential need for impairment is identified, further analysis of the asset’s value is carried out. Such analysis estimates the asset’s value based on applicable market conditions and assessments about the future. The estimated value is then compared with the carrying amount to assess whether or not there is a need for impairment. 69 HOLMEN ANNUAL REPORT 2016 / NOTESPROPOSED APPROPRIATION OF PROFITS PROPOSED APPROPRIATION OF PROFITS The following earnings of the parent company are at the disposal of the Annual General Meeting: Net profit for the 2016 financial year Retained earnings The Board of Directors proposes that a dividend of SEK 12 per share (83 996 162 shares) be paid to the shareholders and that the remaining amount be carried forward SEK 1 197 463 610 3 723 768 125 4 921 231 735 1 007 953 944 3 913 277 791 The Board of Holmen AB has proposed that the 2017 Annual General Meeting resolve in favour of paying a dividend of SEK 12 per share – SEK 1.5 per share higher than the preceding year – totalling SEK 1 008 million. The proposal complies with the Board’s policy, in that decisions on dividends are to be based on an appraisal of the Group’s profitability, future investment plans and financial position. with the business in terms of the amount of equity required, and taking into account the need for consolidation, liquidity and financial position in other respects. The financial position will remain strong after payment of the proposed dividend and is considered to be fully adequate to enable the company to fulfil its obligations in both the short and the long term, as well as to finance such investments as may be necessary. The proposed dividend corresponds to 70.8 per cent of net profit for 2016 for the Group and means that 4.7 per cent of equity in the Group at 31 December 2016 will be paid out by way of dividend. The Board has established that the Group should have a strong financial position with a debt/ equity ratio – defined as net financial debt in relation to equity – at a maximum of 0.5. The debt/ equity ratio at 31 December 2016 was 0.19. Payment of the proposed dividend would raise the debt/equity ratio by around 0.06. Holmen AB’s equity at 31 December 2016 amounted to SEK 10 836 million, of which non- restricted equity was SEK 3 724 million. Assets and liabilities measured at fair value according to Chapter 4 Section 14a of the Swedish Annual Accounts Act had an impact of SEK -167 million on equity. The Group’s equity at 31 December 2016 amounted to SEK 21 243 million. In accordance with IFRS, no distinction is made at Group level between restricted and non-restricted equity. The Board considers that payment of a dividend of the amount proposed is justifiable in view of the demands made on the company and the Group by the nature, extent and risks associated The Board and CEO declare that the annual accounts were prepared in accordance with generally accepted accounting principles in Sweden and the Group’s consolidated accounts were prepared in accordance with the international accounting standards referred to in the European Parliament’s and Council’s regulation (EG) No. 1606/2002 of 19 July 2002 concerning the application of international accounting standards. The annual report and the Group’s consolidated accounts provide a true and fair view of the performance and financial position of the parent company and the Group. The administration report for the parent company and the Group provides a true and fair view of the development of the operations, financial position and performance of the Group and the parent company and also describes material risks and uncertainties to which the parent company and the other companies in the Group are exposed. The annual accounts and the consolidated accounts were approved for publication by the Board in its decision of 13 February 2017. The Group’s consolidated income statement and balance sheet and the parent company’s income statement and balance sheet will be presented for adoption at the Annual General Meeting to be held on 27 March 2017. Fredrik Lundberg Chairman Carl Bennet Board member Steewe Björklundh Board member Kenneth Johansson Board member Stockholm, 13 February 2017 Lars G Josefsson Board member Lars Josefsson Board member Carl Kempe Deputy chairman Louise Lindh Board member Ulf Lundahl Board member Henriette Zeuchner Board member Tommy Åsenbrygg Board member Henrik Sjölund Board member and Chief Executive Officer Our audit report was submitted on 15 February 2017. KPMG AB Joakim Thilstedt Authorised Public Accountant 70 HOLMEN ANNUAL REPORT 2016 / PROPOSED APPROPRIATION OF PROFITS AUDITOR’S REPORT AUDITOR’S REPORT To the general meeting of the shareholders of Holmen AB, corp. id 556001-3301 Report on the annual accounts and consolidated accounts Opinions We have audited the annual accounts and consolidated accounts of Holmen AB for the year 2016. The company’s annual accounts and consolidated accounts are found on pages 4–5, 10–11, 27–29, 32–70 and 74–75 of this document. In our opinion, the annual accounts have been prepared in accordance with the Annual Accounts Act, and present fairly, in all material respects, the financial position of the parent company as of 31 December 2016 and its financial performance and cash flow for the year then ended in accordance with the Annual Accounts Act. The consolidated accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the group as of 31 December 2016 and their financial performance and cash flow for the year then ended in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, and the Annual Accounts Act. A corporate governance statement has been prepared. The statutory administration report and the corporate governance statement are consistent with the other parts of the annual accounts and consolidated accounts, and the corporate governance statement is in accordance with the Annual Accounts Act. We therefore recommend that the general meeting of shareholders adopts the income statement and balance sheet for the parent company and the group. Basis for Opinions We conducted our audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are inde- pendent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Key Audit Matters Key audit matters of the audit are those matters that, in our professional judgment, were of most significance in our audit of the annual accounts and consolidated accounts of the current period. These matters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and consolidated accounts as a whole, but we do not provide a separate opinion on these matters. If not stated otherwise the matters is related to the consolidated accounts. Valuation of Biological Assets Se note 11, note 26 and the Accounting Principles on page 50 of the annual accounts and consolidated accounts for detailed disclosure and description of the matter. Description of key audit matter Biological assets consist of growing forest which has a carrying value of SEK 17 448 million as per 31 December 2016. Biological assets are measured at fair value, via discounting estimated net future cash flows from the growing forest to present value. Cash flows are estimated over a 100-year period, representing the assessed average harvesting cycle. The valuation is performed internally and is calculated using a combination of harvest plans, future sales prices, cost projections, inflation and discount rates. The valuation is complex and comprises significant level of judgement. There is a risk that the estimates that form the basis of the carrying value of Biological Assets may need to be adjusted, which would directly affect the reported result for the period. How the matter was addressed during the audit We have reviewed and assessed the Group’s choice of a cash flow based valuation model. We have also inspected the valuations performed and the underlying documentation in order to assess that they are in line with established valuation techniques. Furthermore, through evaluation of management’s written plans and documentation, we have assessed the reasonableness of assumptions regarding volumes, prices, costs and the discount rate used in the valuation. We have conducted discussions with Company management and evaluated previous year’s estimates compared to actual outcomes. A critical part of our work has also been examination and evaluation of the sensitivity analysis performed by management that shows how changes in the assumptions can affect the overall valuation. We have involved our own specialists on the audit to ensure that the audit team has had sufficient experience and competence within this area, in particular regarding design of the valuation model. In addition to this we have compared the Group’s valuation to valuations performed by other companies via comparison of calculated value per cubic metre. We have also considered the completeness of the disclosures in the Annual Report and assessed whether they are in agreement with the assumptions made by Company management in their valuation of Biological Assets. Valuation of property, plant and equipment / Valuation of the parent company’s shares in Group companies See note 10, not 26 and the Accounting Principles on pages 50 of the annual accounts and consolidated accounts for detailed disclosure and description of the matter. Regarding the parent company’s shares in Group companies, see note 23. Description of key audit matter Property, plant and equipment as per 31 December 2016 have a carrying value of SEK 9 387 million. In recent years, profitability in certain parts of the business has been weak, which has resulted in impairments of values of the related assets. Profitability in someparts of the business is still weak and therefore there the need for further impairments of asset values may exist. According to IFRS; impairment tests shall be performed according to a certain methodology wherein Company management is required to make estimates regarding both internal and external conditions and plans. Examples of estimates are future cash flows as well as which discount rate should be used to take into consideration the fact that future inflows are associated with a certain amount of risk. Property, plant and equipment are mainly found in subsidiaries of Holmen AB, therefore should there be a need for asset impairment within these subsidiaries, there may be a corresponding impairment of the value of shares in the parent company’s balance sheet. How the matter was addressed during the audit We have inspected the Group’s impairment test to ensure that it is in line with the aforementioned methodology. Furthermore, through evaluation of management’s written plans and documentation, we have assessed the reasonableness of future cash flows and the assumed discount rate. We have also conducted discussions with Company management and evaluated previous year’s estimates compared to actual outcomes. HOLMEN ANNUAL REPORT 2016 / AUDITOR’S REPORT 71 AUDITOR’S REPORT Pension provisions See note 17, note 26 and the Accounting principles on page 51 of the annual accounts and consolidated accounts for detailed disclosure and description of the matter. Description of key audit matter The Group has a pension obligation that mainly concerns the United Kingdom. Before reduction by the fair value of plan assets, this pension obligatoin was valued at SEK 2 414 million per 31 December 2016. Estimation of the value of the pension obligation relies upon a number of assumptions, including mortality and inflation rates, and the discount rate applied to estimated payments of pensions. The Group engages external actuaries to perform these complex calculations. Changes to the assumptions on which the valuation is based could significantly affect total comprehensive income for the financial period and the size of the pension obligation. How the matter was addressed during the audit We have examined the external actuarial report that is used by the Group for valuation of its pension obligation. We have assessed the assumptions within the calculations, for instance regarding inflation and discount rate, with input from our internal specialists’ analyses. We have also considered the the completeness of the disclosures in the Annual Report and assessed the disclosures of the assumptions used by Company management and their sensitivity analysis. Other provisions/Valuation of the parent company’s shares in Group companies See note 18, note 26 and the Accounting principles on page 51 of the annual accounts and consolidated accounts for detailed disclosure and description of the matter. Regarding the parent company’s shares in Group companies, see note 23. Description of key audit matter The carrying value of the Group’s other provisions amounts to SEK 856 million per 31 December 2016. These relate to uncertainties regarding the sale of operations in Spain, environmental obligations and contractual commitments regarding delivery of electricity at a fixed price. How the matter was addressed during the audit We have inspected the Group’s documentation of its provisions. We have assessed management’s estimates and have held discussions with management regarding their assumptions in each area to ensure that the provisions are in line with the Group’s accounting principles and with IFRS requirements. Provisions in the parent company have a carrying value of SEK 833 million per 31 December 2016 and regard primarily environmental obligations, contractual com- mitments regarding delivery of electricity at a fixed price and estimated costs for replantation of forest following harvesting. Provisions involve significant levels of judgement regarding uncertain future out- comes, in particular relating to the amount and timing of the final assessments. Changes to the underlying assumptions used to make these provisions could signifi- cantly affect the reported result. Commitments within subsidiaries of Holmen AB could lead to impairments of the value of shares in Group companies on the parent company’s balance sheet. Other Information than the annual accounts and consolidated accounts This document also contains other information than the annual report and consolidated accounts, which is found on pages 3, 6–9, 12–26, 30–31 and 76–83. The Managing Director is responsible for this other information. Our opinion on the annual accounts and consolidated accounts does not cover this other information and we do not express any form of assurance conclusion regarding this other information. In connection with our audit of the annual accounts and consolidated accounts, our responsibility is to read the information identified above and consider whether the information is materially inconsistent with the annual accounts and consolidated accounts. In this procedure we also take into account our knowledge otherwise obtained in the audit and assess whether the information otherwise appears to be materially misstated. If we, based on the work performed concerning this information, conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Board of Directors and the Managing Director The Board of Directors and the Managing Director are responsible for the preparation of the annual accounts and consolidated accounts and that they give a fair presentation in accord- ance with the Annual Accounts Act and, concerning the consolidated accounts, in accord- ance with IFRS as adopted by the EU. The Board of Directors and the Managing Director are also responsible for such internal control as they determine is necessary to enable the preparation of annual accounts and consolidated accounts that are free from material mis- statement, whether due to fraud or error. In preparing the annual accounts and consolidated accounts The Board of Directors and the Managing Director are responsible for the assessment of the company’s and the group’s ability to continue as a going concern. They disclose, as applicable, matters related to going concern and using the going concern basis of accounting. The going concern basis of ac- counting is however not applied if the Board of Directors and the Managing Director intend to liquidate the company, to cease operations, or has no realistic alternative but to do so. Auditor’s responsibility Our objectives are to obtain reasonable assurance about whether the annual accounts and consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and generally accepted auditing standards in Sweden will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual accounts and consolidated accounts. An impairment test of the shares in the Spanish Group companies was conducted in the parent company, which resulted in an impairment of SEK 508 million in 2016. We have inspected the supporting documentation used to test the value of shareholdings and evaluated the performed impairment test against the applicable regulations. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • • • • • • Identify and assess the risks of material misstatement of the annual accounts and consolidated accounts, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of the company’s internal control relevant to our audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors and the Managing Director. Conclude on the appropriateness of the Board of Directors’ and the Managing Director’s, use of the going concern basis of accounting in preparing the annual accounts and consolidated accounts. We also draw a conclusion, based on the audit evidence obtained, as to whether any material uncertainty exists related to events or conditions that may cast significant doubt on the company’s and the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the annual accounts and consolidated accounts or, if such disclosures are inadequate, to modify our opinion about the annual accounts and consolidated accounts. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause a company and a group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the annual accounts and consolidated accounts, including the disclosures, and whether the annual accounts and consolidated accounts represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated accounts. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our opinions. We must inform the Board of Directors of, among other matters, the planned scope and timing of the audit. We must also inform of significant audit findings during our audit, including any significant deficiencies in internal control that we identified. 72 HOLMEN ANNUAL REPORT 2016 / AUDITOR’S REPORT AUDITOR’S REPORT / REVIEW OF SUSTAINABILITY REPORT We must also provide the Board of Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Board of Directors, we determine those matters that were of most significance in the audit of the annual accounts and consolidated accounts, including the most important assessed risks for material misstatement, and are therefore the key audit matters. We describe these matters in the auditor’s report unless law or regulation precludes disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in the auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on other legal and regulatory requirements Opinions In addition to our audit of the annual accounts and consolidated accounts, we have also audited the administration of the Board of Directors and the Managing Director of Holmen AB for the year 2016 and the proposed appropriations of the company’s profit or loss. We recommend to the general meeting of shareholders that the profit be appropriated in accordance with the proposal in the statutory administration report and that the members of the Board of Directors and the Managing Director be discharged from liability for the financial year. Basis for Opinions We conducted the audit in accordance with generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have oth- erwise fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Responsibilities of the Board of Directors and the Managing Director The Board of Directors is responsible for the proposal for appropriations of the company’s profit or loss. At the proposal of a dividend, this includes an assessment of whether the dividend is justifiable considering the requirements which the company’s and the group’s type of operations, size and risks place on the size of the parent company’s and the group’s equity, consolidation requirements, liquidity and position in general. The Board of Directors is responsible for the company’s organization and the administration of the company’s affairs. This includes among other things continuous assessment of the company’s and the group’s financial situation and ensuring that the company’s organization is designed so that the accounting, management of assets and the company’s financial affairs otherwise are controlled in a reassuring manner. The Managing Director shall manage the ongoing administration according to the Board of Directors’ guidelines and instructions and among other matters take measures that are necessary to fulfill the company’s accounting in accordance with law and handle the management of assets in a reassuring manner. Auditor’s responsibility Our objective concerning the audit of the administration, and thereby our opinion about discharge from liability, is to obtain audit evidence to assess with a reasonable degree of assurance whether any member of the Board of Directors or the Managing Director in any material respect: • • has undertaken any action or been guilty of any omission which can give rise to liability to the company, or in any other way has acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. Our objective concerning the audit of the proposed appropriations of the company’s profit or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company’s profit or loss are not in accordance with the Companies Act. As part of an audit in accordance with generally accepted auditing standards in Sweden, we exercise professional judgment and maintain professional skepticism throughout the audit. The examination of the administration and the proposed appropriations of the company’s profit or loss is based primarily on the audit of the accounts. Additional audit procedures performed are based on our professional judgment with starting point in risk and materiality. This means that we focus the examination on such actions, areas and relationships that are material for the operations and where deviations and violations would have particular importance for the company’s situation. We examine and test decisions undertaken, support for decisions, actions taken and other circumstances that are relevant to our opinion concerning discharge from liability. As a basis for our opinion on the Board of Directors’ proposed appropriations of the company’s profit or loss we examined the Board of Directors’ reasoned statement and a selection of supporting evidence in order to be able to assess whether the proposal is in accordance with the Companies Act. Stockholm 15 February 2017 KPMG AB Joakim Thilstedt Authorised Public Accountant REVIEW OF SUSTAINABILITY REPORT Holmen’s Sustainability Report, as defined on page 3 of Holmen’s Annual Report 2016, has been subject to a limited review in accordance with RevR 6 Assurance of Sustainability Reports, issued by FAR. Based on the limited assurance procedures we have performed, nothing has come to our attention that causes us to believe that the Sustainability Report is not prepared, in all material respects, in accordance with the criteria defined by Group management. A complete assurance report on the Sustainability Report is available at holmen.com. The assurance report contains the following conclusion: Stockholm, 15 February 2017 KPMG AB Joakim Thilstedt Authorised Public Accountant Torbjörn Westman Expert member of FAR HOLMEN ANNUAL REPORT 2016 / AUDITOR’S REPORT 73 Board of Directors Carl Kempe Deputy chairman. Örnsköldsvik. Born in 1939. Member since 1983. Licentiate in Engineering. Dr. h.c. mult. Other significant appointments: Chairman of Kempe Foundations, MoRe Research AB and UPSC Berzelii Centre for Forest Biotechnology. Own and related parties’ shareholdings: 386 000 shares. Henrik Sjölund Norrköping. Born in 1966. Member since 2014. M.Sc. in International Economics. President and CEO. Other significant appointments: Board member of Swedish Forest Industries Federation. Shareholding: 4 917 shares. Fredrik Lundberg Chairman. Djursholm. Born in 1951. Member since 1988. M.Sc. in Engineering and M.Sc. in Economics. D. Tech. h.c. and D. Econ. h.c. President and CEO of L E Lundbergföretagen AB. Other significant appointments: Chairman of Hufvudstaden AB, AB Industrivärden and Indutrade AB. Deputy chairman of Svenska Handelsbanken AB. Board member of L E Lundbergföretagen AB and Skanska AB. Own and related parties’ shareholdings: 839 724 shares. Shareholding of L E Lundbergföretagen: 27 622 000 shares. Louise Lindh Stockholm. Born in 1979. Member since 2010. M.Sc. in Economics. CEO of Fastighets AB L E Lundberg. Other significant appointments: Chairman of J2L Holding AB. Board member of Hufvudstaden AB and L E Lundbergföretagen AB. Shareholding: 100 000 shares. Carl Bennet Gothenburg. Born in 1951. Member since 2009. M.Sc. in Economics. D. Tech. h.c. CEO of Carl Bennet AB. Former President and CEO of Getinge AB. Chairman of Getinge AB, Lifco AB och Elanders AB. Other significant appointments: Board member of L E Lundbergföretagen AB. Shareholding: 100 000 shares. Martin Nyman Iggesund. Born in 1978. Deputy member since 2010. Employee representative, LO. Kenneth Johansson Söderköping. Born in 1958. Member since 2004. Employee representative, LO. Section chairman of the Swedish Paper Workers Union branch 53, Holmen Paper Braviken. 74 HOLMEN ANNUAL REPORT 2016 / BOARD OF DIRECTORS Lars G Josefsson Stockholm. Born in 1950. Member since 2011. M.Sc. in Engineering. Former President and CEO of Vattenfall. Other significant appointments: Chairman of Burntisland Fabrication Ltd. Board member of Robert Bosch GmbH, Robert Bosch Industrietreuhand KG and Brookfield Renewable Energy. Board member of Hand in Hand International and member of The Royal Swedish Academy of Engineering Sciences, IVA. Shareholding: 5 000 shares. Ulf Lundahl Lidingö. Born in 1952. Member since 2004. Bachelor of Laws and M.Sc. in Economics. Other significant appointments: Chairman of Eltel AB, Fidelio Capital AB, Ramirent plc and SHB Regionbank Stockholm. Board member of Attendo AB and Indutrade AB. Shareholding: 4 000 shares. Lars Josefsson Norrköping. Born in 1953. Board member since 2016. M.Sc. in Engineering. Other significant appointments: Deputy chairman of Vestas. Chairman of Driconeq, Ouman and TimeZynk. Board member of Metso. Shareholding: 2 500 shares. Henriette Zeuchner Stockholm. Born in 1972. Member since 2015. M.Sc. in Economics and Bachelor of Laws. President and CEO of Berling Media AB. Other significant appointments: Board member of the NTM Group. Shareholding: 800 shares. Steewe Björklundh Hudiksvall. Born in 1958. Member since 1998. Employee representative, LO. Tommy Åsenbrygg Skebobruk. Born in 1968. Member since 2015. Employee representative, PTK. Deputy chairman of Ledarna, Hallsta Paper Mill. Shareholding: 100 shares. Daniel Hägglund Örnsköldsvik. Born in 1982. Deputy member since 2014. Employee representative, PTK. Per-Arne Berg Forsa. Born in 1955. Deputy member since 2015. Employee representative, PTK. Chairman of the Holmen-Iggesund Trade Union Club. Auditors: KPMG AB Principle Auditor: Joakim Thilstedt Authorised Public Accountant HOLMEN ANNUAL REPORT 2016 / BOARD OF DIRECTORS 75 Group management Johan Padel Head of Wood products business area. Born in 1966. Joined Holmen in 2014. Shareholding: 830 shares. Lars Ericson Director of Legal Affairs. Company secretary. Born in 1959. Joined Holmen in 1988. Shareholding: 650 shares. Ingela Carlsson Director of Communications. Born in 1962. Joined Holmen in 2008. Shareholding: 1 015 shares. Anders Jernhall Executive Vice President. CFO. Born in 1970. Joined Holmen in 1997. Shareholding: 4 900 shares. Gunilla Rolander HR Director. Born in 1967. Joined Holmen in 2013. Shareholding: 362 shares. Nils Ringborg Head of Paper business area. Born in 1958. Joined Holmen in 1988. Shareholding: 2 514 shares. Ola Schultz-Eklund Director of Technology. Born in 1961. Joined Holmen in 1994. Shareholding: 800 shares. Sören Petersson Head of Forest business area. Born in 1969. Joined Holmen in 1994. Shareholding: 4 400 shares. Henrik Sjölund President and CEO. Head of Paperboard business area. Born in 1966. Joined Holmen in 1993. Shareholding: 4 917 shares. Henrik Sjölund has no significant shareholdings and no ownership in companies with which the Group has important business relations. Further information about the CEO is provided on page 74. Daniel Peltonen will join as head of the Paperboard business area on 1 April 2017. 76 HOLMEN ANNUAL REPORT 2016 / GROUP MANAGEMENT KEY FIGURES Holmen uses performance measures in its reporting in addition to the measures defined within IFRS regulations, or directly in the income statement and balance sheet, in order to illustrate the company’s financial position and performance and to increase comparability between different periods and other companies. Below are calculations used to arrive at the performance measures applied within the Group. For further information, see also Definitions. ESMA’s (European Securities And Markets Authority) ‘Guidelines – Alternative Performance Measures’ have been used since 3 July 2016. In accordance with these guidelines, the information on financial measures not defined under IFRS has expanded. Alternative performance measures published in this report should not be regarded as replacing the financial measures defined under IFRS regulations, but rather as a complement and they do not need to be comparable in the same way with defined performance measures published by other companies. KEY FIGURES SEKm OPERATING PROFIT, EBITDA AND EXCLUDING ITEMS AFFECTING COMPARABILITY EBITDA Depreciation and amortisation according to plan Change in value of forests Operating profit/loss excluding items affecting comparability Items affecting comparability* Operating profit/loss OPERATING MARGIN Operating profit/loss Net sales Operating margin, % EARNINGS FROM OPERATIONS, FOREST EARNINGS FROM OPERATIONS, FOREST Change in value of forests Operating profit, forest CAPITAL EMPLOYED AND OPERATING CAPITAL Equity Net financial debt Capital employed Deferred tax assets Deferred tax liabilities Operating capital RETURN ON CAPITAL EMPLOYED Operating profit/loss excluding items affecting comparability Average capital employed Return, % RETURN ON OPERATING CAPITAL Operating profit/loss excluding items affecting comparability Average operating capital Return, % NET FINANCIAL DEBT Non-current financial liabilities Current financial liabilities Pension provisions Non-current financial receivables Current financial receivables Cash and cash equivalents Net financial debt DEBT/EQUITY RATIO Net financial debt Equity Debt/equity ratio, times EQUITY/ASSETS RATIO Equity Assets Equity/assets ratio, % * See page 42 for what items affecting comparability refers to. 2016 2015 2 865 -1 018 315 2 162 -232 1 930 2 673 -1 240 267 1 700 -931 769 1 930 15 513 13.9 769 16 014 10.6 686 315 1 001 21 243 3 945 25 190 -4 5 613 30 799 2 162 25 146 8.6 2 162 30 669 7.0 882 3 200 201 -39 -89 -210 3 945 3 945 21 243 0.19 21 243 34 891 60.9 638 267 905 20 853 4 799 25 653 -6 5 508 31 155 1 700 26 769 6.4 1 700 32 284 5.3 2 295 2 698 130 -43 -61 -221 4 799 4 799 20 853 0.23 20 853 35 456 58.8 HOLMEN ANNUAL REPORT 2016 / KEY FIGURES 77 TEN-YEAR REVIEW, FINANCE SEKm 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 INCOME STATEMENT Net sales Operating costs Profit from investments in associates and joint ventures Depreciation and amortisation according to plan Change in value of forests Operating profit/loss excl. items affecting comparability Items affecting comparability* Operating profit/loss Net financial items Profit/loss before tax Tax Profit/loss for the year Diluted earnings per share, SEK NET SALES Forest Paperboard Paper Wood products Renewable energy Elimination of intra-Group net sales Group OPERATING PROFIT/LOSS Forest Paperboard Paper Wood products Renewable energy Group-wide costs and eliminations Items affecting comparability* Group CASH FLOW Profit/loss before tax Adjustment items Income tax paid Changes in working capital Cash flow from operating activities Cash flow from investing activities Cash flow after investments Share buy-backs Dividend paid * Items affecting comparability. 15 513 -12 626 -22 -1 018 315 16 014 -13 348 7 -1 240 267 15 994 -13 270 -7 -1 265 282 16 231 -13 919 3 -1 370 264 17 852 -15 224 47 -1 313 350 18 656 -15 501 84 -1 260 - 17 581 -15 077 28 -1 251 52 18 071 -15 191 45 -1 320 16 19 334 -16 614 50 -1 343 -16 19 159 -15 637 12 -1 337 89 2 162 -232 1 930 -71 1 859 -436 1 424 16.9 5 302 5 252 5 431 1 342 314 -2 128 15 513 1 001 903 289 -3 120 -148 2 162 -232 1 930 1 859 965 -504 -360 1 961 -123 1 838 - -882 1 700 -931 769 -90 679 -120 559 6.7 5 481 5 472 6 148 1 314 359 -2 760 16 014 905 847 -74 9 176 -163 1 700 -931 769 679 1 802 -398 443 2 526 -832 1 694 - -840 1 734 -450 1 284 -147 1 137 -230 907 10.8 5 641 5 113 6 247 1 352 389 -2 748 15 994 817 674 141 37 212 -146 1 734 -450 1 284 1 137 1 448 -191 -217 2 176 -834 1 342 - -756 1 209 -140 1 069 -198 871 -160 711 8.5 5 694 4 618 7 148 1 175 450 -2 853 16 231 924 433 -309 -75 371 -136 1 209 -140 1 069 871 1 056 210 -127 2 011 -869 1 142 - -756 1 713 -193 1 520 -227 1 294 559 1 853 22.1 6 061 4 967 8 144 1 129 522 -2 972 17 852 931 596 94 -130 355 -132 1 713 -193 1 520 1 294 1 057 -434 338 2 254 -1 920 334 - -672 1 980 3 593 5 573 -244 5 328 -1 374 3 955 47.1 6 348 5 109 8 631 875 552 -2 858 18 656 739 863 228 -136 406 -120 1 980 3 593 5 573 5 328 -2 561 -557 -109 2 101 -1 733 368 - -588 1 332 264 1 596 -208 1 388 -684 704 8.4 5 585 4 849 8 142 586 626 -2 207 17 581 818 817 -618 20 495 -200 1 332 264 1 596 1 388 811 -704 28 1 523 -1 597 -74 - -588 1 620 - 1 620 -255 1 366 -360 1 006 12.0 4 799 5 023 9 303 553 527 -2 135 18 071 605 419 340 21 414 -178 1 620 - 1 620 1 366 1 163 -334 678 2 873 -818 2 054 - -756 1 412 -361 1 051 -311 740 -98 642 7.6 5 443 4 860 10 443 499 434 -2 345 19 334 632 320 280 13 327 -159 1 412 -361 1 051 740 1 797 -192 -686 1 660 -1 124 536 -138 -1 017 2 286 557 2 843 -261 2 582 -1 077 1 505 17.8 4 775 5 100 10 345 589 377 -2 026 19 159 702 599 623 146 272 -56 2 286 557 2 843 2 582 629 -390 -345 2 476 -1 315 1 161 - -1 017 Year 2016: Sale of the mill in Spain and insurance compensation of SEK -232 million for the reconstruction of the Hallsta Paper Mill following a fire. Year 2015: Impairment loss on non-current assets, provision for costs and the effects of a fire totalling SEK -931 million. Year 2014: Impairment loss on non-current assets of SEK -450 million. Year 2013: Impairment loss on non-current assets and restructuring costs of SEK -140 million. Year 2012: Impairment loss on non-current assets and restructuring costs of SEK -193 million. Year 2011: Revaluation of forest of SEK 3 593 million. Year 2010: Impairment losses on non-current assets and restructuring costs of SEK -786 million and revaluation of forest amounting to SEK 1 050 million. Year 2008: Impairment loss on non-current assets, restructuring costs and the effects of a fire totalling SEK -361 million. Year 2007: Impairment of goodwill and non-current assets of SEK -1 543 million and revaluation of forest amounting to SEK 2 100 million. 78 HOLMEN ANNUAL REPORT 2016 / TEN-YEAR REVIEW, FINANCE SEKm BALANCE SHEET Non-current assets Current assets Financial receivables Cash and cash equivalents Total assets Equity Deferred tax liability Financial liabilities and interest-bearing provisions Operating liabilities Total equity and liabilities OPERATING CAPITAL Forest Paperboard Paper Wood products Renewable energy Group-wide and other* Operating capital Deferred tax liability, net Capital employed KEY FIGURES OPERATING MARGIN, %** Paperboard Paper Wood products Group RETURN ON OPERATING CAPITAL, %* Forest Paperboard Paper Wood products Renewable energy Group KEY FIGURES Return on capital employed, %** Return on equity, % Debt/equity ratio DELIVERIES Harvesting in own forests, ’000 m3 Paperboard, ’000 tonnes Paper*** ’000 tonnes Wood products, ’000 m3 Own production of hydro and wind power, GWh 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 For a ten-year review of data per share, see page 41. 28 701 5 852 128 210 34 891 21 243 5 613 4 283 3 752 34 891 17 798 6 426 2 815 892 3 412 -544 30 799 -5 609 25 190 17 5 0 14 6 14 9 0 4 7 9 7 0.19 2 986 497 1 134 776 1 080 29 524 5 607 104 221 35 456 20 853 5 508 5 124 3 971 35 456 17 589 6 622 3 558 924 3 351 -888 31 155 -5 502 25 653 15 -1 1 11 5 12 neg 1 5 5 6 3 0.23 3 213 499 1 325 730 1 441 30 221 5 964 62 187 36 434 20 969 5 480 6 156 3 829 36 434 17 340 6 790 4 666 901 3 401 -744 32 354 -5 478 26 876 13 2 3 11 5 10 3 3 6 5 6 4 0.28 3 297 493 1 305 725 1 113 30 652 5 774 52 275 36 753 20 854 5 804 6 443 3 653 36 753 16 813 6 863 4 810 1 361 3 357 -433 32 772 -5 802 26 970 9 -4 -6 7 6 7 neg neg 11 4 4 3 0.29 3 465 469 1 574 686 1 041 30 664 6 005 69 308 37 046 20 813 5 504 6 967 3 762 37 046 16 663 6 177 5 608 1 416 3 261 -220 32 905 -5 502 27 403 12 1 -12 10 6 10 2 neg 11 5 7 9 0.32 3 211 485 1 651 660 1 353 30 335 6 642 128 112 37 217 19 773 6 630 6 499 4 313 37 217 16 278 5 041 6 606 1 507 3 253 -217 32 469 -6 436 26 032 17 3 -16 11 6 19 3 neg 13 7 9 23 0.32 2 988 474 1 668 487 1 235 26 028 6 950 262 193 33 432 16 913 5 910 6 227 4 383 33 432 12 597 4 313 6 954 1 192 3 235 93 28 385 -5 700 22 684 17 -8 4 8 7 20 neg 3 15 5 6 4 0.34 2 999 464 1 732 285 1 149 25 694 6 075 225 182 32 176 16 504 5 045 6 091 4 536 32 176 11 384 4 114 8 789 396 3 207 -963 26 929 -4 741 22 188 8 4 4 9 5 10 4 6 13 6 7 6 0.34 2 897 477 1 745 313 1 090 26 507 7 268 175 653 34 602 15 641 4 819 8 332 5 809 34 602 11 415 4 254 10 237 366 3 006 -1 654 27 623 -4 477 23 146 7 3 3 7 6 8 3 4 11 5 6 4 0.48 2 649 494 2 044 266 1 128 26 153 6 549 147 394 33 243 16 932 5 482 6 518 4 311 33 243 11 264 4 180 9 971 345 2 960 -630 28 090 -5 181 22 909 12 6 24 12 8 15 5 64 9 8 10 9 0.35 2 575 516 2 025 262 1 193 * Income and costs from the sale of newsprint from the Spanish mill sold in Q2 2016 is recognised in the Group-wide segment. ** Excluding items affecting comparability. *** Deliveries from own mills, i.e. no deliveries from the Spanish mill as of Q3 2016. HOLMEN ANNUAL REPORT 2016 / TEN-YEAR REVIEW, FINANCE 79 FIVE-YEAR REVIEW, SUSTAINABILITY The environmental and employee data provided is the most relevant information with regard to regulatory requirements and internal monitoring. The key performance indicators provided are widely used in the industry. Data from all parts of the Group is collected, quality-assured and evaluated. No material changes have been made to the principles of reporting in comparison with 2015. The facility in Madrid was sold in mid-2016. Reported data for the Group includes data on the facility in Madrid for the first half of 2016. Some of the parameters have a footnote stating the individual figure for the facility in question. Holmen reports its environmental data to the supervisory authorities monthly and annually. Reporting to Swedish authorities is made available to the public under the principle of public access to documents. Data from all the mills is reported to the EU annually. Expenditure on environmental protection is reported in accordance with guidelines from Statistics Sweden. As some of the details provided in this report had already been collected by the end of the year they refer to, they might differ slightly from the information finally reported to the authorities. PRODUCTION AND ENVIRONMENT 2016 2015 2014 2013 2012 PRODUCTION, ’000 TONNES Paperboard Market pulp Printing paper Wood products, ’000 m3 RAW MATERIALS, ’000 TONNES Wood, million m3sub1) Recovered fibre Purchased pulp Thermal energy, GWh Electrical energy, GWh Water use, million m3 Plastic granules/foiling material Chemicals3) Filler, pigment3) THERMAL ENERGY, GWh Production at mills from recovered liquors, bark and wood residues Recovered in the TMP process4) Natural gas, oil and purchased5) ELECTRICAL ENERGY, GWh Company hydro power Company wind power Production at mills Purchased, (net)6) EMISSIONS TO AIR, TONNES Sulphur dioxide (counted as sulphur, S) Nitrogen oxides Particulates Fossil carbon dioxide7), ’000 tonnes Biogenic carbon dioxide, ’000 tonnes EMISSIONS TO WATER, TONNES COD (organic matter), ’000 tonnes Suspended solids, ’000 tonnes AOX (chlorinated organic matter) Nitrogen Phosphorus BY-PRODUCTS, ’000 TONNES To energy production, internally/externally Tall oil8) WASTE, ’000 TONNES Utilised or for recovering9) Hazardous10) Sent to landfill (wet) ENERGY SUPPLIES Branches, treetops and peat, GWh11) Electrical and thermal energy, GWh12) 503 56 1 176 776 5.36 200 70 6 375 3 949 70 2.6 151 148 4 605 1 171 599 958 121 784 2 086 41 960 39 124 1 539 20.4 3.2 51.9 208 14.0 872 12.8 270 2.2 16 155 380 502 56 1 287 734 5.10 394 79 6 288 3 994 682) 2.5 138 146 4 289 1 083 916 1 302 138 781 1 773 52 891 48 180 1 441 21.0 3.3 56.7 226 19.0 823 11.9 303 1.92) 13 230 348 500 67 1 325 742 5.16 439 75 6 230 4 067 74 2.1 146 147 4 532 1 068 630 1 048 65 740 2 214 57 1 181 29 126 1 551 20.4 3.6 54.3 203 19.0 824 13.2 296 1.6 5.6 275 305 478 50 1 545 710 5.25 543 99 6 451 4 420 77 2.6 146 178 4 156 1 117 1 178 1 008 33 769 2 610 91 1 557 52 254 1 449 20.4 4.3 46.5 215 15.0 885 13.0 367 2.4 12 294 199 492 35 1 658 651 5.19 630 108 5 833 4 603 77 2.3 145 175 2 880 1 171 1 783 1 343 10 563 2 687 116 1 664 84 330 1 064 18.9 3.2 47.7 242 15.7 865 12.3 380 2.4 16 297 202 1) At Group level, wood consumption is computed net, taking into account internal deliveries of chips from the sawmills to the nearby mills. 2) Figure adjusted. 3) 100 per cent active substance. Total quantity of commodities was 229 000 tonnes for chemicals and 207 000 tonnes for filler and pigment. 4) Thermal energy is produced from the electricity used in the production of thermo-mechanical pulp at Braviken Paper Mill and Hallsta Paper Mill; this is recovered and used in production. 5) The reporting includes data for gas consumption and associated emissions linked to Holmen’s share (approximately 240 GWh) of electricity production at the, until mid-2016, half-owned cogeneration (COGEN) plant at the mill in Madrid. The data also includes natural gas and oil used at the mills. 6) The energy purchased is fossil-free. 7) Emissions in 2016 from the mill in Madrid that was sold mid-year were approximately 47 000 tonnes. 8) For delivery to the chemical industry. 9) By-products used, for example, as filling material, construction material or for the production of soil products. 10) Hazardous waste is dealt with by authorised collection and recovery contractors. Certain fractions of the waste are recovered. Oil- containing waste from docking ships is dealt with at port facilities at three Holmen mills. Such waste is included in the figures for hazardous waste. The volume of this waste in 2016 totalled 591 tonnes. 11) Branches, treetops and peat delivered from Holmen’s land to external energy producers. 12) For 2016: 155 GWh of electrical energy supplied from the mill at Workington to the local community. 217 GWh of thermal energy from Iggesund Mill and Braviken Paper Mill to Iggesund Sawmill and Braviken Sawmill, 8 GWh thermal energy from Hallsta Paper Mill and Iggesund Mill to the district heating network of the local communities. 80 HOLMEN ANNUAL REPORT 2016 / FIVE-YEAR REVIEW, SUSTAINABILITY ELECTRICAL ENERGY 2016 2015 2014 2013 2012 HOLMEN’S PRODUCTION RELATIVE TO TOTAL CONSUMPTION, % Company hydro power/wind power Electricity production at the mills Purchased electricity (net) 27 20 53 36 20 44 27 18 55 24 17 59 30 12 58 THERMAL ENERGY 2016 2015 2014 2013 2012 SHARE OF HOLMEN'S PRODUCTION/CONSUMPTION, % Biofuel Recovered thermal energy Natural gas Oil, LPG Purchased thermal energy 72 18 6 3 <1 68 17 12 2 <1 73 17 8 2 <1 64 17 12 6 <1 49 20 18 9 4 THERMAL ENERGY Share of Holmen's production/ consumption, % <1 3 6 18 72 Biofuel Recovered thermal energy Natural gas Oil, LPG Purchased thermal energy 72 18 6 3 <1 ENVIRONMENTAL PROTECTION EXPENDITURE SEKm Investments (remedial and preventive) Electricity and heat-saving investments1) Environmental taxes and charges2) Internal and external environmental costs3) Environmental cost of forestry4) PERSONNEL EMPLOYEES Average number of whom women, % of whom temporary employees, % Average age5) 1) The high costs stated for 2012–2014 mainly consist of environmentally related elements of the implementation of biofuel boilers within the paperboard business and the wind farm at Varsvik, Norrtälje, Sweden. 2) The stated amount includes costs for waste management, energy tax charged in Sweden on the use of fossil fuels, nitrogen oxide tax and inspection charges. 3) Includes costs of environmental personnel, operation of treatment equipment, waste management, management systems, environmental training, applications for permits, environmental consultants and the costs of inquiries and measures in connection with discontinued operations. 4) The environmental cost of forestry is calculated as the value of the wood that is not harvested for environmental reasons. Holmen sets aside 14 per cent of its productive forest for environmental reasons and thus refrains from harvesting around 14 per cent of the potential volume. The annual loss of income in 2016 is estimated at around SEK 71 million. 5) Relates to permanent employees. 6) Relates to permanent and temporary employees. SICKNESS ABSENCE 6), % Total of which longer than 60 days Good health index (proportion of employees with no sick leave during the year) GENDER EQUALITY 5), % Women managers out of total number of managers Women joining the company out of total new employees PERSONNEL TURNOVER 5), % Personnel turnover of which given notice of which retiring of which leaving at own request New employees NUMBER OF INDUSTRIAL ACCIDENTS Industrial accidents, more than 8 hours of absence, per million hours worked UNION COOPERATION 6), % Percentage of employees that work at a unit with a collective agreement Rate of union membership 2016 2015 2014 2013 2012 55 8 14 182 71 12 18 12 208 101 26 320 10 169 70 122 300 14 178 84 60 576 22 196 93 2016 2015 2014 2013 2012 2 989 19.3 8.8 46.3 4.2 2.0 48 19.0 27 6.9 1.6 2.4 2.9 5.4 8.8 94 67 3 315 19.4 9.0 46.8 3 359 19.2 7.9 46.8 3 718 19.3 7.7 46.8 3 945 19.3 6.9 45.9 4.2 1.8 48 20.5 24 7.6 2.8 2.4 2.5 5.3 3.9 1.7 50 20.9 31 7.2 2.0 2.2 3.0 5.1 3.6 1.3 47 20.3 37 11.5 6.2 1.7 3.6 3.4 3.4 1.1 48 20.3 24 8.5 2.7 2.6 2.9 3.6 8.8 6.5 8.4 11.6 97 68 97 70 98 72 95 72 HOLMEN ANNUAL REPORT 2016 / FIVE-YEAR REVIEW, SUSTAINABILITY 81 DEFINITIONS AND GLOSSARY DEFINITIONS Capital employed Net financial debt plus equity. Average values are calculated on the basis of quarterly data. GLOSSARY Bio co-location A co-location of different operations for more efficient use of raw materials and energy, amongst other benefits. Cash flow after investments Cash flow from operating activities less cash flow from investing activities. Debt/equity ratio Net financial debt divided by total equity. Earnings per share Profit/loss for the year divided by the weighted average number of shares outstanding, adjusted for buy-back of shares, if any, during the year. Diluted EPS means that any diluting effect from outstanding call options has been taken into account. EBITDA Earnings before interest, taxes, depreciation, amortisation and change in value of forests, excl. items affecting comparability. Equity/assets ratio Equity expressed as a percentage of total assets. Financial assets Non-current and current financial receivables and cash and cash equivalents. Items affecting comparability Used to illustrate how income measures were affected by events outside normal business operations, such as impairment losses, disposals, fire and restructuring. Net financial debt Non-current and current financial liabilities and pension provisions, less financial assets. Operating capital Capital employed plus the net sum of deferred tax liability and deferred tax assets, which corresponds to non-current assets plus working capital. Average values are calculated on the basis of quarterly data. Operating margin Operating profit/loss (excl. items affecting comparability) expressed as a percentage of net sales. Operating profit/loss Profit before net financial items and tax. Return on capital employed Operating profit/loss (excl. items affecting comparability) expressed as a percentage of average capital employed. Return on equity Profit for the year expressed as a percentage of average equity, calculated on the basis of quarterly data. Return on operating capital Operating profit/loss (excl. items affecting comparability) expressed as a percentage of average operating capital. Biofuel Renewable fuels (such as wood, black liquor, bark and tall oil). Fuels that do not generate any net emission of carbon dioxide into the atmosphere, since the quantity of carbon dioxide formed during combustion is part of the carbon cycle. Bulk Bulk is a measure of the volume of the paper. Paper with the same basis weight may have a different thickness, depending on the bulk of the paper. A high bulk indicates a thick but relatively lightweight paper. Carbon dioxide (CO2) Carbon is the building block of life and is part of all living things. Biogenic carbon dioxide is released when biological material decays or wood is burned. Fossil carbon dioxide is released when coal, oil or natural gas is burned. COD Chemical Oxygen Demand. A measure of the amount of oxygen needed for the complete decomposition of organic material in water. FBB Folding Box Board. Multi-layered paperboard made from mechanical and chemical pulp. Fillers Fillers, such as ground marble and kaolin clay, are used to give the paper bulk and make it more uniform in structure and brighter. Fossil fuels Fuels based on carbon and hydrogen compounds from sediment or sedimentary bedrock – mainly coal, oil and natural gas. GRI Global Reporting Initiative. International cooperation body, in which many different groups of stakeholders in society have drawn up global guidelines for how companies are to report on activities encompassed by the umbrella term of sustainable development. IPPC Integrated Pollution Prevention and Control. EU environmental legislation about integrated, individual testing and supervision of major industrial companies. ISO 50001 An international energy management systems standard that provides a framework for energy efficiency measures. ISO 9001 An international standard for quality management systems. Primarily aimed at companies and organisations that wish to improve two aspects of their operations, i.e. to ensure more satisfied customers and lower costs. ISO 14001 An international standard for environmental management. Important principles in ISO 14001 include regular environmental audits and a gradual increase in the requirements. m3 growing stock, solid over bark Cubic metre growing stock, solid over bark. The volume of tree stems, incl. bark, from stump to top. Generally used as a measure for growing forest. m3sub Cubic metre solid volume under bark. The actual volume (no gaps between the logs) of whole stems or stemwood excl. bark and treetops. Generally used as a measure for harvested wood. Nitrogen (N) An element contained in wood. Nitrogen emissions to water may cause eutrophication. Nitrogen oxides (NOx) Gases that consist of nitrogen and oxygen that are formed in combustion. In moist air, nitrogen oxides are converted into nitric acid, which creates acid rain. Nitrogen oxides also have a fertilising effect. OHSAS 18001 A series of international standards regarding a management system for health and safety. The management system includes monitoring, evaluating and reporting on health and safety work. Particulates Particles of ash formed in incineration of bark or liquor, for example. Phosphorus (P) An element contained in wood. Excessive phosphorus in the water may cause over-fertilisation (eutrophication) and oxygen consumption. SBB Solid Bleached Board. Multi-layer paperboard made from bleached chemical pulp. Sulphate pulp Chemical pulp that is produced by boiling wood under high pressure and at a high temperature together with white liquor (sodium hydroxide and sodium sulphide). Sulphur dioxide (SO2) A gas consisting of sulphur and oxygen that is formed in combustion of sulphur-containing fuels, such as oil. In contact with moist air, sulphur dioxide is converted into sulphuric acid, which creates acid rain. Suspended solids Waterborne substances consisting of fibres and particles that can largely be removed using a fine mesh filter. Tall oil By-product of the sulphate pulp process used for making soft soap, paints, biodiesel and other products. TMP Thermo-mechanical pulp. Obtained by heating spruce chips and then grinding them in refiners. 82 HOLMEN ANNUAL REPORT 2016 / DEFINITIONS AND GLOSSARY Information The interim and year-end reports are presented at press and teleconferences in English. The conferences can also be accessed live on holmen.com. The annual report, together with year-end and interim reports, is published in Swedish and English and the reports are sent automatically to the shareholders who have indicated their wish to receive them. They are also available on holmen.com. How to order printed material: • holmen.com • Holmen AB, Group Communications, P.O. Box 5407, SE-114 84 Stockholm, Sweden • e-mail: info@holmen.com • telephone: +46 8 666 21 00 Calendar For 2017 Holmen will publish the following financial reports: Interim report January–March 3/5 17/8 Interim report January–June 24/10 Interim report January–September 2018 30/1 Year-end report The cover is printed on Invercote® G 280 gsm. It is laminated, partially varnished and embossed. The insert is printed on Holmen TRND, 2.0 – 80 gsm. Layout: BYN Kommunikationsbyrå AB. Graphic production: Gylling Produktion AB. Photos: Rolf Lavergren, Ulla-Carin Ekblom, Fredrik Schlyter, Lasse Hejdenberg and others. Print: Åtta.45 Holmen AB (publ) P.O. Box 5407, SE-114 84 Stockholm, Sweden Tel +46 8 666 21 00 E-mail info@holmen.com • www.holmen.com ID no. 556001-3301 • Registered office Stockholm 100% Holmen-produced This entire annual report is made using Holmen’s own products. The cover is printed on Invercote G, manufactured at Iggesund Mill. This is a paperboard with high whiteness and a smooth, matt surface. The paperboard is ideal for products where the focus is on designing and embossing the surface. The insert is printed on Holmen TRND, which is manufactured at Hallsta Paper Mill. This is an uncoated, matt magazine paper that offers a wide range of options in terms of bulk, grammage and shade. Both Holmen TRND and Invercote G are made from fresh fibres that can be recycled up to seven times. 

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