Holmen
Annual Report 2017

Plain-text annual report

Forest Paperboard Paper Wood products Renewable energy The year in brief CEO’s message Strategy and targets Forest Paperboard Paper Wood products Renewable energy A sustainable business Employees 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 3 4 6 10 12 14 16 18 20 26 28 32 36 38 44 66 67 69 70 72 73 74 76 78 79 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 2017 financial year. The annual report comprises the administration report (pages 2–3, 8–9, 22, 25–26, 28–37, 66, 70–71) and the financial statements, together with the notes and supplementary information (pages 38–65). The statutory sustainability report in accordance with the Annual Accounts Act is included in the annual report (pages 8–9, 22, 25–26 and 33). The Group’s income statement and balance sheet and the parent company’s income statement and balance sheet will be adopted at the Annual General Meeting. The basis for the sustainability information presented is the sustain- ability 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 8–9, 20–27, 33, 76–77 and the GRI index on the website holmen.com. The information is audited by a third party, see separate assurance report at holmen.com. This is a translation of the Swedish annual report of Holmen Aktie- bolag (publ.). In the event of inconsistency between the English and the Swedish versions, the Swedish version shall prevail. Holmen in brief Forest Active and sustainable forestry is conducted on over a million hectares of productive forest land owned by Holmen. The annual harvest amounts to 3 million cubic metres. Paperboard Paperboard in the premium consumer packaging segment. Production, which takes place at one Swedish and one UK mill, amounts to just over 500 000 tonnes a year. Paper Paper for magazines, books and advertising. 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. The annual production at three sawmills, whose by-products are used in the Group’s paperboard and paper mills, amounts to just over 800 000 cubic metres. Renewable energy In a normal year, the renewable energy production from hydroand wind power amounts to over 1.2 TWh. Strong cash flow Operating profit for 2017 amounted to SEK 2 166 million and the return on capital employed was 8.7 per cent, which is largely unchanged compared with 2016 but significantly above the Group’s target level. Deliveries increased and the sales mix improved, but this was offset by somewhat higher costs and major maintenance shutdowns in paper- board. Cash flow was strong and covered the dividend of SEK 1 008 million, while net debt was reduced by SEK 889 million. SEKm 20 000 16 000 12 000 8 000 4 000 0 Net sales and operating margin Operating profit/loss and return % 20 16 12 8 4 0 SEKm 2 500 2 000 1 500 1 000 500 0 16 133 13.4 12 13 14 15 16 17 2 166 8.7 12 13 14 15 16 17 % 10 8 6 4 2 0 Sales of paperboard increased by 6 per cent through higher deliveries to customers in the premium segment, both in and outside Europe. A rise in sales of book and magazine paper, which now account for over 85 per cent of the paper business, meant that deliveries of paper were also up 6 per cent, adjusted for the fire at Hallsta Paper Mill at the end of 2015 and the divestment of the newsprint mill in Madrid in 2016. The market for wood products was strong with rising prices, and Holmen’s deliveries climbed by 10 per cent, driven by productivity increases in the sawmills and the acquisition of a small sawmill, Linghem. The har- vesting of forest stood at a normal level and the volume of standing timber grew by 1 per cent, as planned. Production of hydro and wind power was 5 per cent lower than in a normal year, due to reduced levels of rainfall and wind. Outlook. The market situation for paperboard is good, but additional production capacity is expected to increase competition. Holmen’s ambition is to continue to increase paperboard production on the back of implemented investments and grow globally in the premium seg- ment. Despite the falling demand for paper, the market balance is good as a consequence of capacity closures. Holmen’s aim is to continue to capture market share by offering a cost-effective alternative to estab- lished products for books, magazines and advertising. Demand for wood products is strong. Holmen is focusing on increasing production, while at the same time raising the value added through its wood treat- ment plant at Braviken Sawmill, which is due to come on stream in 2018. The harvesting of company-owned forest and the production of hydro and wind power are expected to be at normal levels in 2018. Key figures 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, SEKm Cash flow from investments, SEKm Net financial debt, SEKm Debt/equity ratio, times Average number of employees 2017 2016 16 133 2 166 2 166 1 668 1 668 19.9 13* 8.7 2 509 644 2 936 0.13 2 976 15 513 1 930 2 162 1 424 1 652 16.9 12 8.6 1 961 123 3 945 0.19 2 989 Net sales Operating margin* Operating profit/loss* Return on capital employed* *Excl. items affecting comparability *Excl. items affecting comparability Cash flow, SEKm Debt/equity ratio, times 0.5 0.4 0.3 0.2 0.1 0.0 3 000 2 000 1 000 0 2 310 644 1 008 12 13 14 15 16 17 Investments Dividend Cash flow before investments and change in working capital 0.13 12 13 14 15 16 17 Operating profit/loss* Business area, % Capital employed* Business area, % 6 3 12 33 46 12 3 9 21 54 Total: 2 166 Forest 1 069 SEKm Paperboard 764 SEKm Paper 288 SEKm Wood Products 80 SEKm Renewable Energy 135 SEKm Total: 24 972 Forest 13 824 SEKm Paperboard 5 433 SEKm Paper 2 193 SEKm Wood Products 862 SEKm Renewable Energy 3 115 SEKm *Board proposal **Excl. items affecting comparability *Excl. Group-wide *Excl. Group-wide HOLMEN ANNUAL REPORT 2017 / THE YEAR IN BRIEF 3 Dear shareholder In 2017, we succeeded in significantly growing sales of paperboard, paper and wood products, while at the same time seeing a positive development of the product and market mix. This is the fruit of both long-term invest- ments and focused internal work. The return is almost 9 per cent, which is good, considering that forest and energy account for two-thirds of the balance sheet. Our financial position is strong, thanks to sound cash flow. Against the background of this, the Board has proposed to raise the dividend from SEK 12 to SEK 13 per share. 4 HOLMEN ANNUAL REPORT 2017 / CEO’S MESSAGE There is a growing awareness of the forest’s value and its role in the transition to an economy where products based on fossil raw materials are replaced with renewable alternatives. Holmen’s own forest holdings are the foundation for its business. With a focus on profitability, we manage the raw material from the forest and refine it into everything from wood products for climate-smart construc- tion to renewable packaging, magazines and books. Strength in fresh fibre In the paperboard business, Holmen has an enviable position as a market leader in the premium segment for consumer packaging. Our fresh fibre- based paperboard of the very highest quality, combined with active long- term sustainability work, is appreciated by customers all over the world, prompting close collaborations with global brand owners such as Apple and IKEA. Substantial investments in recent years have created an opportunity to increase production and improve our cost position. Our strong market position and high product quality provide a sound basis for continued global growth. With a paper business fully focused on fresh fibre-based paper for magazines, books and advertising, we have a concept that has proven to work well. The fresh fibre allows us to develop paper grades that meet customer demand for cost-effective and innovative products. Further- more, our raw material is fundamental for the European recovered paper ecocycle. The market situation for paper remains challenging, but with successful products and a clear product strategy, we are well placed to develop our paper business. Building the future in wood There is no doubt that the renewable raw material from our Swedish forests has huge potential, not least from a climate perspective. The link between the forest and climate improvement measures is becoming particularly clear in the wood products area. Building in wood helps to reduce climate change, as wood binds carbon dioxide and is able to replace construction materials with a greater carbon footprint, such as steel and concrete. Since we handle every part of the harvest, we also ensure that by-products such as wood chips, bark and shavings are turned into recyclable products or converted into useful bioenergy. More homes need to be built. According to the Swedish National Board of Housing, Building and Planning (Boverket), Sweden will be needing 600 000 new homes by 2025. This, coupled with the growing interest in sustainable development, has put wood construction firmly in the spotlight like never before. Holmen’s modern, large-scale sawmills provide a sound foundation for future development. One step in this direction is the acquisition of Linghem Sawmill, whose products complement our existing range and allow more efficient raw material handling in the region. The construction of a wood treatment plant at Braviken Sawmill is another example that increases the value added and gives us a broader offering for builders’ merchants. Right to manage our forests There is a growing awareness of the forest’s value and its role in the transition to an economy where products based on fossil raw materials are replaced with renewable alternatives. The correct conditions for the Swedish forest industry, such as the right to manage our forests and mar- ket acceptance of fresh fibre-based products in competition with recov- ered fibre, are crucial if we are to complete the transition and make full use of the forest’s potential. Holmen has many years’ experience of long-term and successful sustainability work that combines efficient and rational forestry with the preservation of biodiversity. Conducting sustainable forestry involves balancing different interests: economic, social and not least environmen- tal. I firmly believe there is no contradiction between responsibly man- aged forests and the preservation of habitats with high conservation value. Further restrictions on how forests can be managed would, how- ever, jeopardise the continued success and sustainability of Swedish for- estry. If large swathes are exempted from forest management, this would restrict the uptake of carbon dioxide and reduce the forest’s contribution to mitigating the greenhouse effect. The objective must be to make more and smarter use of the forest, not less. We are creating a sustainable future Our business is rooted in the growing forest. With that foundation, plus well invested production facilities and strong market positions, we will continue to develop our business in paperboard, paper and wood prod- ucts. This will deliver good profitability and growing value for our forest and our industry, while at the same time contributing to a better climate, flourishing rural communities and to the Swedish economy. Stockholm, 16 February 2018 Henrik Sjölund President and CEO HOLMEN ANNUAL REPORT 2017 / CEO’S MESSAGE 5 We grow a sustainable future Our business concept is to own and add value to the forest. Holmen’s forest holdings form the basis of our business – an ecocycle in which the raw material grows and is refined into everything from wood for climate-smart building to renewable packaging, magazines and books. 6 HOLMEN ANNUAL REPORT 2017 / STRATEGY AND TARGETS Forest Active forestry The revenue from and value of the forest will grow through active and sustainable forestry, where the harvest is managed and refined into climate-smart products. A strong position in the wood market will contribute to the competitiveness of Holmen’s industries. Paperboard High-performance premium paperboard The paperboard business will grow based on Holmen’s position as a market leader in the premium segment for consumer pack- aging. High quality and custom solutions are combined with large-scale production. Paper Cost-effective alternatives The paper business will develop by offering cost-effective alternatives to traditional products for advertising, magazines and books. Wood Products Efficient use of the raw material Sales of wood products to the joinery and construction industry will be increased by adding value and making better use of the raw material. Renewable Energy Renewable production Hydro and wind power will contribute to a sustainable energy supply and be managed with a focus on long-term profitability. HOLMEN ANNUAL REPORT 2017 / STRATEGY AND TARGETS 7 The value of the forest and the industry will grow. The forest is managed to provide a good annual return and stable value growth. The industry is run with a focus on profitability and greater value added. 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. The return for 2017 was 8.7 per cent, which exceeds the target for the second year running. Capital structure Our financial position is to 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. In 2017, the debt/equity ratio was 0.13. Good cash flow in recent years has enabled a higher dividend, while at the same time strengthening the financial position. Dividend Decisions on dividends are to be based on an appraisal of the Group’s profitability, investment plans and financial position. The Board proposes a dividend of SEK 13 per share in 2018. The proposed dividend corre- sponds to 5.0 per cent of equity. Over the past five years the dividend has increased by 8 per cent annually. Return on capital employed, % Debt/equity ratio, times Dividend per share 10 8 6 4 2 0 8.7 12 13 14 15 16 17 Excl. items affecting comparability 0.5 0.4 0.3 0.2 0.1 0.0 0.13 12 13 14 15 16 17 SEK 15 12 9 6 3 0 Proposal, SEK 13 5.0 12 13 14 15 16 17 % 10 8 6 4 2 0 Dividend Dividend as percentage of equity 8 HOLMEN ANNUAL REPORT 2017 / STRATEGY AND TARGETS We will contribute to a better climate. The growing forests capture carbon dioxide and provide the industry with renewable raw material. The climate impact from our production is to be reduced by phasing out fossil fuels and increasing the production of our own renewable electricity. Forest growth Growth in Holmen’s forests is to increase, which will give higher future harvests and capture more carbon dioxide. The volume of standing timber and harvesting will be 50 per cent higher in 2050 than in the base year 2000. The volume of standing timber has grown by 15 per cent to date, with harvesting up 25 per cent. Carbon emissions By 2020, use of fossil fuels at the Group’s mills will be down 90 per cent compared with the base year 2005. The use of fossil fuels at the mills has fallen by 86 per cent since 2005. Renewable electricity production Company-generated renewable electricity will equate to 50 per cent of Holmen’s total electricity consumption by 2020, compared with 31 per cent in 2005. The proportion of company-generated renewable electricity in 2017 amounted to 45 per cent. Volume of standing timber, m3 growing stock per hectare productive forest land Use of fossil fuels (base year 2005),% Renewable electricity production relative to electricity use (base year 2005), % 160 120 80 40 0 +1%/year 1948 1965 1955 1975 1988 2000 2020 2040 1993 2010 2030 2050 30 0 -30 -60 -90 60 50 40 30 20 -86 45 05 06 07 08 09 10 11 12 13 14 15 16 17 05 06 07 08 09 10 11 12 13 14 15 16 17 Assessment of tax Forecast HOLMEN ANNUAL REPORT 2017 / STRATEGY AND TARGETS 9 Active forestry benefits society Holmen’s forest holdings are the foundation of our business. Efficient and sustainable manage- ment of the forest boosts its growth and the opportunities for harvest- ing. As well as being a stable source of revenue, the forest brings major climate benefits by capturing and storing carbon dioxide and providing the industry with renew- able and fossil-free raw material. Strength in company forest Holmen’s forests cover 1.3 million hectares, of which a little over a million is productive forest land. The strategy is to increase the revenue from and future value of the forest holdings through active and sustainable forestry with a clear focus on costs. As one of the country’s largest landowners, we are largely able to sup- ply our Swedish production units with renew- able raw material from our own sources. Eco- nomies of scale and efficient logistics give us a strong position in the wood market, which contributes to the Group’s competitiveness. Growing forests create value 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 80 per cent of the growth. The volume of standing timber is thus growing by 1 per cent per year. The goal is for today’s volume of standing timber, 121 million m³ growing stock, solid over bark, to increase to 160 million m³ grow- ing stock, solid over bark by 2050, whilst at the same time, harvests will rise from 3 to 3.5 million m³sub per year. Social benefit. Forestry is of significant region- al importance. It creates employment in rural areas and for many is the reason why they are able to live and work outside the big cities. 10 Climate benefit. 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 captured. Carbon capture is greater in younger and middle-aged stands, where growth is greatest, than in older stands where growth is in decline. Furthermore, the benefit to the climate becomes many times greater when the forest’s renewable products replace fossil materials. Forest that is not managed does not deliver the same benefits for the cli- mate, not least because there is no substitution of products that are harmful for the climate. 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 begin- ning after harvest. The most important silvicul- ture measures come in the years immediately after harvest, when 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 continu- ing their growth. Around 10–30 years before the forest is harvested, it can be fertilised to further boost growth. Holmen’s forestry is cer- tified according to PEFC™ and FSC® and all the wood is traceable. High growth while preserving natural assets. Long-term development of quality and profitability requires continuous improve- ments in technology, methods and skills. Holmen works with other actors in the indus- try, manufacturers and researchers, to improve productivity and develop the natural assets of the forest. Holmen’s nature conservation strategy sets out how we work to combine high growth with preserving biodiversity. The aim is to ensure that all naturally occurring species are able to thrive in Sweden’s forest landscape. Quality-assured growth. Holmen invests around SEK 150 million a year in future growth through silviculture and fertilisation. The foundation for future growth in the forest is laid when new forest is planted. Regenera- tion is quality-assured and Holmen conducts long-term development work that covers the entire chain from seed to new planting. Togeth- er, the company’s two nurseries produce 35 million seedlings each year, with the majority planted on the Group’s land. For every tree harvested, at least two new ones are planted and, through selective breeding, the new trees show significantly higher growth than the old ones. 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 while at the same time the periods of ground frost may become shorter, which makes harvesting more difficult. The seeds for the com- pany’s plant nurseries are selected to grow and thrive in a changing climate, and Holmen’s forestry is robust in climate terms. Right to manage our forests The significance of forestry for both the climate and the Swedish economy places it squarely on the political agenda. Holmen and other indus- try players have joined forces to make politi- cians, authorities and the general public aware that the forest is vital with regard to the climate and that active and sustainable forestry is the very foundation of the emerging bioeconomy. The aim is to establish a regulatory framework that takes account of the industry’s unique posi- tion in contributing to an economically, envi- ronmentally and socially sustainable society. Rising demand for forest raw material An active construction industry and a growing interest in building in wood have led to greater demand for logs in recent years. Demand for pulpwood is also on the rise, due to a strong trend for various types of packaging material and the recent large-scale investments in pulp mills. Holmen’s forest holdings Holmen’s Swedish industries Volume of standing timber, m3 growing stock per hectare productive forest land 160 120 80 40 0 +1%/year 1948 1965 1988 2000 2020 2040 1955 1975 1993 2010 2030 2050 Assessment of tax Forecast HOLMEN ANNUAL REPORT 2017 / FOREST Holmen’s forests 2017 Total land acreage Total forest land acreage* - of which nature conservation areas Productive forest land** 1 301 000 ha 1 153 000 ha 192 000 ha 1 042 000 ha Total volume of standing timber on productive forest land 121 million m3 growing stock, solid over bark * Analysis performed by the Swedish National Forest Inventory, according to the inter- national definition of forest land: Land area > 0.5 hectares with a tree canopy cover of more than 10 per cent for trees capable of reaching a height of at least 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). 2017 2016 2 571 654 1 069 2 572 686 1 001 49 30 13 824 13 536 364 2 986 363 2 904 Operating profit/loss and return Key figures SEKm 1 200 900 600 300 0 7.8 1 069 12 13 14 15 16 17 Operating profit/loss Return on capital employed % 8 6 4 2 0 External net sales, SEKm Profit/loss before change in value, SEKm Operating profit/loss incl. change in value of forests, SEKm Investments, SEKm Capital employed, SEKm Average number of employees Harvesting in own forests, ’000 m3sub 54 % of the Group’s capital is employed in the Forest business area 3.7% cash flow yield The operating profit from the forest amounted to SEK 1 069 million in 2017, which breaks down as SEK 415 million in value growth and SEK 654 mil- lion in earnings from operations. The earnings from operations represent the cash flow from the forest business and equate to a cash flow yield of 3.7 per cent in relation to the book value of the forest, which stands at SEK 17.8 billion. See Note 11, page 55. 11 HOLMEN ANNUAL REPORT 2017 / FOREST Global growth from leading position Holmen produces paperboard for consumer packaging in the pre- mium segment. The strategy is to grow globally through two of the market’s strongest brands, high quality and custom solutions. Market leader in the premium segment Holmen is a market leader in the premium seg- ment for consumer packaging and paperboard for advanced graphical printing. The main cus- tomer groups are converters, wholesalers and brand owners who want to be able to offer high-quality and sustainable products. The global market for packaging board is growing, and Holmen is well positioned for growth. Strong brands in Invercote and Incada. Holmen markets its paperboard under two brands: Invercote and Incada. The brands are held in high esteem by converters, brand owners and designers the world over and together, they represent one of the market’s most versatile ranges in the premium segment for consumer packaging. With its high and consistent quality, paperboard from Holmen ensures stable results in the customer’s production process. Fresh fibre offers unique properties Both Invercote and Incada are manufactured using fresh fibre from sustainably managed forests. The fresh fibre-based paperboard brings benefits for both production and the environment. Higher strength, better bright- ness and a neutral effect on smell and taste in contact with food are just a few of the proper- ties that add clear value to the end product. The fresh fibre and the inherent properties of the paperboard make it possible to manufac- ture attractive and functional packaging solu- tions that offer an excellent substitute for packaging based on fossil raw materials. Sustainable ecocycle. The forest is the source of all paperboard and paper. The addi- tion of fresh fibre is necessary to keep the recovered fibre ecocycle going. Wood fibre can be recycled up to seven times before it wears out and ends up as biofuel. Customer-led product development Products are constantly being developed in close collaboration with customers, in order to meet the ever-growing demand for customer- specific packaging solutions. The longstanding relationship with Apple is one such example. The collaboration began in 2005 and has developed into a partnership for innovation and sustainable packaging. The customers’ need for support and fast deliveries is a priority area that covers everything from advice and product samples to service centres with local warehouses and sheeting units. Our support teams work closely with the market, speak the customer’s language and have in-depth knowledge of their circum- stances. This enables them to offer expert advice before, during and after the customer’s production process. The service offering includes environmen- tal documentation plus access to analysis facili- ties at the company’s own accredited laborato- ry for sensory and chemical analysis, known as the taint and odour lab, at Iggesund Mill. Coupled with the finishing options at the lami- nation unit in Strömsbruk, this means that Holmen can offer custom solutions that meet the toughest requirements. Climate-smart production Invercote and Incada are manufactured at paperboard mills in Iggesund (Sweden) and Workington (UK). Both mills hold chain-of- custody certification and all the wood raw material comes from sustainably managed forests. The plants are largely 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 growth in the packaging market Demand for packaging is rising in line with factors such as population growth, urbanisa- tion and an expanding middle class with more single-person households. The demand in the various product segments varies depending on the market, but there is a general increase in demand for renewable packaging materials. The exception is tobacco products, which are declining in several markets. Growth in food packaging can be seen primarily in Asia, the Middle East and Africa, while demand for pharmaceutical packaging is rising in all markets. Packaging for cosmetics is seeing 12 HOLMEN ANNUAL REPORT 2017 / PAPERBOARD a particular increase in markets with rapid population growth, such as Asia, Eastern Europe, and South and Central America. Europe. 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. Asia. Demand for status goods is rising, with the emergence of local brands for which Holmen’s high quality paperboard is the per- fect fit. Holmen’s presence in the Asian market has grown in recent years, with service levels boosted not least by the establishment of a service centre with warehousing and sheeting in Taiwan. North America. Holmen is growing in the pre- mium segment with a greater presence and a better service level. Thanks to warehousing and sheeting in three strategic locations, local dis- tribution and short delivery times are now offered from coast to coast. European paperboard market 2017 0.5 2.3 e c i r P 2.4 3.7 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) Drinks, dairy products and dry goods. WLC (white lined chipboard) Dry goods and household products. Iggesund Mill Products: Multi-layered paperboard made from bleached chemical pulp (SBB) Brand: Invercote Raw materials: Softwood and hardwood pulpwood Workington Mill Products: Multi-layered paperboard, surface layer of chemical pulp, core of mechanical pulp (FBB) Brand: Incada Raw materials: Spruce pulpwood and purchased sulphate pulp 2017 2016 5 526 764 375 5 433 1 383 526 5 252 903 413 5 546 1 406 497 6% higher deliveries 2017 saw deliveries rise by 6 per cent through increased sales in the premium segment within and outside Europe, plus greater productivity at the paperboard mills following the completion of invest- ments. However, operating profit decreased by SEK 139 million to SEK 764 million as a result of SEK 220 million in costs and lost revenue relating to two major maintenance shutdowns and rising costs for input goods and freight. Operating profit/loss and return Key figures Net sales, SEKm Operating profit/loss, SEKm Investments, SEKm Capital employed, SEKm Average number of employees Deliveries, ’000 tonnes SEKm 1 000 750 500 250 0 % 20 15 10 5 0 764 13.9 12 13 14 15 16 17 Operating profit/loss Return on capital employed 21% of the Group’s capital is employed in the Paperboard business area HOLMEN ANNUAL REPORT 2017 / PAPERBOARD 13 Paper that saves customers money Holmen utilises the properties of fresh fibre to offer cost-effective alternatives to traditional paper products for advertising, maga- zines and books. Paper with potential Holmen develops and sells fresh fibre-based paper that challenges traditional, more expen- sive paper grades. All the paper is produced at two Swedish mills and is made using renewable raw material from sustainably managed for- ests. Efficient production units, continued spe- cialisation and a strong marketing organisa- tion will see Holmen strengthen its position in existing and new markets. Customers include retailers, printers and publishers across the globe seeking cost-efficient paper solutions. Unique benefits of fresh fibre Fresh fibre makes it possible to develop paper grades with high bulk – paper that is thick but light. This means that the customer gets more paper with the same feel as traditional paper grades, but without the higher costs. A lighter paper also leads to lower distribution costs. In addition, the paper has a naturally higher brightness that improves the way text and images are experienced, compared with paper based on recovered fibre. Cutting-edge products Holmen is an industry leader in developing new products entirely based on fresh fibre. Working closely with the customer, the result is innovative products that, compared with tradi- tional paper choices, offer clear cost benefits when purchasing and distributing finished products. Magazine paper. The brands Holmen UNIQ, Holmen VIEW and Holmen TRND represent a broad range of modern paper grades. The products challenge coated paper and are excel- lent for magazines, without any need to com- promise on print quality, brightness or feel. Book paper. Compared with wood-free paper, Holmen BOOK gives its customers the oppor- tunity to lower paper costs considerably. Pub- lishers appreciate Holmen’s wood-containing paper because it maintains high quality and offers product properties that enhance the reading experience thanks to the paper’s high stability and bright, smooth surface. Printed advertising. Holmen’s lightweight papers create opportunities for retailers seek- ing an attractive overall cost profile – either in the form of pure cost savings for both paper and distribution, or through the option of step- ping up the format, page numbers or print run, without adding to the cost. Sustainability at every stage Production at both mills has been streamlined and the operations have been upgraded in line with the strategy to transition to magazine and book 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, and both mills are close to ports with good capacity and effi- cient handling. Braviken Paper Mill and Braviken Sawmill make an energy-efficient co-location. The paper mill receives raw material in the form of wood chips from the sawmill, which in turn is sup- plied with energy and heat from the mill. Sur- plus bark and wood shavings are sold for the production of renewable energy. Hallsta Paper Mill is one of the most resource-efficient mills in its segment in Europe, with practically no emissions of fossil carbon dioxide. The residual products from the mill’s production processes are sold on as bio- fuel and soil products. Recovered paper grows in the forest. 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 and paper manufacture is based on recovered paper to a considerably higher extent. However, paper cannot be recycled again and again for- ever. After 5–7 times the fibres are exhausted. 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, as a guarantee that the wood raw material is traceable and comes from sustainably man- aged forests. This stands in stark contrast to the majority of products based on recovered fibre, whose origin cannot be guaranteed. Ecolabelled products. All the magazine and book paper that Holmen manufactures is approved to carry the EU Ecolabel – the EU’s official labelling scheme for products that meet strict environmental, functional and quality criteria. The ecolabelling process mainly exam- ines the use of fibre raw materials, chemicals 14 HOLMEN ANNUAL REPORT 2017 / PAPER and energy and emissions to air and water in manufacturing. Opportunities in a challenging market The transition from newsprint to magazine and book paper has boosted Holmen’s competi- tiveness and created opportunities to develop our position in selected areas. A changing magazine market. Many maga- zine publishers are being squeezed by competi- tion from digital channels and are constantly reviewing their paper choices as they chase lower costs. Our products deliver significant cost benefits, which creates the potential for volume growth. Stable book paper market. Holmen BOOK is the market’s leading wood-containing paper in Europe for paperbacks and hardback books. Its market share has increased steadily in recent years. We are now looking to new mar- kets with potential outside Europe, mainly in Asia and Latin America. Printed advertising for retailers. Although the digital alternatives are gaining ground, paper-based direct mail remains strong. Our products combine high quality and competitive pricing, making the sums more than add up for customers. Production, % 100 75 50 25 0 87 13 12 13 14 15 16 17 Magazine and book paper Newsprint Braviken Paper Mill Products: Paper for magazines, books, printed advertising and newspapers Raw material: Spruce pulpwood Hallsta Paper Mill Products: Paper for magazines, books and printed advertising Raw material: Spruce pulpwood Operating profit/loss and return Key figures SEKm 400 200 0 -200 -400 11.9 288 12 13 14 15 16 17 % 12 6 0 -6 -12 Operating profit/loss, excl. items affecting comparability Return on capital employed, excl. items affecting comparability Net sales, SEKm Operating profit/loss excl. items affecting comparability, SEKm Investments, SEKm Capital employed, SEKm Average number of employees Deliveries, ’000 tonnes 9% of the Group’s capital is employed in the Paper business area 2017 2016 5 408 5 431 288 141 2 193 858 1 117 289 259 2 507 861 1 134 12% return At SEK 288 million, this year’s operating profit is practically the same as in 2016 and equates to a return of 12 per cent. Deliveries increased by 6 per cent, adjusted for the divestment of the Spanish newsprint mill and the effects of the fire at Hallsta Paper Mill in late 2015. The increase occurred in magazine and book papers, which now account for slightly more than 85 per cent of deliveries. The contribution that sales made to earnings was, how- ever, offset by higher wood prices. HOLMEN ANNUAL REPORT 2017 / PAPER 15 Wood products for sustainable building Holmen supplies wood products to the joinery and construction indus- try and to builders’ merchants. The business is being developed by increasing the value added and making better use of the wood raw material in combination with large- scale production. Building the future in wood Wood is a versatile material and the only con- struction material that is renewable. Since wood products have the capacity to store car- bon dioxide for a long time, wooden buildings are significantly more climate-smart than those built using fossil-based materials and process- es. Manufacturing steel and concrete creates considerable emissions of fossil carbon that affect the climate. Replacing such materials with renewable structural components in wood achieves climate benefits on many fronts. Emissions of greenhouse gases from manufac- The wood treatment plant at Braviken Sawmill will be operational in 2018. turing and using climate-negative materials are avoided, while increased use of products from the forest captures more carbon dioxide. In addition, the whole chain from manufacture to transport is much more energy-efficient and cost-effective. Modern and large-scale production Modern sawmills with a high technological level and gradually expanding value-adding processing are delivering a stronger product range. With an efficient production chain and customer-centric working methods, Holmen is building a platform for long-term and profita- ble customer relations with the capacity to meet demand in different markets. Proximity to the raw material combined with efficient wood purchasing is a key factor for profitabi- lity. Competitiveness is underpinned by the fact that production is co-located with the Group’s paperboard and paper mills. Holmen’s saw- mills are strategically located to benefit from a transport network that reaches around the globe by sea, rail and road. A large proportion of the finished products are shipped by sea. Treated wood for builders’ merchants. The 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 impor- tant part of the range offered by Swedish build- ers’ merchants and is used for terraces, deck- ing, fences and jetties. Demand for treated products is growing and the sawmill’s central location in a densely populated region means there are good opportunities to reach out to builders’ merchants. Acquisition of Linghem Sawmill. 2017 saw the acquisition of Linghem, a small log sawmill situated 40 km from Braviken Sawmill. With its integrated planing mill, Linghem produces sawn and planed wood products from small logs for joinery and construction purposes. The products provide a good complement to Braviken’s range and the acquisition helps to strengthen Holmen’s market position, primari- ly in Sweden and the UK. Sustainable raw material supply. Holmen’s sawmills have chain-of-custody certification, which means that all the wood can be traced back to its origin in sustainably managed for- ests. The wood raw material is sourced from Holmen’s own forest holdings and from other forest owners, ensuring an efficient logistics chain from forest to sawmill. The acquisition of Linghem Sawmill and the switch to sawing two types of wood at Braviken Sawmill have increased flexibility regarding raw material supply and improved opportunities to source raw material within the local region to a greater extent. Complete bio co-locations. The Group’s larger sawmills, Iggesund and Braviken, form co-locations with their neighbouring paper- board 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 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 pro- cesses at the sawmills. Positive market trends Holmen manufactures and supplies high-quali- ty wood products to joinery and construction industry customers, mainly in Scandinavia, the UK, the rest of Europe, the Middle East and North Africa. Deliveries are also made directly to local Swedish builders’ merchants. The market for wood products is global and huge streams of goods are shipped between continents. Demand largely follows the general economic cycle and has been devel- oping well. The market for wood products is strong in all the key territories. The construc- tion industry is doing well in Europe and North American consumption has recovered. Asia is breaking new records and is dominated by the Chinese market, which is also seeing the fastest growth. Growing cities are driving Swedish wood construction. For a long time, the increase in the use of wood in Sweden has largely been attributable to renovation work and exten- sions. Now the trend is being driven by the construction of new homes, which in turn is affected by population growth, urbanisation and the aim to build sustainable cities. There is great potential for growth, mainly in high-rise buildings, and the proportion of housing built in wood is expected to rise as the capacity for industrial building in wood is expanded. New wood building techniques are also under devel- opment, which could lead to increased demand. 16 HOLMEN ANNUAL REPORT 2017 / WOOD PRODUCTS Braviken Sawmill Products: Spruce and pine wood products for joinery and construction Raw material: Spruce and pine saw logs Iggesund Sawmill Products: Pine wood products for joinery Raw materials: Pine saw logs Linghem Sawmill Products: Spruce and pine wood products for joinery and construction Raw materials: Spruce and pine saw logs 16% higher sales Sales climbed steeply in 2017 as a result of a 10 per cent increase in deliveries and rising market prices, which drove operating profit up to SEK 80 million, equating to a return of 9 per cent. 2017 2016 1 562 80 100 862 251 852 1 342 -3 52 859 225 776 Operating profit/loss and return Key figures Net sales, SEKm Operating profit/loss SEKm Investments, SEKm Capital employed, SEKm Average number of employees Deliveries, ’000 m3 SEKm 100 50 0 -50 -100 -150 80 9.1 12 13 14 15 16 17 % 10 5 0 -5 -10 -15 Operating profit/loss, excl. items affecting comparability Return on capital employed, excl. items affecting comparability 3% of the Group’s capital is employed in the Wood Products business area HOLMEN ANNUAL REPORT 2017 / WOOD PRODUCTS 17 Renewable energy production Holmen’s renewable energy as- sets in the form of hydro and wind power contribute to a sustainable energy supply and provide a good revenue stream over time. Holmen’s own energy production is dominated by renewable hydro power. In an energy system that is increasingly based on weather-depend- ent energy sources, such as solar and wind power, hydro power is uniquely controllable. Electricity cannot be stored to any great extent, but the water that is used to generate electricity can be stored in reservoirs, lakes and rivers. Hydro power stations can therefore generate both baseload power and regulating power, which is the energy needed to meet fluctuations in demand. Production is tailored to demand or changes in other electricity production by reducing or increasing the flow of water through the turbines. The environmental impact of the operation is marginal, with mini- mal emissions. Another benefit of hydro power is service life, since a hydro power station can deliver energy for over 100 years. The investment required is relatively small compared with other types of power and the operating and mainte- nance costs are low, since the plants are almost entirely automated. Overall, hydro power brings major benefits to society as part of the drive for a totally renewable electricity system. Strength in own energy assets In a normal year, Holmen produces 1 100 GWh from hydro power and a little over 100 GWh from wind power. Together with the renewable electrical energy that is produced at the Group’s mills, this equates to almost 50 per cent of Holmen’s overall energy consumption. Hydro power provides a reliable electricity supply Sweden’s electricity production is based largely on nuclear power and hydro power, each of which account for around 40 per cent of total production. Wind power a supplement. Wind power is the fastest growing energy source in the EU. Holmen is a major land owner and has the potential to develop its land holdings by estab- lishing wind farms on sites with good wind conditions. Wind power’s total cost per kilo- watt hour produced has been relatively high due to the significant cost of investing in the infrastructure and power grids. However, tech- nical advances and a new generation of more efficient wind turbines, combined with slightly higher electricity prices, create opportunities for the future establishment of wind power on the Group’s land. Turbine hall at Holmen’s hydro power station in central Norrköping. Swedish investment in renewable energy Over the year, Sweden’s energy policy has focused on implementation of the energy policy agreement that was secured in 2016. The tax on thermal energy for nuclear power is being stepped down to facilitate man- datory investments and the electricity certifi- cate system is being increased and extended until 2030 to stimulate the expansion of wind power. The energy agreement also states that hydro power plays a central role in Sweden’s renewable electricity supply. The property tax on hydro power will be reduced to the same level as for other electricity production plants over a four-year period beginning in 2017. This will allow investments to continue the opera- tion of hydro power stations. Sweden’s electricity production, % 9 11 39 41 Hydro power Nuclear power Wind power Thermal power 41% 39% 11% 9% 18 HOLMEN ANNUAL REPORT 2017 / RENEWABLE ENERGY 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 Owner Varsvik VindIn Wind farms Varsvik Skutskär Trattberget Svalskulla, Finland *Refers to normal production Holmen’s production share GWh* 470 97 3 1 8 9 7 7 14 115 23 70 7 22 30 17 45 29 17 112 10 % 49 22 10 10 10 10 10 10 7 100 30 100 100 100 20 20 9 11 7 100 100 Holmen’s production share GWh* 83 5 38 9 % 50 18 18 18 Year of construction 1957–58 1962 1985–96 –”– –”– –”– –”– –”– 1961–74 –”– –”– –”– 1915 2009 1949–75 –”– –”– –”– –”– 1990 1927 Year of construction 2014 2009 2012 2014 2017 2016 315 135 26 3 115 11 314 120 23 3 153 10 1 169 1 080 5% lower production than normal Low rainfall caused production to be 5 per cent lower than in a normal year. However, operating profit increased by SEK 15 million to SEK 135 million due to a reduction in property tax of SEK 20 million. Operating profit/loss and return Key figures External net sales, SEKm Operating profit/loss, SEKm Investments, SEKm Capital employed, SEKm Average number of employees Own production of hydro and wind power, GWh SEKm 500 375 250 125 0 % 16 12 8 4 0 135 4.3 12 13 14 15 16 17 Operating profit/loss Return on capital employed 12% of the Group’s capital is employed in the Renewable Energy business area HOLMEN ANNUAL REPORT 2017 / RENEWABLE ENERGY 19 Sustainability every step of the way Holmen’s value creation begins in the sustainably managed forest. By absorbing carbon dioxide, the forest plays an important role for the climate, while also providing the indus- try with renewable raw material. With our own renewable energy production and resource-efficient production units, Holmen creates climate-smart products for the future. How we manage the forest 70 – 90 years After about 70–90 years, the for- est is mature enough to be har- vested. By the time the trees are this old, growth slows down and the forest’s ability to capture and store carbon dioxide is reduced. 80% of the growth is harvested. This means that the amount of wood in our forests increases every year. From seedling to plank 0 – 20 years Once the forest has been har- vested, the ground is prepared, and new trees are planted or sown. Holmen’s two nurseries produce 35 million seedlings each year, with the majority planted on the Group’s land. The forest is cleaned to select the trees that are best able to grow, and to make the forest more re- sistant to storms and damage. 20 – 70 years The trees grow fastest during this time and absorb the highest amount of carbon dioxide. The forest is thinned to give the best trees a chance to grow big. The trees that are thinned are used to produce pulp. We take care of the whole harvest We saw as much wood as possible from the trees we harvest, and nothing is wasted. Division of the stem Wood – Planks and boards Chips – Paper pulp Bark – Bioenergy Wood shavings – Bioenergy 20 50% The large logs that make up ap- proximately half of the harvest go to sawmills where they become building materials in the form of construction timber and joinery products. 40% The thinner parts of the tree and wood from thinning are ground or boiled down into pulp that then becomes paper or paperboard. 10% Branches, tops, bark and wood shavings become renewable bioenergy. HOLMEN ANNUAL REPORT 2017 / A SUSTAINABLE BUSINESSThe carbon cycle The trees in Holmen’s forests capture carbon dioxide and store it throughout their lifetime. The carbon dioxide is then bound in the harvested wood products and does not return to nature until the wood is burned or rots. This means that a wooden house that is a hundred years old is still storing the carbon dioxide that the tree absorbed when it was growing in the forest. As paperboard and paper have a relatively short lifetime, the carbon di- oxide bound in these products returns to the ecocycle relatively quickly. However, paperboard and paper can be recycled several times before they, like end-of-life wood products, can be used as biofuel. 2 815 000 tonnes Net uptake of CO2 in Holmen’s operations 2017 The Swedish forest is growing Almost three-quarters of Sweden is covered by forest. Today there is twice as much forest in Sweden as there was a hundred years ago and the volume of standing timber is increasing by 1 per cent a year. 70% of Sweden is covered by forest Approximately 75% of the forest land is actively managed and 25% is used for nature conservation. Holmen’s forest covers more than 1 million hectares. That’s about the same size as the region of Skåne. Energy-efficient production Production at Holmen’s mills and sawmills is largely based on renewable electrical and thermal energy. In the past decade, emissions of fossil carbon from the plants have fallen by almost 80 per cent, and about half of all the energy consumed in Holmen's operations comes from self-gener- ated renewable production. 21 HOLMEN ANNUAL REPORT 2017 / A SUSTAINABLE BUSINESSIn collaboration with our stakeholders Maintaining knowledge of and continuous dialogue with the company’s stakeholders as a matter of course enables us to run and develop opera- tions efficiently and for the long term. The Group’s CEO bears ultimate responsibility for driving work in a sustainable direction for the long term, while the group’s Senior Vice President Sustainability and Communications has a coordinating role and reports to the Group’s CEO. Continuous improvement and regular follow-up of the business lay the foundation for Holmen’s development in economic, social and environmental terms. Customers. Over 85 per cent of Holmen’s deliveries go to European customers. Other exports are mainly to customers in the USA and Asia. Holmen’s business ethics policy and associated guidelines provide guid- ance on how to maintain good business ethics when dealing with exter- nal contacts in various markets. Suppliers. Holmen’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. Employees. Competent employees and a value-driven company culture are important to Holmen attaining its business objectives. As an employ- er, Holmen must work to ensure good leadership and safe working con- ditions, while also motivating its employees and facilitating their devel- opment. It is also important for operations to be characterised by trans- parency and comply with rules on business ethics. Society. Forestry is of significant regional importance. It creates employ- ment in rural areas and for many is the reason why they are able to live and work outside the big cities. Holmen plays a significant role as an employer in a number of locations and not only creates jobs in the Group but also for suppliers of goods and services and various social functions. This means that Holmen contributes substantial tax revenue. Ongoing dialogue with local communities and stakeholder organisations, and partnerships with higher education institutions and universities create conditions for sustainable development. Large parts of Holmen’s land in northern Sweden overlap Sami winter grazing land for reindeer. Via con- sultation with the reindeer husbandry community, it is possible to arrive at solutions that meet both parties’ requirements as closely as possible. Sustainably managed forests are not only important from a climate- related and economic perspective, they are also important for people’s wellbeing and as a place for recreation, hunting and fishing. Media, opinion formers and the general public. Through clear com- munication and dialogue, Holmen is helping to increase interest in and understanding of the conditions and opportunities for the Group and the industry. 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 pub- lic 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 and develop operations with a good return on invested capital. The Group’s financial statements and sustainability reporting are effective ways of providing relevant data for analysis. Income statement 2017 by stakeholders Customers Sales of products, wood and electricity Suppliers Purchases of products, services, along with depreciation, etc. Employees Wages and social security costs Lenders State Interest Taxes Shareholders Net profit Board’s dividend proposal SEKm 17 269 -12 851 -2 252 -53 -445 1 668 1 092 Development for the future Holmen’s development work is mainly focused on three areas: in- creased forest growth, more efficient production and developing exist- ing and new products with forest raw material as a base. The work is often industry-wide, through collaboration with universities, higher ed- ucation institutions and research institutions. Among other things, re- search is being conducted into the components that make up wood: cellulose, hemicellulose 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 starting point for the work is that new business opportunities must be linked to Holmen’s existing industrial sites. The Group’s investments in research and development amounted to approximately SEK 95 million in 2017. 22 HOLMEN ANNUAL REPORT 2017 / A SUSTAINABLE BUSINESS An important climate actor Carbon dioxide is captured in the growing forests and in the products. Holmen’s resource-efficient production is predominantly driven by renewable energy. Investments in self-generated energy and the develop- ment of the products of today and tomorrow based on forest raw mate- rial mean the positive climate effects will be even greater in the future. The forest. The volume of standing timber in Holmen’s forests increases by 1 per cent a year, which means that carbon dioxide is bound into its increase in volume. Based on Sweden’s official reports of greenhouse gases for forest and land between 1990 and 2017, uptake for Holmen’s forests and forest land on average is estimated at 1 300 000 tonnes per year. Over the foreseeable period, annual growth in Holmen’s forests is expected to exceed the harvests, and the Group’s forest growth target shows 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 from the mills have fallen by over 80 per cent and amounted to just under 75 000 tonnes in 2017. Annual emissions of fossil carbon dioxide from forest machinery, manufacture of input goods and transport of raw materials and products are estimated at approximately 340 000 tonnes. Emissions represent the negative climate impact of Holmen’s operations. The products and substitution effects. Wood products store carbon dioxide throughout their lifetime and this is only released when the prod- ucts are incinerated. Holmen’s production of wood products in 2017 is equivalent to approximately 680 000 tonnes of carbon dioxide 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 substi- tution effect when used to replace climate-negative construction mate- rials. The substitution effect for 2017 is estimated to amount to approxi- mately 1 250 000 tonnes of carbon dioxide. Residual volumes from the sawmills are used in wood packaging, which also has a long lifetime. The substitution effect for these products has not been calculated. Paper and paperboard products can also replace fossil-based prod- ucts but as they have a relatively short lifetime, it is not meaningful to calculate their uptake of carbon dioxide. Once the fibres in paper and paperboard have been recycled several times as recovered fibre, however, like the end-of-life wood products, they make excellent biofuels. Biofuels from Holmen’s forests and by-products from production, such as bark, provide renewable energy from incineration. Here too, it would be possi- ble to calculate a substitution effect as fossil fuels are replaced by biofuel, but no such calculation has been carried out for this compilation. Under the parameters set, calculations show that Holmen’s business brings substantial climate benefits, as it reduces the amount of carbon dioxide in the atmosphere by almost 3 million tonnes per year. Key figures for Holmen’s operations from a climate perspective 2017 Emissions of fossil carbon dioxide (tonnes) Forestry Input goods Production facilities Transport of raw materials and products1) Absorption of carbon dioxide (tonnes) Volume of standing timber and forest land2) Wood products for construction purposes Substitution of climate-negative construction materials Net, capture of carbon dioxide and substitution effect (tonnes) -26 500 -75 000 -73 500 -240 000 -415 000 1 300 000 680 000 1 250 000 3 230 000 2 815 000 1) Includes emissions from transport of finished products to customers and deliveries of wood, pulp and chemicals to Holmen’s facilities. 2) Average based on 1990–2017. Holmen’s operations contribute major climate impact by annually reduc- ing the amount of carbon dioxide in the atmosphere by almost 3 million tonnes. Several independent sources show the positive climate impact of forestry and forest products. The summary is based on internal data and calculations and on scientific articles published in recent years. On the basis of this reference material, data has been obtained to calculate the substitution effect. • Simplified reporting of carbon pool changes for Holmen’s forest and land holdings in line with the guidelines of the Convention on Climate Change (UNFCCC), 2018. Swedish University of Agricultural Sciences. • 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 Conven- tion on Climate Change. Swedish Environmental Protection Agency, pp. 353–392. • 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 sub stitution 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 has been part of the UN Global Compact and its corresponding Nordic network since 2007. We see it as natural to support its ten principles on human rights, social responsibility and anti-corruption.” Henrik Sjölund, President and CEO Information on how the Group complies with and works in line with the principles of the Global Compact is available at holmen.com. The Group reports its work on sustainability to the organisation each year in line with the ten princi- ples and sets out the progress made. Work on the ten principles also helps to attain the UN’s global sustainable development goals. 23 HOLMEN ANNUAL REPORT 2017 / A SUSTAINABLE BUSINESS Holmen’s environmental responsibility For Holmen, environmental and energy con- cerns play a natural role in planning produc- tion and investments. Operations are charac- terised by resource-efficient use of renewable raw material and energy, and by protecting the environment, applying the precautionary prin- ciple. Energy, chemicals and fibre are recovered as far as possible, in order to minimise the envi- ronmental impact of production. The section on Risk management on page 33 outlines Holmen’s preventive work on eco-related risks and how they are managed. Holmen’s environmental work is charac- terised by constant improvement measures within the framework of certified environmen- tal and energy management systems, which ensure compliance with legislation and require- ments set by authorities. 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 76–77. Growth in Holmen’s forests is to increase, which will give higher future harvests and capture more carbon dioxide. The volume of standing timber and harvesting will be 50 per cent higher in 2050 than in 2000. The volume of standing timber has grown by 15 per cent to date, with harvesting up 25 per cent. The Group’s target for fossil fuels is to reduce their use at the mills by 90 per cent by 2020 compared with 2005 levels. A reduction of 86 per cent has been achieved by 2017. Ex- tensive investments in bio-based energy pro- duction at the paperboard mills, and the adjust- ed energy strategy at the other mills have resulted in a considerable reduction in fossil fuel use. The third climate-related sustainability target is to increase company-produced renew- able electrical energy as a proportion of total electricity use by Holmen. The target for 2020 is for production to reach 50 per cent, com- pared with 31 per cent for the base year 2005. In 2017 self-generated renewable electrical energy equated to 45 per cent of Holmen’s total electricity consumption. Environmental targets for sustainable development. For many years, Holmen has been working with Group-wide environmental targets for sustainable development. Increased production and use of products made from renewable forest raw material are important for the climate. Contribute towards global and national environmental goals Holmen’s Group-wide sustainability targets are in line with global, European and national sustainability goals. In late 2016 the global Agreement on Climate Change entered into force, with the overarching goal of keeping global warming to below 2°C, and ideally limiting it to 1.5°C. The Agreement on Climate Change states that action must be taken to pre- serve and improve the capacity to capture and store greenhouse gases, and the importance of the forests is particularly highlighted in this context. In the long term, Holmen will there- fore be an important player in ensuring that the target set out in the global Agreement on Climate Change can be achieved. The overarching goal of Swedish environ- mental policy is the generational goal, which guides the values that must be protected, and the transformation of society needed to attain the desired environmental quality. Achieving it demands an ambitious environmental policy in Sweden, the EU and in international contexts. The Swedish environmental quality system com- prises 16 environmental quality objectives in areas such as climate impact, air pollution and biodiversity. Swedish businesses are expected to contribute measures that show how systematic environmental work is profitable for society and for business. Holmen is constantly working on environment-related studies and measures both within forest operations and at production plants. In this way, Holmen is contributing towards the achievement of several of Sweden’s national environmental quality objectives, such as Reduced climate impact, Sustainable forests and A rich diversity of plant and animal life. Work in line with global guidelines Recognition and assessments In autumn 2015, the member states of the UN adopted 17 global goals for achieving social, economic and sustainable development around the world. An overall analysis shows that with its resource- efficient business model, Holmen is already working within the scope of several of the goals, illustrated below. An ongoing materiality analy- sis will identify the areas that continued sustainability work should be focused on. Strategic choices and investments for the future have strengthened Holmen’s sustainability profile, which has led to recognition in impor- tant contexts. Holmen is included in a number of sustainability index- es. More information is available at holmen.com. This can be seen as a mark of quality, showing that Holmen is capable of tackling risks as well as opportunities in the field of sustainability. Holmen has reported to the CDP Climate Program since 2007 and also to the CDP Forest Program since 2013. The survey of climate work in 2017 shows that Holmen has good management in place and a strate- gy to reduce the negative impacts of climate change. In the evaluation of forest management, Holmen was placed in the group for good lead- ership that ensures sustainable use of the forest’s resources. In 2017 Holmen was placed 21st in the prestigious Global 100 index of the 100 most sustainable companies in the world, with Holmen be- ing the only company in the forest industry sector to make it onto the list. Almost 5 000 companies were evaluated for the index, which is based on an overall assessment of how a company handles issues such as resource management, em- ployees and governance. In 2017 Holmen was awarded the Golden Peacock Global Award for Sustainability. The jury made par- ticular reference to Holmen’s ab- sorption of carbon dioxide in its growing forest and the climate ben- efit from its products. This is the first time a Swedish company has won in the sustainability category. 24 HOLMEN ANNUAL REPORT 2017 / A SUSTAINABLE BUSINESS Environmental per- mits for the Group’s production facilities Iggesund Mill, Environmental Code1) Workington Mill, IED Hallsta Paper Mill, Environmental Protection Act Braviken Paper Mill, Environmental Code Iggesund Sawmill, Environmental Code Braviken Sawmill, Environmental Code Linghem Sawmill, Environmental Code 2013 2017 2000 2002 2014 2010 2003 1) In addition, operations subject to notification require- ments take place at the production unit in Strömsbruk. Port activity (at Skärnäs Terminal) alongside Iggesund Mill has held an environmental permit under the Envi- ronmental Code since 1999. In 2017 Iggesund Mill un- derwent the process for obtaining a new environmental permit for production increase. Operations at Skärnäs Terminal are included in this application. Management system certifications Production facilities1) Iggesund Mill2) Workington Mill Hallsta Paper Mill Braviken Paper Mill Iggesund Sawmill3) Braviken Sawmill3) Environment ISO 14001 2001 2003 2001 1999 1999 2011 Energy ISO 50001 2005 2015 2005 2006 2006 2011 Quality ISO 9001 1990 1990 1993 1996 1997 2011 Health and safety OHSAS 18001 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 operations are certified in accordance with environmental management system ISO 14001. Forest operations are also certified under criteria issued by PEFC™ and FSC® respectively and have chain-of-custody certification (FSC® Con- trolled Wood), 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. For Linghem Sawmill, which was acquired in 2017, work began during the year to incorporate its operations under the certification of the other sawmills. Permits At the end of 2017 Holmen was running pro- duction operations that require environmental permits at seven facilities. The permits specify conditions regarding permitted production volumes and permitted emissions to air and water. Six of the facilities are located in Sweden and one is in Workington in the UK. The facili- ties’ turnover amounted to almost 80 per cent of the Group’s net sales in 2017. By October 2018 at the latest, Holmen’s pulp, paper and paperboard mills must comply with the tougher emissions requirements set out in the EU’s Industrial Emissions Directive (IED) of 2013. The environmental status of the Swed- ish mills is good, and they are expected to meet the new requirements. The mill in Workington has been granted a derogation whereby the mill is to have invested in measures to ensure that the emission requirements are met by 2021. In 2017 Iggesund Mill underwent the pro- cess for obtaining a new environmental permit for production increase. In 2017 Braviken Sawmill received an envi- ronmental permit for a facility for preservation treatment for wood products. The facility will be taken into use in spring 2018. Holmen has all the permits to build approximately 500 GWh of wind power pro- duction in Västernorrland, and an application to build an additional approximately 500 GWh of wind power on Holmen’s land in Västerbotten is being processed. The energy agreement from 2016 means Sweden has to comply with the requirements of the EU’s Water Framework Directive, including introducing modern environmental permits for hydro power. Consequently, in 2017 the Swedish government presented a pro- posal for significant changes to the Environ- mental Code that may lead to restrictions on industry and hydro power that affect aquatic environments. In autumn 2017, discussions were held between the ministry responsible and different actors seeking to arrive at legisla- tion capable of meeting the EU requirements. Holmen actively participated in this work. Emission allowances and electricity certificates Within the EU Emissions Trading Scheme, Holmen has been awarded emission allow- ances up to 2020. In recent years, Holmen has significantly reduced the use of fossil fuels as a result of investments in bio-based energy pro- duction at several facilities. Surplus allocated emission allowances 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 in propor- tion to the amount of electricity generated. The mill in Workington obtained these green certifi- cates in 2017. Exceedances and complaints The environmental manager within each oper- ation handles any incidents that occur. Close dialogue with the mills’ local residents is important in order to identify and address any views on operations at an early stage. 29 (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 meas- ures were taken to deal with these cases, in line with the environmental management system of the operations concerned. 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. In 2017, studies were in progress at different stages regarding the former sawmills Håstaholmen, Stocka and Lännaholm, the sulphite mills at Strömsbruk, Domsjö and Loddby, the former ground wood mill in Bureå and a landfill site in Kvillsfors. Remediation of land and buildings at the former industrial site of a surface treat- ment plant in Iggesund was completed in the first quarter of 2017. Varsvik wind farm in Hallstavik. 25 HOLMEN ANNUAL REPORT 2017 / A SUSTAINABLE BUSINESS Together we achieve success Competent employees and a value-driven company culture are important to Holmen attaining its business objectives. Values and management by objectives Holmen’s core values of courage, commitment and responsibility combined with the Code of Conduct create a framework for how em - ployees should act and how leadership should be structured. Expectations concerning what the orga- nisation should achieve are clarified with the help of a process of management by objectives, in 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. How work is managed HR issues are conducted and developed Group-wide and locally. Employees and man- agers bear joint responsibility for a good work- ing climate that promotes development. At Group-wide level, the Senior Vice President Human Resources is responsible for coordina- tion and for strengthening Holmen’s employer brand. Holmen’s Code of Conduct, policies and values are part of every employee’s induction programme. To keep them front of mind, the content is repeated in training at meetings with employees, where the engagement of managers is key. Compliance is monitored partly through employee surveys and appraisal talks, pay sur- veys, safety statistics and audits of the organi- sational and social work environment. Where non-compliances or failings are found in terms of the corporate culture, the issue is addressed on a case-by-case basis. The steering docu- ments below are particularly important for HR work and the employees. Code of Conduct. Holmen’s operations must be characterised by responsible behaviour towards employees, shareholders, customers, suppliers, stakeholders, agencies and the sur- rounding community. The Code of Conduct is one way of ensuring this by clearly setting out and emphasising the requirements and expec- tations made of employees. HR policy. The policy was updated and adopt- ed in 2017. It describes expectations of em- ployeeship and management, and sets out the remit of management by objectives, talent management, cooperation with unions, equali- ty, pay, working hours and other terms of employment, health and safety, travel, internal representation, social engagement and side- lines, as well as the use of tools. Work environment policy. The policy sets out how Holmen is to ensure a good working envi- ronment in terms of health and safety. Business ethics policy. The policy and asso- ciated guidelines address issues including anti-corruption and competition and provide clear guidance on how to maintain good busi- ness practices when dealing with external contacts in various markets. It also states that employees must carefully consider the meaning and purpose of any favours/benefits offered in their contacts with customers and suppliers. Employees in departments at risk of encounter- ing unauthorised behaviour receive special training on these issues. Recruitment and development To maintain competitiveness over time, attract- ing the right employees is of the utmost impor- tance. The Group’s sustainability profile, com- bined with our products geared towards the future and a values-driven company culture, strengthens Holmen’s employer brand. To ensure the development of good leadership, Holmen runs internal leadership programmes for managers at all levels. In addition, there are development programmes for specialists who drive change management. Holmen also takes a structured approach to identifying and devel- oping talent in the organisation. Equality With respect for human rights, Holmen works for a workplace climate that is founded in the equal value of all people. All Holmen’s em - ployees must have the same rights, obligations and opportunities irrespective of their sex, transgender identity or expression, ethnicity, religion or other belief, disability, sexual orien- tation and age. Holmen draws up action plans and annual pay surveys in line with the Equality Act and uses appraisal talks and employee surveys as additional tools. The forest industry has long been a male- dominated sector. Holmen is working to attain a better balance and just over 19 (19) per cent of employees are women. In 2017 the propor- tion of women managers was approximately 21 (19) per cent. Employee surveys Employee surveys are conducted to follow up working conditions and identify improvement measures. They are carried out locally to pro- duce results closer to operations with a greater opportunity to put appropriate measures in place. As well as surveys, appraisal talks are held with a target frequency of at least once a year for all employees. In 2017 approximately 80 per cent of Holmen’s employees took part in such appraisals. Union cooperation A relationship with the union organisations that is based on trust is important and helps drive Holmen forward. Collaboration with trade unions takes place in consultation groups at various levels in the company and interna- tionally in the Holmen European Works Coun- cil. The company’s employees are represented on the Group Board by three members and three deputy members. In 2017 the level of union membership reached 77 (67) per cent. Health and safety 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. Holmen conducts Group- wide, systematic work on health and safety in line with OSHAS 18000. All units are certified with the exception of Linghem Sawmill, which was acquired in 2017. Work on certification began during the year. In 2017, health and safe- ty work focused on safety behaviours, shared rules and exchanging experiences. The number of industrial accidents per million hours worked fell by over 40 per cent in 2017 com- pared with 2016, from 8.8 in 2016 to 5.1 in 2017. The dominant causes are slips, trips and pinch injuries. The long-term target is zero accidents and several units have also been at this level for more than a year. By the end of 2018 the interim target is for the number of accidents to be half the 2017 figure. In 2017 sickness absence was 4.2 per cent, which is on a par with previous years. Long- term sickness absence (more than 60 days) is at 2.0 per cent, which is also on a par with previ- ous years. The good health index is a measure of the proportion of employees with no sick leave during the year. The figure for 2017 was 49 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 17 26 HOLMEN ANNUAL REPORT 2017 / EMPLOYEES Petra Arborén, Claes Lindqvist, Malin Ekroos, Iggesund Mill. Average number of employees Business area, % Cristoffer Björk, operational planner and forest planner, analyses the land area in a stand using a relascope. 0.4 4 8 12 29 46 Forest Paperboard Paper Wood Products Renewable Energy Group-wide Total: 2 976 363 1 383 858 251 11 110 Sandra Kolar, production engineer, Hallsta Paper Mill. Niclas Nordström, operator, Braviken Sawmill. HOLMEN ANNUAL REPORT 2017 / EMPLOYEES 27 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 require- ment under the Swedish Annual Accounts Act. The corporate governance report complies with the rules and instructions stipulated in the Swedish Code of Corporate Governance. Shareholders Holmen had 30 903 shareholders at year-end 2017. Private individuals with Swedish citizen- ship accounted for the largest category of own- ers with 28 967 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, which means that a Group relationship exists between L E Lund- bergföretagen 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 Annual Gen- eral Meeting (AGM). At the 2017 AGM, the Board’s authorisa- tion to purchase up to 10 per cent of the com- pany’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 36–37 for further information on the shares and ownership structure. General meeting of shareholders The notice convening the AGM is sent no earli- er than six and no later than four weeks before the meeting. The notice contains: a) informa- tion about registering intention to attend and entitlement to participate in and vote at the meeting; b) a numbered agenda of the items to be addressed; c) information on the proposed dividend and the main content of other pro- posals. Shareholders or proxies are entitled to vote in respect of the full number of shares owned or represented. Registration for the meeting is made by letter, telephone or at holmen.com. Notices convening an Extra- ordinary General Meeting (EGM) called to deal with changes to the company’s articles of association 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 submit- ted in good time before the notice is distribut- ed. Information about the rights of sharehold- ers to have matters discussed at the meeting is provided at holmen.com. It was announced on 5 April 2017 that the 2018 AGM would take place in Stockholm on 10 April 2018. 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 2017 and 2018 AGMs is shown in the table on page 30. 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 applica- ble, for the election of auditors. The commit- tee’s proposals are presented in the notice con- vening the AGM. The nomination committee applies rule 4.1 of the Swedish Corporate Governance Code (the Code) as a diversity policy in estab- lishing proposals, which means the composi- tion of the Board should reflect the company’s business operations, phase of development and other circumstances, and should be diverse and wide-ranging in terms of the expertise, experi- ence and background of the members elected by general meetings. An even gender distribu- tion is sought. The nomination committee has observed this policy in its proposals to the Board. Further information about the work of the nomination committee will be provided at the 2018 AGM. For the 2018 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, Lars G Josefsson, Lars Josefsson, Carl Kempe, Louise Lindh, Ulf Lun- dahl, 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 articles of association, the Board should consist of seven to eleven members. The company’s articles of association contain no other rules regarding the appointment or dismissal of Board mem- bers, or regarding amendments to the articles, or restrictions on how long members can serve on the Board. The 2017 AGM re-elected Fredrik Lundberg, Carl Bennet, Lars G Josefsson, Lars Josefsson, Carl Kempe, Louise Lindh, Ulf Lundahl, Henriette Zeuchner and AGM 2017 The 2017 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 and approved by Anne-Charlotte Hormgard of The Third Swedish National Pension Fund (AP3) and Emelie Westholm of Folksam. 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 2018 meeting. Board meetings The Board held ten meetings in 2017, four of which were in connec- tion with the company’s publication of its quarterly reports. One meeting was dedicated to reviews of strategic issues and the Group budget for 2018. One meeting was held in connection with the Board meeting important paperboard and paper customers. Two meetings were held in connection with the company’s AGM. Short meetings were held by telephone on two occasions. The Board also paid spe- cial attention to strategic, financial and accounting issues, follow-up of business operations and major investment matters. On one occa- sion the company’s auditors reported directly to the Board, providing a presentation about their audit of the accounts and internal control. 28 HOLMEN ANNUAL REPORT 2017 / CORPORATE GOVERNANCE REPORT SHAREHOLDERS NOMINATION COMMITTEE GENERAL MEETING OF SHAREHOLDERS BOARD OF DIRECTORS CEO GROUP MANAGEMENT AUDITORS FIVE GROUP STAFFS FIVE BUSINESS AREAS Henrik Sjölund to the Board. Fredrik Lundberg was re-elected chairman. At the statutory first meeting of the new Board in 2017, Carl Kempe was elected deputy chairman and Lars Ericson, Senior Vice President Legal Affairs, was appoint- ed 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 70–71. 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 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 continually regarding financial developments and other key events. Employees of the company partici- pate in Board meetings to submit reports. In order to develop the work of the Board, an annual evaluation is undertaken involving each member answering a questionnaire containing relevant questions concerning the Board’s work and having the opportunity to make sug- gestions on how to enhance the Board’s work. Their responses were presented and discussed at a Board meeting. The results of the 2017 evaluation will form the basis for planning the Board’s work for the coming year. The chair- man of the Board has reported the results of the evaluation to the nomination committee. Remuneration The Board has appointed a remuneration committee consisting of Fredrik Lundberg and Carl Bennet. During the year, the commit- tee prepared matters pertaining to the remu- neration and other employment conditions of the CEO. Remuneration and other employment conditions for senior management who report directly to the CEO are decided by the latter in accordance with the 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 2017 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 2018 AGM. These guidelines and informa- tion about remuneration are presented in Note 4 on page 50. The 2017 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 Board members as of the 2017 AGM Board members Elected Role on the Board Fredrik Lundberg Carl Kempe Carl Bennet Lars G Josefsson Lars Josefsson Louise Lindh Ulf Lundahl Henriette Zeuchner Henrik Sjölund 1988 1983 2009 2011 2016 2010 2004 2015 2014 Chairman Deputy chairman Member Member Member Member Member Member Member, President and CEO Audit committee Remuneration committee Member Member Member Member Member Member Chairman Member - Chairman - Member - - - - - - Attendance at meetings: Board1) 10/10 9/10 10/10 8/10 10/10 10/10 9/10 10/10 10/10 Audit committee Remuneration committee Fee (SEK ’000) 5/5 5/5 5/5 5/5 5/5 5/5 5/5 5/5 - 1/1 - 1/1 - - - - - - 680 340 340 340 340 340 340 340 - 1) With one exception, absence relates to additional meetings by telephone held at very short notice. According to the nomination committee, Fredrik Lundberg, Carl Kempe, Carl Bennet, Lars G Josefsson, Lars Josefsson, Louise Lindh, Ulf Lundahl and Henriette Zeuchner are independent of the com- pany and its senior management, and Lars G Josefsson, Lars Josefsson, Ulf Lundahl, Henriette Zeuchner and Henrik Sjölund are independent of the company’s major shareholders. Employee representatives 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 Christer Johansson, deputy member, elected 2017 HOLMEN ANNUAL REPORT 2017 / CORPORATE GOVERNANCE REPORT 29 STRATEGY AND TARGETS STRATEGY, BUDGET AND MANAGEMENT BY OBJECTIVES BUSINESS PROCESSES EARNINGS, REPORTING AND MONITORING CODE OF CONDUCT VALUES POLICIES GUIDELINES GROUP INSTRUCTIONS MANAGEMENT SYSTEMS AUTHORITY AUTHORISATION RULES Internal management processes. five business areas and the heads of the five Group staffs. Information about the CEO and other members of Group management is pro- vided on page 72. Group management met on nine occasions in 2017. Its meetings dealt with matters such as earnings trends and reports before and after Board meetings, strategy reviews, 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 2017 AGM as audi- tor for a period of one year. Authorised public accountant Joakim Thilsted was appointed as the principal auditor. Under applicable regula- tions KPMG can be re-elected as auditor up until 2023. 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 and audit of the final annual accounts and the annual report take place in January–February. During the year the Board established an audit committee consisting of external Board members, chaired by Ulf Lundahl. The audit committee met five times in 2017. 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 account- ing, management of funds and other aspects of the company’s financial circumstances. The auditors reported to the audit committee at four meetings in 2017. In addition to the audit assignment, Holmen has consulted KPMG on matters per- taining to taxation, accounting and for various investigations. The remuneration paid to KPMG for 2017 is stated in Note 5 on page 51. KPMG is required to assess its independence before making decisions on whether to provide Holmen with independent advice alongside its audit assignment. Internal management processes A review is conducted annually of each busi- ness area’s strategy, including the business’ goals. The strategy is presented to the Board and forms the basis of the expectations applied to 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 perfor- mance. The strategy review also provides the basis for the budget, in which decisions are tak- en 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, research and development, IT, environment and communication processes. Operations are followed up through regular reporting 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. 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 busi- ness ethics policy and its accompanying guide- lines address matters such as anti-corruption measures and competition issues. Employees in departments at risk of encountering unauthor- ised behaviour receive special training on these issues. The Supplier Code of Conduct 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. Materiality analysis. In order to further focus and manage Holmen’s sustainability work, a materiality analysis was initiated in 2017 and this will be completed in 2018. Whistleblower function. A whistleblower function is available so that employees and other stakeholders can highlight any deficien- cies 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 Cor- porate 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 achieves its financial reporting objectives (see box on page 31), ensure the company’s assets are man- aged according to Group rules and to prevent irregularities. Group Finance coordinates and monitors the internal control process concern- ing financial reporting in the Group. 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: 2018 x (chairman) x x x 2017 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 2017, 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. 30 HOLMEN ANNUAL REPORT 2017 / CORPORATE GOVERNANCE REPORT 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: con- trol 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 processes. The Board of Directors’ procedural rules and the instruction for the CEO establish the distri- bution of roles and responsibilities to ensure effective control and management of the busi- ness’ risks. Policies, guidelines and instructions con- tribute 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 Nasdaq Stock- holm 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-re- lated 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 32–35. Control activities. To ensure that Holmen’s financial reporting objectives are met, control requirements are incorporated into the pro- cesses that are deemed relevant: sales, purchas- ing, investments, personnel, financial state- ments, payments and IT. Control activities aim to prevent, identify and rectify errors and dis- crepancies. Business-specific self-assessments that are completed by all Group units set out what control requirements apply for each respec- tive process 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 the CEO. The provision of financial information for Holmen’s sharehold- ers and other stakeholders must be accurate, comprehensive, transparent and consistent, 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 Executive Vice President. 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. Holmen’s financial reporting External financial reporting must: • be accurate and complete, and comply with applicable laws, regula- tions 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. Follow-up is an important tool to identify pos- sible deficiencies within the Group and to address these through the development of new control requirements. Statement on internal audit. The Board of Directors does not believe that particular cir- cumstances in the business or other conditions 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. Inspection of debarking drum at Braviken Paper Mill. HOLMEN ANNUAL REPORT 2017 / CORPORATE GOVERNANCE REPORT 31 Risk management The business areas are responsible for their 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 and price changes affect 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 ani- mals and insect pests are risks in growing forests. Changes in prices and deliveries largely depend on the devel- opment 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 opportunities 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 log harvest from the company’s forests is essen- tially the same as consumption at the company’s saw mills, while pulpwood from own forests corresponds to approximately 35 per cent of the paperboard and paper mills’ consumption. 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 purchases. 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 just under 50 per cent of its total 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 and used chemicals at the mill are recycled. Damage prevention measures, regular maintenance and con- tinual 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 mil- lion 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. To reduce the extent of grazing by wild animals, active efforts are undertaken on Holmen’s land to maintain game at the correct population level. Insect pests such as pine weevils are countered by waxing seedlings. In 2017, sales of paperboard, paper and wood products to priority end-use areas and markets increased. Commodity prices have been generally stable in recent years. The price of net electricity consumption is 80–85 per cent hedged for 2018–2020 and 65 per cent hedged for 2021. Linghem Sawmill, with production capacity of 75 000 cubic me- tres, was acquired in 2017 to strengthen the raw material supply and expand the product offering for Braviken Sawmill. No event causing significant damage occurred in 2017. No major unforeseen events involving dam- age occurred in Holmen’s forests in 2017. 32 HOLMEN ANNUAL REPORT 2017 / 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 continually 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 also lead to produc- tion disruptions and increased costs. Environment. Production disruptions can cause breaches of emissions conditions set for the business by environmental authori- ties, which could impact the environment. Personnel. Skilled and motivated em- ployees are key in being able to conduct long-term business operations with good profitability. Business ethics. Both nationally and in- ternationally, customers and partners place requirements on Holmen as a stable and reliable supplier that has good business ethics and clear sustainability principles. Deviations from principles and policies could have a negative impact on reputation and business relationships. 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 re- quirements can also have a negative effect on operations. 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. Good health and safety is a priority at all levels of manage- ment in the Group. 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 achieve a high level of safety in the workplace. Environmental measures are organised and conducted in accordance with Holmen’s environmental and energy policy. In the event of process disruptions, the environment takes precedence over production. 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 chain-of-custody certification. Issues regarding management by objectives, responsibility, participation, safety and skills development are prioritised in day-to-day work through continual feedback and dialogue be- tween managers and employees, as well as training of person- nel. 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 ethics 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. Holmen endeavours to have at least two approved suppliers per area of use. In addition, Holmen’s Supplier Code of Con- duct is included in all new contracts. It contains requirements on sustainable development, including by respecting interna- tionally recognised principles on anti-corruption measures, human rights, health and safety and the environment. Since 2017, Holmen has hired an external partner, EcoVadis, to follow up supplier compliance with the Code in the areas of human rights, health and safety, the environment, business ethics and purchasing. Operating disruptions and unauthorised access are prevented by security measures and preventive measures in the form of appropriate 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. Holmen is continually developing these protective measures to address changes in the risk profile. At 31 December 2017 the Group’s trade receivables totalled SEK 2 089 million, of which 37 per cent (46) were insured against credit losses. During the year, credit losses on trade receivables had a SEK -5 million (-5) impact on earnings. Sales to the five largest customers accounted for 13 per cent of the Group’s total sales in 2017. The figure in 2017 was 5.1 industrial accidents per 1 million hours worked (8.8). See also page 26. The mills reported 29 (44) incidents to the supervisory authorities in 2017. The nonconformities were not of a significant nature in terms of environmental impact or impact on profits. No cases regarding deviations from the code of conduct or the HR policy were reported in 2017. No cases concerning deviations from either the business ethics policy or the parts of the Code of Conduct regarding business ethics issues were reported in 2017. No cases regarding breaches of the Suppli- er Code of Conduct were reported in 2017. By the end of 2017, suppliers account- ing for over 80 per cent of the Group’s purchasing volumes had signed up to the Supplier Code of Conduct. Holmen is subject to the UK Modern Slavery Act and a report relating to this is available at holmen.com. Business operations were not affected by IT incidents in 2017. Political decisions. Laws and rules in countries 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. Rules on the use of fresh fibre rather than recovered fibre, as well as leg- islation regarding water-based operations, could have a negative impact on the Group. 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 and the general public in areas where the Group has operations. This takes place, for example, through consultation and information meetings and through debate in the media. On issues regarding the right to manage the forest and water-based operations, Holmen has participated actively in work with business organisations and responses to consultation on relevant subjects. In late 2017, the EU issued a decision about how the land and forestry sector should contribute to the EU’s climate and energy policy. The result was positive for Holmen and the Swedish forest products industry. In 2017, a parliamentary bill regarding water-based operations was introduced that could affect Holmen and the business sector’s ability to develop operations. HOLMEN ANNUAL REPORT 2017 / RISK MANAGEMENT 33 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 subsidi- aries’ 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 prod- ucts’ profitability, competitiveness and the currency situation. Currency exposure arising when investments are paid for in foreign currency is distinguished from other transaction ex- posure. 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. Expo- sure that arises when the earnings of foreign subsidiaries are translated into Swedish kronor is not normally hedged. For the next approximately two years, 90 per cent of expected flows in EUR/SEK are hedged at an average of 9.67, for EUR/GBP 90 per cent of one year’s ex- pected flows are hedged at 0.89. For other currencies, 4 months of flows are hedged. USD/SEK are hedged at 8.19 and GBP/SEK at 10.98. Hedging in pounds sterling amounted to GBP 14 million at year-end. Net assets in other currencies are very limited and are not usually hedged. SEKm 10 000 8 000 6 000 4 000 2 000 0 EUR/SEK GBP/SEK USD/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 borrowing rate in 2017 was 1.4 per cent. The table below shows the Group’s fixed interest agree- ments by currency. SEKm SEK EUR GBP Other items Year 1 Year 1–3 Year 3–5 >5 years -1 834  -51 -446 33 -2 297 -600 0 0 0 -600 0 0 0 0 0 0 0 0 0 0 Pension provisions -12 -8 -19 0 -39 Total -2 445 -59 -465 33 -2 936 Credit risk from financial counter- parties. 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 continu- ally. 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 derivative. The maximum credit risk for other financial assets is estimated to correspond to their nominal amount. At 31 December 2017, the Group had out- standing derivative contracts with a nom- inal amount of about SEK 15 billion and a net fair value of SEK -159 million. Holmen’s total credit risk in derivative transactions amounted to SEK 1 497 million at year-end 2017. This calculation is based on the maturity and historical volatility of different types of derivative. 34 HOLMEN ANNUAL REPORT 2017 / RISK MANAGEMENT Liquidity and refinancing. The risk of the need for future funding and refinanc- ing 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 profit forecasts and budgets that are regularly updated. SEKm 4 000 3 000 2 000 1 000 0 2018 2019 2020 2021 Financial liabilities Credit facility Net financial debt decreased in the year by SEK 1 009 million and amounted at 31 December 2017 to SEK 2 936 million, SEK 39 million of which comprised pension provisions. The Group has a contracted credit facility of EUR 400 million (SEK 3 936 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 0.13. 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 profit before tax and equity next year, taking account of hedging. Impact on operating profit, SEKm Paperboard Paper Wood products Wood from company forests Hydro and wind power Input goods 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 54 54 16 12 3 Deliveries 29 18 5 8 3 28 12 12 14 14 23 12 * Taking account of harvesting of company forests and generation of own electricity, net earnings sensitivity for the Group is SEK 16 million for wood and SEK 9 million for electricity. Earnings before tax Exchange rates SEK/EUR SEK/USD SEK/GBP SEK/other currencies Electricity price Borrowing rate Equity Transaction hedging Investment hedging Equity hedging Electricity hedging Interest rate hedging Change +/- 1% +/- 1% +/- 1% +/- 1% +/- 1% +/- 1% +/-1 percentage point Change +/- 1% +/- 1% +/- 1% +/- 1% +/-1 percentage point SEKm 23 3 7 8 5 1 21 SEKm 99 3 2 8 12 HOLMEN ANNUAL REPORT 2017 / RISK MANAGEMENT 35 Shareholder information In 2017, the price of Holmen’s class B shares increased by SEK 109 or 33 per cent. Earnings per share excluding items affect- ing comparability was SEK 19.9. It is proposed that the dividend be raised to SEK 13 (12). 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 109 or 33 per cent, to SEK 436. The Stockholm Stock Exchange rose by 8 per cent over the same period. Holmen’s market capitalisation of SEK 36.6 billion (27.4) represents 0.6 per cent of the total value of the Stockholm Stock Exchange. The highest closing price for Holmen’s class B shares was SEK 436, on 29 December. The lowest closing price was SEK 314, on 16 January. The daily average number of class B shares traded was 136 000, which corresponds to a value of SEK 50 million. The daily average number of class A shares trad- ed was 714. Nearly 73 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 were SEK 19.9 (16.9). 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 10 April 2018, approve a dividend of SEK 13 (12) per share. The proposed dividend corresponds to 5.0 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: 10 April 2018. • Record date for dividend: 12 April 2018. • Payment date for dividend: 17 April 2018. Share split In order to make it easier for the shares to be traded on Nasdaq Stockholm, the Board pro- poses that the 2018 AGM approve a share split, involving each share, regardless of series, being divided into two shares (split 2:1) of the same series. The proposed record date for the share split is 2 May 2018. 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. Neither laws nor the company’s articles of association place any restrictions on the transferability of the shares. Ownership structure Holmen had a total of 30 903 shareholders at year-end 2017. In terms of numbers, Swedish private individuals account for the largest owner category with 28 967 shareholders. Shareholders registered in Sweden own 82 per cent (83) of the share capital. Among foreign shareholders, the largest proportion of shares are held in the US and Norway, accounting for 6 per cent and 2 per cent of capital, respective- ly. The largest owner at the turn of 2017/2018, with 61.6 per cent of votes and 32.9 per cent of capital, was L E Lundbergföretagen AB. the company and to create long-term commit- ment to Holmen. The programme involves previously repurchased shares being trans- ferred to programme participants at the end of the term. The number of shares to be trans- ferred depends on the return generated over the 2016–2018 period. In the event of maxi- mum allocation, 80 000 shares will be trans- ferred from the company to programme par- ticipants. 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 2017 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 2018 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 connec- tion with the publication of quarterly reports and on the occasion of the AGM. It also deliv- ers information that is important to the stock market by publishing press releases. The holmen.com website offers financial informa- tion 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. Share savings programme The 2016 AGM decided on a targeted share savings programme for around 40 key individ- uals in the Holmen Group. The purpose of the programme was to strengthen the interests between the owners and the management of Analysts Analysts at 10 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 avail- able at holmen.com. Share price performance, Holmen class B and general index Total shareholder return on Holmen class B shares and general index incl. reinvested dividend excluding tax SEK 500 400 300 200 100 0 No. of shares (thousands) 20 000 16 000 12 000 8 000 4 000 0 Index 300 200 100 0 08 09 10 11 12 13 14 15 16 17 08 09 10 11 12 13 14 15 16 17 Holmen B Affärsvärlden General Index Total number of class B shares traded (thousands) Holmen B General index (SIX Return Index) Source: Macrobond 36 HOLMEN ANNUAL REPORT 2017 / SHAREHOLDER INFORMATION Shareholder categories Share of capital, % 11 18 19 52 Swedish institutions 52% Swedish equity funds 19% Swedish private individuals 11% Foreign shareholders 18% Shareholder structure at 31 December 2017 % of capital % of votes L E Lundbergföretagen Kempe Foundations Carnegie funds (Sweden) Nordea funds Lannebo funds Alecta Swedbank Robur Fonder DFA funds (US) Vanguard (US) Norges Bank Total Other Total* *Of which non-Swedish shareholders. 32.9 7.0 5.4 3.2 3.2 2.9 2.0 1.9 1.5 1.5 61.3 38.7 100.0 17.7 61.6 17.0 1.6 0.9 0.9 0.8 0.6 0.6 0.4 0.4 84.9 15.1 100.0 5.4 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’. Ownership structure Share structure No. of shares 1–1 000 1 001–100 000 100 001– Total Share- holders 29 105 1 788 10 30 903 Share of capital, % 6 27 67 100 Share Votes No. of shares No. of votes 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 Quotient value 50 50 SEKm 1 131 3 107 4 238 Changes in share capital 2000–2017 2001 Cancellation of shares repurchased 2004 Conversion and subscription Change in no. of shares Total no. of shares Change in share capital, SEKm Total share capital, SEKm -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, SEK 1) 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), B, at year-end4) Number of shareholders at year-end 2017 19.9 135) 5 3 65 8 9 262 436 372 436 314 36.6 22 14 0.8 30 903 2016 16.9 12 5 4 71 7 9 253 327 281 327 227 27.4 19 11 0.8 28 159 2015 6.7 10.5 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 1) See page 78: 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 2017 / SHAREHOLDER INFORMATION 37 GROUP Financial statements Income statement, 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 Earnings 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 2017 16 133 1 136 -128 -8 945 -2 252 -3 189 -991 - 415 -12 2 166 2 -55 2 113 -445 1 668 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 1 668 1 424 19.9 19.9 84.0 84.0 16.9 16.9 84.0 84.0 Operating profit amounted to SEK 2 166 million (1 930). Deliveries of paperboard, paper and wood products increased and the sales mix improved, but this was offset by higher costs for input goods and shipping, as well as significant maintenance shutdowns within paperboard. Operating profit for 2016 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 compen- sation for reconstruction following the fire at Hallsta Paper Mill, which together amount to a net total of SEK -232 million. Net financial items for 2017 totalled SEK -53 million (-71). Average net debt was lower than in the previous year. Tax recognised totalled SEK -445 million (-436) in 2017. Recognised tax corresponds to 21 per cent of profit before tax. Statement of comprehensive income, SEKm Note 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 38 17 7 12 7 2017 1 668 2016 1 424 121 -24 97 -88 124 -1 36 -49 -4 3 21 119 1 786 -159 29 -130 96 126 -12 -165 1 -21 -52 -26 -157 1 267 1 786 1 267 HOLMEN ANNUAL REPORT 2017 / FINANCIAL STATEMENTSGROUP Balance sheet at 31 December, SEKm Note 2017 2016 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 Assets held for sale 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 11 13 17 18 7 13 19 7 18 19 90 9 078 17 831 1 749 2 42 1 28 793 2 905 2 089 36 658 32 356 23 6 098 34 891 4 238 281 -214 17 731 22 035 552 39 662 5 650 6 903 2 775 1 957 21 144 1 056 5 952 12 856 34 891 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 39 HOLMEN ANNUAL REPORT 2017 / FINANCIAL STATEMENTS Reserves Share capital 4 238 - Other contributed capital 281 - Translation reserve 76 - Retained earnings incl. profit/loss for the year 16 543 1 424 Hedge reserve -284 - Total equity 20 853 1 424 - - - - - - - - - - 4 238 - - - - - - - - - - - 4 238 - - - - - - - - - - 281 - - - - - - - - - - - 281 - - -165 1 - -6 -170 -170 - - -95 - - - 36 -49 - 11 -2 -2 - - -97 - 211 - - -21 -46 144 144 - - -141 - - 35 - - -4 -8 24 24 - - -117 -159 - - - - 29 -130 1 294 -882 5 16 960 1 668 121 - - - - -24 97 1 765 -1 008 13 17 731 -159 211 -165 1 -21 -24 -157 1 267 -882 5 21 243 1 668 121 35 36 -49 -4 -21 119 1 786 -1 008 13 22 035 GROUP Changes in equity, SEKm Opening equity balance 31 Dec 2016 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 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 2017 40 HOLMEN ANNUAL REPORT 2017 / FINANCIAL STATEMENTSCash flow statement, SEKm Operating activities Earnings 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 Acquisition of shares and participating interests Disposal of shares and participating interests Cash flow from investing activities Financing activities 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. ** Relates to repayments of loans previously classified as long-term. 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 2017 -3 945 2 509 -644 -1 008 120 32 -2 936 GROUP 2017 2016 2 113 991 - -415 -236 78 -221 2 310 73 22 104 2 509 -674 31 -18 -11 27 0 0 -644 -1 400 680 9 -1 008 -1 718 147 210 -1 356 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 2016 -4 799 1 961 -123 -882 -158 56 -3 945 41 HOLMEN ANNUAL REPORT 2017 / FINANCIAL STATEMENTSPARENT COMPANY Income statement, SEKm Note 2017 2016 Cash flow statement, SEKm Note 2017 2016 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 Disposal of shares and participating interests Cash flow from investing activities Financing activities 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 25 1 257 1 094 25 -109 855 -131 26 -59 502 -464 1 897 1 100 74 97 260 2 329 -1 -32 11 0 -22 -1 400 -479 241 -1 008 530 0 -2 116 190 104 294 -61 -146 -271 622 -10 -29 28 2 -9 -400 -531 450 -882 700 0 -663 -51 155 104 * Other adjustments primarily consist of impairment losses on the value of shares in Group compa- nies, currency effects and the marking to market of financial instruments as well as gains/losses on the sale of non-current assets. ** Relates to repayments of loans previously classified as long-term. 2 3 Net sales Other operating income Change in inventories Raw materials and consumables 4 Personnel costs Other external costs 5, 20 Depreciation and amortisation according to plan 9, 10 Operating profit/loss Profit/loss from investments in Group companies Interest income and similar income Interest expense and similar costs Profit/loss after financial items Appropriations Earnings before tax Tax Profit/loss for the year 6, 23 6 6 24 7 14 345 565 -166 -7 969 -1 877 -4 031 -25 841 497 18 -99 1 257 787 2 044 -197 1 847 13 794 822 205 -8 086 -1 827 -4 547 -26 335 780 30 -52 1 094 404 1 499 -301 1 197 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 7 Total items that will be reclassified to profit/loss for the year Total comprehensive income Note 2017 2016 1 847 1 197 -71 109 -1 -8 29 1 876 133 90 -12 -46 164 1 362 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. The item ‘Interest expense and similar costs’ in the income statement includes the result of SEK -49 million (1) from hedging equity in foreign subsidiaries. 42 HOLMEN ANNUAL REPORT 2017 / FINANCIAL STATEMENTSPARENT COMPANY Balance sheet at 31 December, SEKm 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 Changes in equity, SEKm Opening equity balance 31 Dec 2016 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 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 2017 Note 2017 2016 Balance sheet at 31 December, SEKm Note 2017 2016 9 10 12, 23 13 14 15 7 13 13 8 2 930 10 702 3 018 16 658 2 322 2 210 29 32 294 4 888 21 545 8 2 925 11 519 3 202 17 653 2 396 2 254 106 89 104 4 950 22 602 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 4 238 1 577 100 3 956 1 847 11 718 4 238 1 577 100 3 724 1 197 10 836 2 032 2 290 12 45 725 610 1 392 880 2 775 - 2 749 6 403 21 545 12 45 833 612 1 503 2 328 3 200 - 2 445 7 974 22 602 Restricted equity Non-restricted equity Share capital 4 238 Statutory reserve 1 577 Revaluation reserve 100 Hedge reserve -287 Retained earnings 3 985 Profit/loss for the year 738 Total equity 10 351 - - - - - - - - 4 238 - - - - - - - - 4 238 - - - - - - - - 1 577 - - - - - - - - 1 577 - - - - - - - - 100 - - - - - - - - 100 - - 211 -46 164 164 - - -123 - - 38 -8 29 29 - - -93 738 - - - - 738 -882 5 3 847 1 197 - - - - 1 197 -1 008 13 4 049 -738 1 197 - - - 459 - - 1 197 -1 197 1 847 - - - 649 - - 1 847 - 1 197 211 -46 164 1 362 -882 5 10 836 - 1 847 38 -8 29 1 876 -1 008 13 11 718 43 HOLMEN ANNUAL REPORT 2017 / 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 44 48 49 50 51 51 52 53 53 54 55 56 57 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 Ac- counting Rules for Groups) has also been applied. 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 ac- cordance 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. 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. See also Note 26 ‘Critical accounting estimates and judgements’. 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 60 60 60 61 62 62 62 63 63 64 65 65 65 Changes in accounting policies New and amended accounting policies applicable as of 2017 No new accounting policies with a material effect on the Group’s accounting have been applied since 1 January 2017. Changes to IAS7 have resulted in disclosures being added to Note 25, with the change in the debt for the year attributable to financing activities being reconciled against an itemisation of items such as new borrowing, repayments, changes linked to disposals/acquisitions of subsidiaries and currency effects. Disclosures are made for both changes affecting cash flow and not affecting cash flow. The change is applied prospectively, which is why no disclosures are presented for the comparative year. 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. IFRS 15 Revenue from Contracts with Customers is a new revenue standard with associated disclo- sure requirements which will replace IAS 18, IAS 11 and IFRIC 13. This new standard comes into force on 1 January 2018. During the year, the Group’s sales contracts were analysed based on the five-stage model defined under regulations. The most significant change from current regulations is that income was previously recognised after the critical risks and benefits associated with ownership of the sold goods had been transferred to the buyer, and there is no remaining right of disposal or possibility to retain actual control over the sold goods. Under IFRS 15, income is recognised when the customer gains control over the goods, which the Group assesses to be similar to when income is currently recognised, so it is not assessed there will be any effect from the transition to IFRS 15 on 1 January 2018. Other changes in regulatory changes relate, for example, to accounting of dis- counts and the right of return, which will only have a marginal impact on Holmen’s accounting. IFRS 9 Financial Instruments addresses the accounting of financial instruments and will replace IAS 39. This standard encompasses classification, valuation and impairment of financial instru- ments and hedge accounting. This standard comes into force on 1 January 2018. The material changes compared with current regulations are that 1) the category of financial assets held for trade will disappear, which has no effect on Holmen as it holds no such instruments. 2) Impairment of financial assets should be based on a model based on expected future losses. The impact from the introduction of the new model is assessed to be marginal for Holmen. 3) Hedge accounting rules are changing, with requirements for hedging relationships to be the same as the Group’s risk management targets, which is not expected to have any impact on Holmen as its hedge relation- ships are currently the same as requirements under IFRS 9. 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 opera- tions are monitored by the company’s highest executive decision-maker, known as the manage- ment approach. The segmentation criterion is based on the Group’s business areas. This corre- sponds 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. 44 HOLMEN ANNUAL REPORT 2017 / NOTES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 recov ered or paid within 12 months of the balance sheet date. Consolidation principles Subsidiaries A subsidiary is a company over which the parent company, Holmen AB, exercises a controlling in- fluence. 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 in- fluence 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’ in- come 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 book value of the shares in the associates and joint ventures stated in the consolidated accounts corresponds to the Group’s interest in the associates and joint ventures’ 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, respec- tively, 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 book value of the in- vestment. 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 book value 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 trans- lated into the functional currency at the exchange rate prevailing on the balance sheet date. Ex- change 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 cur- rency, to the Group’s reporting currency (Swedish kronor) at the balance sheet date rate. The income and expenses of foreign operations are translated into Swedish kronor at an average rate that is an ap- proximation 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. NOTE 1 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 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 re- maining 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 and 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 ex- change 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 for- est 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 expense, dividend income and re- valuations of financial instruments valued at fair value, as well as unrealised and realised currency gains and losses. Interest income on receivables and interest expense on liabilities are calculated by using the effec- tive interest method. Interest expense includes transaction costs for loans, which have been distri- buted 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 expense normally affects profit/loss in the period to which it relates. 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 dif- ferences between book values 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 differ- ences are not taken into account in goodwill arising upon consolidation, nor in temporary differ- ences 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. 45 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 1 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 ac- cordance 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. Spot transactions are stated in accordance with the trade date principle. Trade receivables are recognised in the bal- ance 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, exclud- ing 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 prof- it/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 meas- ured 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 deter- mined on the basis of the effective interest that was calculated at the time of acquisition. Trade pay- ables 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 cri- teria for hedge accounting, the changes in value are recognised within operating profit/loss or with- in 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 in- come 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 ex- change swaps are used as cash flow hedges to safeguard against fluctuations in exchange rates. In- terest rate swaps are used as a cash flow hedge to safeguard against changes in interest rates. Hedging of 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 com- pany, 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 dis- counted 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, where appropriate. Non-current intangible assets Non-current intangible assets such as patents, licences and IT systems are recognised at cost after deduction of accumulated amortisation 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 accumulated impairment losses. Goodwill arising in connection with the acquisition of associates is included in the book value 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 materi- als 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 cap- italised only if it is estimated to generate financial benefits for the company. The key factor determin- ing 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 capital- ised in cases where a new component is created. Any undepreciated book values for replaced com- ponents or parts of components are retired and expensed in connection with the replacement. The book value 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 ex- pected 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 book value of the asset, less any direct selling costs. Gains and losses are recognised in the accounts as other operating income/costs. An asset is classified as being held for sale if it is available for immediate sale in its present condition and based on normal terms, and it is highly likely that a sale will take place. Such assets are recog- nised on a separate line as a current asset in the balance sheet. Upon initial classification as holdings for sale, non-current assets are recognised at the lower of book value and fair value, less selling 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 sawmills, pulp, paper and paperboard production Other machinery Forest roads Equipment 10–20 10 20 4–10 If there is any indication that the book value is too high, an analysis is made in which the recovera- ble 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 book value. An 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 book value that would have been recognised, less depreci- ation, if there had been no impairment. Borrowing costs attributable to the purchase or construction of qualifying assets are to be capital- ised 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 rec- ognised 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. 46 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 1 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. expected number of allocated shares and the effect of any change in previous estimates are recog- nised 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. 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. Inventories Inventories are valued at the lower of cost and production cost after deduction for necessary obsoles- cence, or net realisable value. The cost of inventories is calculated by using the First in, First out meth- od (FIFO). The net realisable value is the estimated selling price in operating activities after deduction of the estimated costs of completion and affecting the sale. The cost of finished products manufac- tured 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 inven- tories 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 certifi- cates are measured at the lower of cost and fair value. Recognition takes place, in line with pro- duction, as inventories or accrued income. 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 pre- vious periods. This benefit is discounted to present value and unrecognised costs relating to em- ployment 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 corre- sponding 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 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 recog- nised when the company recognises the associated restructuring costs. The changes are recog- nised directly in profit/loss for the year. When the calculation leads to an asset for the Group being limited, the book value of the asset is limited to the lower of the plan surplus and the asset limitation calculated using the discount rate. The limitation of assets consists of the present value of future economic benefits in the form of re- duced future costs or cash reimbursement. Any minimum funding requirements are taken into account in calculating the present value of future reimbursements or receipts. The interest expense on defined benefit obligations is recognised in profit/loss for the year under fi- nancial 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 (dis- count rate). Other components are recognised in operating profit/loss. The revaluation effects con- sist 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 obli- gations. Policyholder tax is recognised as it is incurred in profit/loss for the period to which the tax re- lates 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 pro- grammes 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 corre- sponding adjustment of equity. At the end of each vesting period, an estimate is made of the 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 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. Equity Consolidated equity comprises share capital, other contributed capital, translation and hedge re- serves 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 propor- tion 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 transac- tions 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 re- structuring 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 appli- cable 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 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 compa- nies’. 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. Share- holder 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 (-). 47 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 2 Note 2. Operating segment reporting 2017 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 Change in value of biological assets Share of profits of associates Operating profit/loss Operating margin, % Return on capital employed, % Operating assets Operating liabilities Net deferred tax Capital employed Investments 2 571 2 965 164 -5 016 -30 415 - 1 069 19 8 19 380 -1 305 -4 251 13 824 49 5 526 - 742 -5 012 -492 - - 764 14 14 7 174 -832 -909 5 433 375 5 408 - 147 -4 928 -339 - - 288 5 12 3 210 -696 -320 2 193 141 1 562 - 275 -1 673 -86 - 1 80 5 9 1 080 -169 -49 862 100 315 - 16 -161 -24 - -11 135 43 4 3 464 -91 -258 3 115 26 751 - 246 -1 144 -21 - -2 -170 - - 549 -1 143 139 -455 11 - -2 965 -455 3 419 - - - - - - -398 398 - - - 16 133 - 1 136 -14 515 -991 415 -12 2 166 13 9 34 461 -3 840 -5 648 24 972 702 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 capital employed, excluding items affecting comparability, % Operating assets Operating liabilities Net deferred tax Capital employed Investments 2 572 2 730 206 -4 792 -29 - 315 - 1 001 1 001 19 7 18 989 -1 191 -4 262 13 536 30 5 252 - 823 -4 693 -479 - - - 903 903 17 16 7 185 -759 -880 5 546 413 5 431 - 505 -5 374 -380 -122 - -1 58 289 5 10 3 454 -639 -309 2 507 259 1 342 - 261 -1 514 -82 - - -9 -3 -3 0 neg 1 031 -138 -34 859 52 314 - 14 -180 -23 - - -5 120 120 38 4 3 475 -64 -258 3 153 23 602 2 196 -922 -24 0 - -3 -149 -148 - - 807 -1 351 134 -410 9 - -2 732 -446 3 178 - - - - - - - - -392 392 - - - 15 513 - 1 559 -14 299 -1 018 -122 315 -18 1 930 2 162 14 9 34 550 -3 752 -5 608 25 190 785 * 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. 48 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 2–3 Non-current assets per country Sweden UK Other Total Net sales by market Sweden Germany UK Netherlands Italy Poland Spain Rest of Europe Rest of the world Total Group Parent company 2017 27 041 1 701 6 28 748 2016 26 871 1 820 5 28 695 2017 13 639 - - 13 639 2016 14 450 - - 14 450 Group Parent company 2017 3 758 2 096 1 808 756 749 711 699 3 069 2 486 16 133 2016 3 660 1 974 1 719 694 857 645 1 009 2 979 1 977 15 513 2017 3 740 1 843 1 183 679 685 585 651 2 696 2 283 14 345 2016 3 632 1 766 1 124 624 807 540 969 2 436 1 896 13 794 The Forest business area manages the Group’s forests, which cover just over one million hectares. Annual wood harvested in company forests is normally 3.0 million m3sub. The Renewable Energy business area is responsible for the Group’s hydro power and wind power assets. In a normal year, production amounts to 1.2 TWh of electricity. The business areas are also responsible for supplying the Group with wood and electricity, respectively, in Sweden. The Paperboard business area produces consumer packaging for the premium segment at one Swedish and one UK mill. The Paper business area produces magazine and book paper at two Swedish mills. The Wood Products business area produces wood products for use in joinery and construction at three sawmills, whose by-products are used at the Group’s paper and paperboard mills. In 2017, the Group produced 0.5 million tonnes of paperboard, 1.1 million tonnes of paper and 0.8 million m3 of wood products. These business areas are responsible for managing the operating assets and liabilities, which together with the net amount of deferred tax assets and tax liabilities constitutes their capital employed. Group management monitors the business at operating profit level, and in terms of how earnings relate to capital employed. Capital employed in each segment includes all assets and liabilities used by the business area such as non-current assets, inventories and operating receiva- bles and operating liabilities, and the net amount of tax assets and tax liabilities. Financing and tax issues are managed at group level. Consequently, financial assets and liabilities, including pension liabilities, and current tax assets and tax liabilities, are not allocated to the business areas. 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. Between 1 July 2016 and the end of 2017 Holmen had an undertaking to sell the newsprint produced by the mill. 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. Income from external customers is allocated to individual countries according to the country in which the customer is based. Net sales by product area Paperboard Paper Wood products Pulp Wood Renewable energy Other Total Group Parent company 2017 5 347 6 131 1 557 164 2 571 315 49 16 133 2016 5 071 5 924 1 337 169 2 572 314 125 15 513 2017 3 527 6 069 1 561 279 2 565 315 30 14 345 2016 3 404 5 879 1 341 268 2 569 314 20 13 794 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 2017 360 405 21 22 47 67 214 1 136 2016 364 415 25 75 42 57 581 1 559 Parent company 2016 2017 226 231 59 37 21 21 27 9 28 31 57 67 404 169 822 565 Of the sales of by-products in the Group, SEK 101 million (141) relates to rejects from production, SEK 123 million (96) to sawdust, bark, chips etc., and SEK 137 million (127) 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 405 million (415). The Group has been allotted emission allowances that have been used partly within its own produc- tion. The surplus resulted in a gain of SEK 21 million (25). In the previous year, the item ‘Other’ included income from 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. 49 HOLMEN ANNUAL REPORT 2017 / 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 2017 1 579 617 2016 1 589 619 2017 1 275 561 2016 1 233 556 Group Parent company AGM’s guidelines for determining salaries and other remuneration for senior management The 2017 AGM decided on the following guidelines for determining the salaries and other remuner- ation 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 sal- ary. 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 remu- neration committee. Deviations in individual cases The Board shall be entitled to depart from these guidelines in individual cases should special rea- sons 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 to 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 i nvested, 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 sav- ings share. The assignment of matching and performance shares requires participants to have been full time employees 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 33 million. Costs corresponding to SEK 13 million (5) have been recognised for 2017. 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 2017, fees to the Board amounted to SEK 3 060 000 (3 060 000). The chairman received a fee of SEK 680 000 (680 000), and each of the other seven (seven) members received SEK 340 000 (340 000). Senior management Salary and other benefits for the CEO in 2017 amounted to SEK 8 566 098 (8 001 168). The total pension cost for the CEO, calculated in accordance with IAS 19, amounted to SEK 4 985 519 (4 340 722). Recognised wages and salaries for the share savings programme for the CEO amounted to SEK 1 676 738 (708 312). No variable remuneration was paid. In 2017, 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 (five) Group staffs who report directly to the CEO, totalled SEK 22 829 993 (21 297 113). The total pension cost for this group, calculated in accordance with IAS 19, amounted to SEK 10 201 247 (10 606 250) in 2017. Recognised wages and salaries for the share savings programme for this group amounted to SEK 2 320 957 (1 254 348). 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 15 million (14) at 31 December 2017 and for other members of senior management to SEK 28 million (32), calculated in accordance with IAS 19. The pension obligations are secured using plan assets managed by an independent pension fund. Average annual number of employees Of which women 2017 Average annual number of employees Of which men Of which women 2016 Of which men 2 377 - 450 - 1 927 - 2 369 11 448 5 1 921 6 6 12 5 - 2 74 11 - 1 3 6 442 23 14 2 5 1 - - 39 7 - 1 1 3 49 11 6 4 7 4 - 2 35 4 - - 2 3 393 12 8 8 13 5 8 2 77 7 1 1 3 6 443 23 12 2 6 1 3 - 38 6 - 1 1 3 49 10 5 6 7 4 5 2 39 1 1 - 2 3 394 13 7 599 2 976 125 575 474 2 401 609 2 989 125 578 484 2 411 Parent company Sweden Spain Group companies Estonia France Hong Kong Italy Japan Netherlands Poland Portugal Russia Switzerland Singapore UK Germany US Total Group companies Total Group Proportion of women, % Board (excl. deputy members) Senior management Total Group 2017 17 20 18 2016 17 30 23 Parent company 2016 17 30 23 2017 17 20 18 50 HOLMEN ANNUAL REPORT 2017 / NOTES NOTE 5–6 The income from financial instruments included in operating profit/loss is shown in the following table: Exchange gains/losses on trade receivables and trade payables Net gain/loss on derivatives stated in working capital Group 2017 2016 Parent company 2016 2017 40 15 34 1 -126 -126 -111 -102 Interest income on trade receivables Interest expense on trade payables 0 0 1 0 0 0 1 0 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 2017 amounted to SEK -90 million (-73), with the remainder being recog- nised in other comprehensive income as hedge accounting is applied. The fair value of outstanding transaction hedges at 31 December 2017 was SEK -135 million (-26). Gains on financial electricity hedges are recognised in the income statement when they expire; for 2017 they totalled SEK -36 million (-53). The fair value of outstanding financial electricity hedges at 31 December 2017 was SEK 55 million (-57). 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 5 million at 31 December 2017. During the period, the cost of hedged items increased by SEK 1 million. Gains on hedging of net assets amounted to SEK -49 million (1) in 2017 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 36 million (165) on consolidated equity. The fair value of outstanding hedges of net assets at 31 December 2017 was SEK 3 million (16) and relates to financial derivatives. The fair value of the derivatives used to manage the fixed interest periods amounted to SEK -47 million (-74) at 31 December 2017, which was recognised in other comprehensive income as hedge ac- counting is applied. This value is expected to be recognised in the income statement from 2018 onwards. Note 5. Auditors’ fee and remuneration The audit firm KPMG was elected by the 2017 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 2017 6 1 - 7 0 7 Parent company 2016 4 1 - 5 2017 4 0 - 4 - 4 - 5 2016 6 3 - 9 1 9 ‘Audit assignments’ refers to the statutory examination of the annual accounts and accounting re- cords, 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 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 management of financial risks* Cash and cash equivalents Other financial liabilities Total net profit/loss Interest expense** Finance costs Net financial items Group 2017 - - 2 2 2016 - 12 1 13 Parent company 2016 2017 1 314 - 18 1 332 1 288 12 17 1 317 - - -817 -508 42 1 -45 -2 -53 -55 -53 36 3 -65 -27 -57 -84 -71 -4 1 -46 -866 -50 -916 416 47 3 -40 -499 -59 -559 759 * Refers to the held-for-trading category in accordance with IAS 39. ** SEK -36 million (-37) in the Group and parent company refers to interest expense on derivatives measured at fair value through profit/loss for the year. Other interest income and interest expense are related to financial items not measured at fair value. Earnings from investments in Group companies amount to SEK 497 million, of which SEK 1 314 million relates to dividends from Group companies and SEK -817 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 inter- nal loans and hedging of internal lending. 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 32–35. 51 HOLMEN ANNUAL REPORT 2017 / NOTES NOTE 7 Note 7. Tax Taxes stated in income statement Current tax Deferred tax Total Group 2017 -436 -10 -445 2016 -331 -105 -436 Parent company 2016 -305 4 -301 2017 -208 11 -197 Tax recognised totalled SEK -445 million, corresponding to 21 per cent of profit before tax. Taxes stated in income statement Recognised profit/loss before tax Tax at applicable rate Difference in tax rate in foreign operations Tax-exempt income Non-tax-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 2017 SEKm 2 113 Group % 2016 SEKm 1 859 -465 6 7 -5 -2 11 -8 10 0 -445 22.0 -0.3 -0.3 0.2 0.1 -0.5 0.4 -0.5 0.0 21.1 -409 3 6 -33 -2 3 -1 0 -3 -436 % 22.0 -0.2 -0.3 1.8 0.1 -0.2 0.1 0.0 0.2 23.4 Parent company 2017 SEKm 2 044 -450 0 328 -182 -2 0 107 0 1 -197 % 22.0 0.0 -16.0 8.9 0.1 0.0 -5.3 0.0 -0.1 9.7 2016 SEKm 1 499 -330 0 286 -257 -2 0 0 0 1 -301 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 Before tax Tax 2017 35 -4 36 -49 121 140 -8 - - 11 -24 -21 Group After tax Before tax 28 -4 36 -38 97 119 211 -21 -165 1 -159 -133 Tax 2016 -46 - - -6 29 -24 After tax Before tax Tax 2017 Parent company After tax Before tax 164 -21 -165 -5 -130 -157 38 - - - - 38 -8 - - - - -8 29 - - - - 29 211 - - - - 211 Tax 2016 -46 - - - - -46 % 22.0 0.0 -19.1 17.2 0.1 0.0 0.0 0.0 -0.1 20.1 After tax 164 - - - - 164 Taxes as stated in balance sheet Tax receivables 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 2017 2016 Parent company 2016 2017 1 36 37 4 132 136 3 943 1 278 444 -27 11 5 650 21 5 671 3 854 1 319 502 -35 -27 5 613 6 5 618 - 29 29 635 -1 - -26 2 610 - 610 - 106 106 634 -1 - -35 13 612 - 612 52 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 7–9 Change in the net of deferred tax assets and deferred tax liabilities Opening balance -3 854 -1 319 -502 35 32 -5 608 Stated in the income statement -89 39 57 - -17 -10 Opening balance -3 788 -1 363 -438 81 5 -5 502 Stated in the income statement -66 25 -64 - 0 -105 Group Stated in other com- prehensive income - - - -8 -24 -32 Group Stated in other com- prehensive income - - - -46 29 -17 Translation differences and other - 2 - - 0 1 Translation differences and other - 19 - - -2 16 Closing balance -3 943 -1 278 -444 27 -10 -5 648 Closing balance -3 854 -1 319 -502 35 32 -5 608 Parent company Opening balance -634 1 - 35 -13 -612 Stated in the income statement 0 0 - - 11 11 Stated in other com- prehensive income - - - -8 - -8 Parent company Opening balance -634 1 - 81 -18 -569 Stated in the income statement -1 0 - - 4 4 Stated in other com- prehensive income - - - -46 - -46 Closing balance -634 1 - 26 -2 -610 Closing balance -634 1 - 35 -13 -612 2017 Biological assets* Property, plant and equipment Tax allocation reserve Transactions subject to hedge accounting Other Deferred net tax liability 2016 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 includes deferred tax related to changes of SEK -8 million (-46) in hedging reserves and an impact of SEK -24 million (29) from the revaluation of defined benefit pension plans. Holmen has requested an advance ruling on the entitlement to group relief in the parent company for tax losses that have arisen in the Group’s Spanish operations. The Swedish tax authority has opposed such entitled to group relief. The Supreme Administrative Court, which is judging the case, is obtaining an interpretation from the Court of Justice of the European Union in order to determine the issue. A positive decision could result in the Group’s tax expense decreasing by approximately SEK 400 million. No deferred tax asset has been recognised. Holmen has appealed against the property tax rate on hydro power assets for the 2011–2016 tax years as the higher tax rate that applied for these assets compared with other types of energy assets could constitute state aid. If the appeals are upheld, it is estimated that SEK 300 million in property tax will be repaid. No deferred tax asset has been recognised. 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 2017 2016 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 Basic EPS for the year, SEK Shareholders’ share of profit for the year, SEKm Diluted average number of shares Diluted EPS for the year, SEK 1 668 1 424 83 996 162 83 996 162 16.9 19.9 1 668 1 424 83 996 162 83 996 162 16.9 19.9 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 to- tal number of votes. In 2016, Holmen introduced a share savings programme. The programme involves previously re- purchased 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, 90 000 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 costs 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 2017 194 18 - 0 212 107 15 - 0 0 123 90 2016 225 5 -36 0 194 118 17 1 -28 0 107 87 Parent company 2016 26 - - - 26 2017 26 - - 0 26 19 - - - 0 19 8 18 1 - - - 19 8 Non-current intangible assets mainly comprise IT systems at SEK 50 million (64) and rights of use for certain energy assets at SEK 32 million (16). These assets were largely acquired from external sources. They have determinable useful lives and are amortised over 5–20 years. No goodwill applies for the Group. 53 HOLMEN ANNUAL REPORT 2017 / NOTESBuildings, other land and land installations 2016 2017 2016 Machinery and equipment 2017 2016 Work in progress and advance payments to suppliers 2017 2016 Forest land 2017 146 0 - -6 0 140 - - - - - - 167 - - -14 -6 146 - - - - - - 5 594 51 - -7 -5 5 633 3 228 96 - -7 -1 3 316 7 003 37 - -1 420 -27 5 594 27 572 559 67 -132 -35 28 031 31 260 729 92 -4 192 -317 27 572 4 247 20 739 23 992 118 81 -1 212 -6 3 228 879 - -127 -20 21 471 882 41 -3 994 -181 20 739 44 84 -67 - 1 61 - - - - - - 130 18 -92 -1 -11 44 - - - - - - Total 2017 2016 33 356 693 - -145 -39 33 865 38 560 784 - -5 627 -362 33 356 23 967 28 239 976 - -134 -21 24 787 1 000 122 -5 205 -187 23 967 140 146 2 317 2 365 6 560 6 832 61 44 9 078 9 387 Buildings, other land and land installations 2016 2017 2016 Forest land 2017 Machinery and equipment 2017 2016 Total 2017 2016 464 1 0 464 - - - - 461 3 0 464 - - - - 2 389 0 2 389 2 853 2 390 -1 2 389 2 853 139 11 0 150 130 1 0 131 1 - 1 20 139 - 0 139 129 1 0 130 1 - 1 10 220 21 -30 210 158 24 -29 154 - - - 56 232 26 -38 220 172 24 -38 158 - - - 62 823 32 -30 825 288 25 -29 285 832 29 -38 823 301 25 -38 288 2 389 0 2 389 2 930 2 391 -1 2 389 2 925 NOTE 10 Note 10. Property, plant and equipment Group Accumulated acquisition costs 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 costs Opening balance Investments Disposal and retirement of assets Total Accumulated depreciations and amortisations 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 The Group’s investment commitments for approved and ongoing projects amounted to SEK 590 million (250) at 31 December 2017. In 2017, the company’s capitalised borrowing costs totalled SEK 2 million (3). An interest rate of 1.1 per cent (1.5) was used to determine the amount. 54 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 11 The net effect of the change in fair value and the change as a result of harvesting is stated in the income statement as a change in value of biological assets. In 2017, this amounted to SEK 415 million (315). The table below shows how the value of forest assets would be affected by changes in the most significant valuation assumptions. Change in value 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 760 1 150 -620 260 400 -210 -490 590 900 -480 200 310 -170 -380 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 rele- vant 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 us- ing an interest rate of 5.5 (5.5) per cent. Holmen owns a total of 1 042 000 hectares of productive forest land, 960 000 hectares of which are actively managed. The productive forest land contains 121 million m3 growing stock, solid over bark. According to the applicable plan from 2011, the harvest will amount to 3.0 million m3sub per year. 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 inflation. The trend price for 2018 is 432 SEK/m3sub, which is slightly lower than 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 17 831 million (17 448) before tax. A deferred tax liability of SEK 3 943 million (3 854) is stated in relation to that figure. This represents the tax that is expected to be charged against earnings from future harvests. On that basis, the growing forest, net after tax, is stated at SEK 13 888 million (13 594). Change in the value of the growing forests Book value at start of year Acquisition of growing forest Sales of growing forest Change due to harvesting Unrealised change in fair value Reclassifications Other changes Book value at end of year Group 2017 17 448 11 -19 -614 1 029 -23 -1 17 831 2016 17 173 4 -27 -587 902 - -17 17 448 Assets that have been reclassified relate to forest properties in the Björkvattnet area in Jämtland, which were classified as an asset held for sale. An agreement on the sale of these properties was signed in late 2017 and the transaction was completed in January 2018. The profit from the sale will be reported within the Forest business area. Harvesting ’000 m3sub/year Prices SEK/m3sub 4 000 3 000 2 000 1 000 0 600 500 400 300 200 2001- 2010 2011- 2017 2018- 2020 2021- 2030 2031- 2040 2041- 2050 2051- 2060 2061- 2070 2071- 2080 2081- 2090 2091- 2100 2101- 2110 Average harvest Planned harvest 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 nomi- nal prices recalculated at 2017 monetary value using historical Swedish CPI. 55 HOLMEN ANNUAL REPORT 2017 / 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 Total comprehensive income from associates and joint ventures Group 2017 -12 -12 -4 -16 2016 -18 -18 -21 -39 The combined value of Holmen’s share in the profits of associates amounted to SEK -4 million (-14) for the Group and to SEK 0 million (-9) for the parent company. The combined value of Holmen’s share in the profits of joint ventures amounted to SEK -13 million (-8) for the Group and to SEK -13 million (-8) for the parent company. Associates Book value at start of year Investments Share of earnings Disposals Dividends received Translation difference Impairment losses Book value at end of year Group 2017 1 646 - -9 - - 0 - 1 636 2016 1 772 5 -16 -105 -12 4 -2 1 646 Parent company 2016 125 - - -2 - - - 123 2017 123 - - - - - - 123 Joint ventures Book value at start of year Investments Share of earnings Other Book value at end of year Parent company and Group holdings of shares and investments in associates and joint ventures Group 2017 127 - -14 - 113 Parent company 2016 82 10 - - 92 2017 92 - - - 92 2016 141 10 -30 6 127 Corporate ID No. Registered office Number of holdings Holding %* 556017-6678 556016-0953 556036-9398 556594-6984 556504-2826 556713-5172 Arbrå Örnsköldsvik Vännäs Stockholm Lycksele Stockholm Tel Aviv 5 556 990 9 886 1 800 683 200 119 13.9 9.9 49.4 36.0 6.8 17.7 46.8 556914-9833 Stockholm 250 50.0 Value of holding in consolidated accounts 2017 Book value in the parent company Holding %* Value of holding in consolidated accounts 2016 Book value in the parent company 36 0 1 463 13 75 49 0 0 1 636 113 1 749 - 0 - 2 75 46 - 0 123 92 215 13.9 9.9 49.4 36.0 6.8 17.7 46.8 50.0 36 0 1 465 12 75 55 2 0 1 646 127 1 773 - 0 - 2 75 46 - 0 123 92 215 Associates Brännälvens Kraft AB Gidekraft AB Harrsele AB Uni4 Marketing AB Vattenfall Tuggen AB VindIn AB Melodea Ltd, Israel Other associates Joint venture Varsvik AB Total Other shares and participating interests Book value at start of year Disposals Translation difference Impairment losses Book value at end of year Group 2017 2 0 0 - 2 Parent company 2016 1 - - - 1 2017 1 0 - - 0 2016 4 - 0 -2 2 * 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 1 463 million (1 465). Holmen purchased 491 GWh (416) of electrical power from Harrsele AB in 2017, giving Holmen an operating profit of SEK 94 million (76) from market sales. Harrsele AB owns power assets that gen- erate 950 GWh of electrical power in a normal year. These assets were originally constructed in 1957–58 and the book value of the non-current assets in Harrsele AB amounts to SEK 122 million (114). 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 develop- ment. The interests in Brännälvens Kraft AB, Gidekraft AB, Vattenfall Tuggen AB and VindIn AB are clas- sified as associates even though the holdings are less than 20 per cent, since shareholder agree- ments provide significant influence over each company’s activities. Ownership in the joint venture, Varsvik AB, relates to wind power operations. 56 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 13 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 par- ent 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 dura- tions of up to one year, accrued interest income and unrealised exchange gains and fair values of derivatives. 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 convert- ed 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 expense, 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 compa- nies 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 32–35. SEK -2 807 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 -151 million. Assets and liabilities are not offset in the report. Recognised derivatives totalled SEK 200 million (213) on the asset side and SEK -351 million (-385) 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 book value arises because certain liabilities are not measured at fair value in the balance sheet, and are instead stated at their amortised cost. In the case of trade receivables and trade payables, the book value 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 32–35. Maturity structure, undiscounted amounts* Financial liabilities Derivatives Other financial liabilities Financial receivables Derivatives Other financial receivables 2018 2019 2020 2021 2022– -36 -2 772 -19 -508 8 380 - 4 -17 - - 1 - - - 0 - - - 37 * Refers to financial instruments included in Group net financial debt, excluding provisions for pensions. 57 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 13 Note 13. Financial instruments, cont. Group Financial instruments included in net financial debt Non-current financial receivables Derivatives 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 Bond loans Derivatives Other non-current liabilities Current liabilities Commercial paper programme Bank account liabilities Derivatives Accrued interest 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) Derivatives recog- nised at fair value through profit/loss 2016 2017 Derivatives with hedge accounting 2017 2016 Trade receiva- bles and loan receivables 2017 2016 Available-for-sale assets Other liabilities 2017 2016 2017 2016 Total book value 2017 2016 Fair value 2017 2016 0 - 0 - 8 - 8 - - - - - - - - - -4 - - - -4 - - 1 - 0 - 0 - 55 - 55 - - - - - - - - - -53 - - - -53 - - 8 - - - - - - - - - - - - - - - - - - - - - - 42 42 0 - 24 24 - 39 39 1 - 34 34 0 356 356 0 210 210 - -45 - -45 - -75 - -75 - - - - - - - - - - - - - - - - - - 192 150 - - - - - - - - - - - - - - - - - - - - - - - - - 2 089 - 2 174 - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 - - - - 2 - - - - - - - - - - - - - - - - - - - - - 2 - - - - - - - - - - - - - - - - - - - - - - - - -500 - -7 -507 -2 099 -10 - -11 -650 0 -2 770 -800 - -8 -808 -1 709 -26 - -12 -1 400 - -3 147 0 42 42 0 8 24 32 0 356 356 -500 -45 -7 -552 0 39 39 1 55 34 89 0 210 210 -800 -75 -8 -882 0 42 42 0 8 24 32 0 356 356 -500 -45 -7 -552 0 39 39 1 55 34 89 0 210 210 -800 -75 -8 -882 -2 099 -10 -4 -11 -650 0 -2 775 -1 709 -26 -53 -12 -1 400 - -3 200 -2 099 -10 -4 -11 -650 0 -2 775 -1 709 -26 -53 -12 -1 400 - -3 200 - - - - - - 2 2 089 2 2 174 2 2 089 2 2 174 192 158 192 158 -1 957 -1 766 -1 957 -1 766 -1 957 -1 766 - - -301 -257 -301 -257 2 -5 234 -5 721 -2 872 -3 433 -2 872 -3 433 -34 -23 -267 -233 Total financial instruments -30 -14 -121 -158 2 511 2 457 58 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 13 Derivatives recog- nised at fair value through profit/loss 2016 2017 Derivatives with hedge accounting 2017 2016 Trade receiva- bles and loan receivables 2017 2016 Available-for-sale assets Other liabilities 2017 2016 2017 2016 Total book value 2017 2016 Fair value 2017 2016 Parent company Financial instruments included in net financial debt Non-current financial receivables Derivatives 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 Bond loans Liabilities to Group companies Derivatives Current liabilities Commercial paper programme Bank account liabilities Derivatives Accrued interest 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) 0 - - 0 - 8 - 8 - - - - - - - - -4 - - - -4 - - 4 - 0 - - 0 - 55 - 55 - - - - - - - - -53 - - - -53 - - 13 - - - - - - - - - - - - - - - - - - - - - - - -45 -45 - - -75 -75 - - - - - - - - - - - - - - - - - - 194 151 - - -34 -24 -267 -234 - 2 916 102 3 018 - 3 104 98 3 202 0 - 24 24 294 294 - - - - - - - - - - - 1 - 34 34 104 104 - - - - - - - - - - - - 1 769 - 1 874 - - - - - - Total financial instruments -27 -10 -118 -157 5 105 5 214 - - - - - - - - - - - - - - - - - - - - - 0 - - - - 0 - - - - - - - - - - - - - - - - - - - - - 0 - - - - - - - - - - - - - - - - - - - - - - - - -500 -334 - -834 -2 099 -10 - -11 -650 0 -2 770 -800 -1 454 - -2 254 -1 709 -26 - -12 -1 400 - -3 147 0 2 916 102 3 018 0 3 104 98 3 202 0 2 916 102 3 018 0 3 104 98 3 202 0 8 24 32 294 294 -500 -334 -45 -880 1 55 34 89 104 104 -800 -1 454 -75 -2 328 0 8 24 32 294 294 -500 -334 -45 -880 -1 709 -2 099 -26 -10 -53 -4 -11 -12 -650 - 1 400 - -3 200 0 -2 775 -2 099 -10 -4 -11 -650 0 -2 775 1 55 34 89 104 104 -800 -1 454 -75 -2 328 -1 709 -26 -53 -12 -1 400 - -3 200 - - - - - - 0 1 769 0 1 874 0 1 769 0 1 874 198 164 198 164 -1 814 -1 576 -1 814 -1 576 -1 814 -1 576 - - -301 -258 -301 -258 0 -5 419 -6 976 -458 -1 929 -458 -1 929 59 HOLMEN ANNUAL REPORT 2017 / 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 2017 842 212 1 319 507 24 2 905 Parent company 2016 637 206 1 077 423 54 2 396 2017 661 201 934 501 24 2 322 2016 831 233 1 431 431 54 2 981 Registered share capital Class A Class B Total no. of shares Repurchased class B shares Total number of shares outstanding During the year reversals of previous impairment losses on finished stock had an effect of SEK 7 million on Group profit, while impairment losses on other stock had an effect of SEK -2 million (-2). Impairment losses on inventories had an impact of SEK -3 million (-5) on the parent company. 31 Dec 2017 Quotient value 50 50 31 Dec 2016 Quotient value 50 50 Number 22 623 234 62 132 928 84 756 162 -760 000 83 996 162 Number 22 623 234 62 132 928 84 756 162 -760 000 83 996 162 SEKm 1 131 3 107 4 238 SEKm 1 131 3 107 4 238 Registered share capital Class A Class B Total no. of shares Repurchased class B shares Total number of shares outstanding 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 2017 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 -145 million (-167) on parent company equity. In the consolidated accounts, valuation of derivatives and other financial instruments had an impact of SEK -151 million (-172) 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 5 802 807 399. The Board proposes that the AGM on 10 April 2018 approve a dividend of SEK 13 per share. The proposed dividend totals SEK 1 092 million. The Board also proposes that the remaining amount of SEK 4 710 857 293 be carried forward. For the previous year, the dividend paid was SEK 12 per share (SEK 1 008 million). The debt/equity ratio was 0.13 (0.19). 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 32–35. 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 2017 2016 Parent company 2016 2017 - 56 2 033 2 089 - 3 291 192 171 658 2 747 - 38 2 137 2 174 - 5 226 158 175 564 2 738 59 56 1 654 1 769 - 3 168 198 72 442 2 210 50 38 1 786 1 874 - 5 129 164 82 380 2 254 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. Follow- ing an individual assessment, a provision for anticipated credit losses of SEK 41 million (37) has been made and recognised, net, together with trade receivables. During the year, the provision was changed by SEK -2 million (-3) as a result of actual credit losses, and by SEK 6 million (2) as a result of changes in the provision for anticipated credit losses. At 31 December 2017, SEK 33 million (44) 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 33. 60 HOLMEN ANNUAL REPORT 2017 / NOTES 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 bene- fit 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 con- tribution 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 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 2017 2016 2017 2016 -5 -4 -9 -7 -2 -9 -12 0 -12 -21 1 -21 -128 -137 -129 -138 -106 -118 -106 -127 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 Effect of asset ceiling Total recognised in other comprehensive income Group 2017 103 122 -101 14 1 -18 121 2016 241 33 -418 -13 -1 - -159 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 obliga- tions 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 3 years and is subject to review every 3 years. The assets in a trust exceed the commitment. This surplus has not been rec- ognised as there are no offset rights. This adjustment is referred to as an asset ceiling in tables. Obligations Obligations at 1 January Current service cost Payroll tax Interest expense Actuarial gains/losses Benefits paid Exchange differences Obligations at 31 December Group 2017 -2 414 -5 2 -60 35 222 21 -2 198 2016 -2 374 -7 2 -77 -399 212 230 -2 414 Parent company 2016 -153 -21 - -7 - 13 - -167 2017 -167 -12 - -5 - 11 - -173 Of the Group’s total obligations, SEK 10 million (11) 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 (12) are secured under the Swedish Pension Obligations Vesting Act. The weighted average duration is 18 years. NOTE 17 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 Benefits paid Exchange differences Fair value of assets at 31 December Effect of asset ceiling Pension provisions, net Plan assets by type are as shown below: Plan assets Equities Bonds Current fixed income investments Group 2017 2 213 55 103 - -3 37 -210 -19 2 177 -18 -39 2016 2 244 75 241 - -5 73 -197 -218 2 213 - -201 Parent company 2016 148 - 2017 155 - - 5 - - - - 160 - -12 - 7 - - - - 155 - -12 Group 2017 1 098 1 050 29 2 177 2016 1 130 1 063 20 2 213 Parent company 2016 71 80 3 155 2017 79 79 3 160 The plan assets do not include any financial instruments issued by Group companies or assets used by the Group. Of equities, 47 per cent relate to the UK, 48 per cent to the rest of Europe and the US and 4 per cent to the rest of the world. Of bonds, 43 per cent relate to government bonds and 57 per cent to corporate bonds. Key actuarial assumptions, Group (weighted average), % Discount rate Rate of salary increase Rate of price inflation Group 31 Dec 2017 2.5 3.0 3.1 31 Dec 2016 2.7 3.0 3.1 The discount rate for pension obligations was established on the basis of high-quality corporate bonds. A discount rate of 0.6 per cent (0.8) 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 actuari- al 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) Group 31 Dec 2017 -183 2 129 108 31 Dec 2016 -203 2 178 82 The Group’s payments into the funded defined benefit plans in 2018 are expected to amount to SEK 42 million. Multi-employer plans The year’s premiums for pension insurance policies taken out with Alecta’s ITP 2 plan amounted to SEK 31 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 715 active members, which corresponds to 0.14 per cent. Premiums to Alecta are expected to amount to SEK 28 million in 2018. 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 intro- duce reductions in premiums. At the end of 2017, Alecta’s collective consolidation level was 154 per cent (148). 61 HOLMEN ANNUAL REPORT 2017 / NOTES NOTE 18–20 Note 18. Other provisions Group Book value at start of year Provisions during the year Utilised during the year Unutilised amount reversed during the year Translation differences Book value at end of year Of which non-current portion of the provisions Of which current portion of the provisions Parent company Book value at start of year Provisions during the year Utilised during the year Unutilised amount reversed during the year Book value 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 2017 45 140 - - - 185 185 - 45 - - - 45 45 - 2016 45 - - - - 45 45 - 45 - - - 45 45 - 2017 856 6 -240 -2 3 622 477 144 833 105 -211 -2 725 532 193 2016 697 335 -163 -15 2 856 627 228 892 228 -274 -13 833 572 261 2017 901 146 -240 -2 3 807 662 144 878 105 -211 -2 770 577 193 2016 742 335 -163 -15 2 901 673 228 937 228 -274 -13 878 617 261 Tax provisions are mainly attributable to the divested operations in Spain. Other provisions mainly relate to uncertainties associated with obligations for environmental restoration, for fixed price electricity supply contracts and the sale of the operations in Spain. A provision is included in the parent company for future measures for reforestation after harvesting for SEK 190 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 2017 2016 Parent company 2016 2017 - - 1 957 1 957 - 6 186 301 563 1 056 3 012 - - 1 766 1 766 - 11 251 257 561 1 079 2 845 53 - 1 761 1 814 0 6 170 301 458 935 2 749 116 - 1 460 1 576 0 11 158 258 443 870 2 445 In 2017, the Group’s lease payments amounted to SEK 52 million (54), and the parent company’s to SEK 38 million (38). 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 2017 financial year. No leased equipment was subleased. Breakdown of future lease payments Future lease payments Present value of future lease payments Group 2019 –2022 40 2018 45 Parent company 2023– 0 2018 31 2019 –2022 22 2023– 0 45 40 0 31 21 0 The contracts have remaining durations ranging from 1 to 6 years. The Group’s future lease pay- ments for existing lease agreements amounted to SEK 90 million at the end of the previous year. Those in the parent company amounted to SEK 53 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 2017 and have a remaining duration of two years from 1 January 2018. 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 191 million (196), discounts of SEK 52 million (42) and goods and services delivered but not yet invoiced of SEK 46 million (36). Fair values of derivatives essentially relate to the hedging of future cash flows. See Note 13. 62 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 21–22 Note 21. Collateral and contingent liabilities Group Financial liabilities Total Parent company Financial liabilities Total Property mortgages Other collateral 6 6 6 6 137 137 137 137 Total col- lateral 2017 143 143 Total col- lateral 2016 150 150 143 143 150 150 Contingent liabilities Surety on behalf of Group companies Other contingent liabilities Total Group 2017 - 97 97 Parent company 2016 34 68 102 2017 40 83 123 2016 - 86 86 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. The holding in a jointly owned company, Varsvik AB, is pledged and amounted to SEK 137 million (144) at the end of the year. Note 22. Related parties Of the parent company’s net sales of SEK 14 345 million (13 794), SEK 115 million (99) relates to deliveries to Group companies. The parent company’s purchases from Group companies amounted to SEK 1 056 million (1 479). There are significant financial receivables and liabilities between the parent company and its Swed- ish 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 was to optimise operations within this business area. The agree- ment was terminated in 2016, with notice of termination running until September 2017. Holmen Paper AB’s purchases from Holmen Paper Madrid SL in 2017 amounted to SEK 889 million (1 371). As Holmen Paper AB is acting on a commissioned basis for Holmen AB, these transactions are accounted for via Holmen AB. Transactions with related parties L E Lundbergföretagen AB is a major shareholder in Holmen (see page 37). Holmen rents office premises for SEK 8 million (8) from Fastighets AB L E Lundberg, which is a group company within L E Lundbergföretagen AB. In 2017, Fredrik Lundberg, who is CEO and principal shareholder in L E Lundbergföretagen, received a fee of SEK 680 000 (680 000) 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 Lundberg, received a Board fee of SEK 340 000 (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 rela- tion 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 consoli- dated accounts within the Renewable Energy business area. Group Associates Joint venture Parent company Subsidiaries Associates Joint venture Sale of products to related parties 2017 333 - 2016 280 - 115 333 - 99 280 - Purchase of products from related parties Other (e.g. interest, dividend) 2017 85 - 1 056 85 - 2016 172 - 1 479 99 - 2017 0 5 1 325 0 5 2016 0 5 1 299 0 5 Liability to related parties 2017 56 - 2016 61 - Receivable from related parties 2017 89 24 2016 82 17 388 52 - 1 571 57 - 2 982 89 86 3 160 82 79 For fees and remuneration paid to members of the Board, see Note 4. 63 HOLMEN ANNUAL REPORT 2017 / NOTES NOTE 23 Note 23. Investments in Group companies Accumulated acquisition costs Book value at start of year Shareholder’s contribution Closing balance at 31 December Parent company 2017 17 141 1 17 142 2016 17 141 1 17 141 Accumulated impairment losses Book value at start of year Impairment losses for the year Closing balance at 31 December Book value at end of year Parent company 2017 5 838 817 6 655 10 487 2016 5 330 508 5 838 11 303 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’. Corporate ID No. Registered office Number of holdings Interest %* Parent company’s direct holdings of investments in subsidiaries 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.** 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 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. 2017 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Book value in the parent company Book value in the parent company Interest %* 2016 0 0 0 0 0 8 868 0 72 0 0 2 8 942 0 1 519 - - 1 - - 4 7 - 7 5 2 1 545 10 487 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 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 64 HOLMEN ANNUAL REPORT 2017 / NOTESNOTE 24–26 Note 24. Untaxed reserves Note 26. Critical accounting estimates and judgements Accumulated depreciation and amortisation in excess of plan Property, plant and equipment Total 31 Dec 2016 10 10 Parent company Appropria- tions 2 2 31 Dec 2017 12 12 When preparing financial statements 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 ac- counts, 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 for- est 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 pulp- wood 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 book value of biological assets at 31 December 2017 was SEK 17 831 million and the attributable deferred tax liability was SEK 3 943 million, giving a net value of SEK 13 888 million. Tax Holmen has requested an advance ruling on the entitlement to group relief in the parent company for tax losses that have arisen in the Group’s Spanish operations. The Swedish tax authority has opposed such entitlement to group relief. The Supreme Administrative Court, which is judging the case, is obtaining an interpretation from the Court of Justice of the European Union in order to determine the issue. A positive decision could result in the Group’s tax expense decreasing by approximately SEK 400 million. No deferred tax asset has been recognised. Holmen has appealed against the property tax rate on hydro power assets for the 2011–2016 tax years as the higher tax rate that applied for these assets compared with other types of energy assets could constitute state aid. If the appeals are upheld, it is estimated that approximately SEK 300 million in property tax will be repaid. No deferred tax asset has been recognised. See Note 7. Pension obligations The Group has benefit-based pension obligations measured at SEK 2 198 million and SEK 2 177 million in plan assets set aside to cover such obligations. The value of pension obligations is esti- mated 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 obligations for environmental res- toration, fixed price electricity supply contracts, the sale of the Spanish operations and corporation tax risks. See Note 18. Tax allocation reserve 2011 fiscal year 2012 fiscal year 2013 fiscal year 2014 fiscal year 2015 fiscal year 2016 fiscal year 2017 fiscal year Total 560 - 280 610 370 460 - 2 280 2 290 -560 - - - - -170 470 -260 -258 - - 280 610 370 290 470 2 020 2 032 Group contributions received amounted to SEK 530 million (700) and Group contributions paid amounted to SEK 0 million (0). Total appropriations of profit amounted to SEK 787 million. Note 25. Cash flow statement Interest paid and dividends received Dividends received Interest received Interest paid Total Group 2017 - 2 -36 -34 Parent company 2016 1 288 17 -51 1 254 2017 1 314 17 -37 1 294 2016 - 1 -49 -48 The change in current liabilities mostly relates to borrowing within the Group’s commercial paper programme. In 2017, a number of different short-term loans totalling SEK 7 160 million (7 192) were raised within the Group’s commercial paper programme, and SEK 6 770 million (7 630) was repaid. For a specification of cash and cash equivalents, see Note 13. Bond loans Commercial paper Other financial liabilities Pension liability Financial liabilities in- cluding pension liability Bond loans Commercial paper Liabilities to Group companies Other financial liabilities Pension liability Financial liabilities in- cluding pension liability 2016 2 200 1 709 173 201 4 283 2016 2 200 1 709 1 454 166 12 5 541 Group Cash flow -1 050* 390 -21 -39 Currency and market revaluation - - -74 -123 2017 1 150 2 099 77 39 -720 -197 3 365 Parent company Currency and market revaluation - - 74 -77 7 2017 1 150 2 099 334 70 12 4 3 665 Cash flow -1 050* 390 -1 194 -18 -7 -1 879 * Relates to SEK 1 400 million in repayment of loans which when raised were long-term but at the point of repayment were short-term, and SEK 350 million in loans raised. 65 HOLMEN ANNUAL REPORT 2017 / NOTES Proposed appropriation of profits The following earnings of the parent company are at the disposal of the Annual General Meeting: Net profit for the 2017 financial year Retained earnings The Board of Directors proposes that a dividend of SEK 13 per share (83 996 162 shares) be paid to the shareholders and that the remaining amount be carried forward SEK 1 846 904 094 3 955 903 305 5 802 807 399 1 091 950 106 4 710 857 293 The Board of Holmen AB has proposed that the 2018 Annual General Meeting resolve in favour of paying a dividend of SEK 13 per share – SEK 1 per share higher than the preceding year – totalling SEK 1 092 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. The proposed dividend corresponds to 65.5 per cent of net profit for 2017 for the Group and means that 5.0 per cent of equity in the Group at 31 December 2017 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 2017 was 0.13. Payment of the proposed dividend would raise the debt/equity ratio by 0.06. Holmen AB’s equity at 31 December 2017 amounted to SEK 11 718 million, of which non- restricted equity was SEK 5 803 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 -145 million on equity. The Group’s equity at 31 December 2017 amounted to SEK 22 035 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 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 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 Parlia- ment’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 16 February 2018. The Group’s consolidated income statement and balance sheet and the parent company’s income statement and balance sheet will be presented for adop- tion at the Annual General Meeting to be held on 10 April 2018. Fredrik Lundberg Chairman Carl Bennet Board member Steewe Björklundh Board member Kenneth Johansson Board member Stockholm, 16 February 2018 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 20 February 2018. KPMG AB Joakim Thilstedt Authorised Public Accountant 66 HOLMEN ANNUAL REPORT 2017 / PROPOSED APPROPRIATION OF PROFITS Auditor’s report To the general meeting of the shareholders of Holmen AB (publ.), 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 (publ.) for the year 2017, except for pages 8-9, 22 and 25-26 in the sustainability report. The annual accounts and consolidated accounts of the company are included on pages 2-3, 8-9, 22, 25-26, 28-66 and 70-71 in 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 2017 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 2017 and their financial performance and cash flow for the year then ended in accordance with International Finan- cial Reporting Standards (IFRS), as adopted by the EU, and the Annual Accounts Act. Our opinions do not cover pages 8-9, 22 and 25-26 in the sustainability report. 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. Our opinions in this report on the the annual accounts and consolidated accounts are consistent with the content of the additional report that has been submitted to the parent company’s audit committee in accordance with the Audit Regulation (537/2014) Article 11. 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 stand- ards 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 otherwise fulfilled our ethical responsibilities in accordance with these requirements.This includes that, based on the best of our knowledge and belief, no prohibited services referred to in the Audit Regulation (537/2014) Article 5.1 have been provided to the audited company or, where applicable, its parent company or its controlled companies within the EU. 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 form- ing our opinion thereon, the annual accounts and consolidated accounts as a whole, but we do not provide a separate opinion on these matters. Valuation of Biological Assets Se note 11, note 26 and the Accounting Principles on pages 44-47 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 17 831 million as per 31 December 2017. 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. Response in 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 documen- tation 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 as- sumptions can affect the overall valuation. We have involved our own specialists in 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 valua- tions 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. Other provisions/ Valuation of the parent company’s shares in Group companies See note 18, note 26 and the Accounting principles on page 44-47 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 622 million per 31 December 2017, including environmental obligations and contractual commitments regarding delivery of electricity at a fixed price. Provisions in the parent company have a carrying value of SEK 725 million per 31 December 2017 and regard primarily environmental obligations, contractual commit- ments regarding delivery of electricity at a fixed price and estimated costs for replanta- tion of forest following harvesting. Provisions involve significant levels of judgement regarding uncertain future outcomes, in particular relating to the amount and timing of the final assessments. Changes to the underlying assumptions used to make these provisions could significantly 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. Response in 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. We have evaluated the parent company’s assessment of the value of shares in Group companies and evaluated whether all of the underlying commitments have been taken into account and assessed write-downs made against applicable regulations. HOLMEN ANNUAL REPORT 2017 / AUDITOR’S REPORT 67 Other Information than the annual accounts and consolidated accounts This document also contains other information than the annual accounts and consoli- dated accounts and is found on pages 4-7,10-21, 23-24, 27 and 72-79. The Board of Directors and the Managing Director are 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 infor- mation 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 accordance with the Annual Accounts Act and, concerning the consolidated accounts, in accordance 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 misstatement, 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 accounting is however not applied if the Board of Directors and the Managing Director intend to liquidate the company, to cease operations, or has no real- istic alternative but to do so. The Audit Committee shall, without prejudice to the Board of Director’s responsibilities and tasks in general, among other things oversee the company’s financial reporting process. 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 er- ror 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. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism 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 proce- dures responsive to those risks, and obtain audit evidence that is sufficient and appro- priate to provide a basis for our opinions. The risk of not detecting a material misstate- ment 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 or- der 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 con- solidated 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 con- cern. 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 man- ner 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 con- solidated 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. 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 mat- ters 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. 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 (publ.) for the year 2017 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 mem- bers 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 Audi- tor’s Responsibilities section. We are independent 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. Responsibilities of the Board of Directors and the Managing Director The Board of Directors is responsible for the proposal for appropriations of the compa- ny’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 administra- tion 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 or- ganization 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 Ac- counts 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 scepticism 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. 68 HOLMEN ANNUAL REPORT 2017 / AUDITOR’S REPORT The auditor’s opinion regarding the statutory sustainability report The Board of Directors and the Managing Director are responsible for the sustainability report on pages 8-9, 22, 25-26 and 33, and that it is prepared in accordance with the Annual Accounts Act. Our examination has been conducted in accordance with FAR:s auditing standard RevR 12 The auditor’s opinion regarding the statutory sustainability report. This means that our examination of the statutory sustainability report is different and substantially less in scope than an audit conducted in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden. We believe that the examination has provided us with sufficient basis for our opinion. A statutory sustainability report has been prepared. KPMG AB, Box 382, 101 27, Stockholm, was appointed auditor of Holmen AB (publ.) by the general meeting of the shareholders on the 27 March 2017. KPMG AB or auditors operating at KPMG AB have been the company’s auditor since 1995. Stockholm 20 February 2018 KPMG AB Joakim Thilstedt Authorised Public Accountant Review of sustainability report Holmen’s Sustainability Report, as defined on page 2 of Holmen’s Annual Report 2017, has been subject to a limited review in accordance with ISAE 3000 Assurance engage- ments other than audits or reviews of historical financial information. A complete assurance report on the Sustainability Report is available at holmen.com. The assurance report contains the following conclusion: 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. Joakim Thilstedt Authorised Public Accountant Torbjörn Westman Expert member of FAR Stockholm 20 February 2018 KPMG AB HOLMEN ANNUAL REPORT 2017 / AUDITOR’S REPORT 69 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. Daniel Hägglund Örnsköldsvik. Born in 1982. Deputy member since 2014. Employee representative, PTK. 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. Henrik Sjölund President and CEO Norrköping. Born in 1966. Member since 2014. M.Sc. in International Economics. Other significant appointments: Board member of the Swedish Forest Industries Federation and the Confederation of Swedish Enterprise. 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 Lundberg- företagen: 27 622 000 shares. Carl Bennet Gothenburg. Born in 1951. Member since 2009. M.Sc. in Economics. D. Tech. h.c. CEO of Carl Ben- net AB. Former President and CEO of Getinge AB. Chairman of Getinge AB, Lifco AB och Elanders AB. Other significant appointments: Board member of Arjo AB and L E Lundbergföretagen AB. Shareholding: 100 000 shares. Steewe Björklundh Hudiksvall. Born in 1958. Member since 1998. Employee representative, LO. 70 HOLMEN ANNUAL REPORT 2017 / BOARD OF DIRECTORS Ulf Lundahl Lidingö. Born in 1952. Member since 2004. Bachelor of Laws and M.Sc. in Economics. Other significant appointments: Chairman of Attendo AB, Fidelio Capital AB, Ramirent plc and SHB Regionbank Stockholm. Board member of Eltel AB and Indutrade AB. Shareholding: 4 000 shares. Lars Josefsson Norrköping. Born in 1953. Member since 2016. M.Sc. in Engineering. Other significant appointments: Deputy chair- man of Vestas. Chairman of Driconeq, Ouman and TimeZynk. Board member of Metso. Shareholding: 2 500 shares. Lars G Josefsson Stockholm. Born in 1950. Member since 2011. M.Sc. in Engineering. Former President and CEO of Vattenfall. Other significant appointments: Board member of Robert Bosch GmbH, Robert Bosch Industrie- treuhand 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. Henriette Zeuchner Stockholm. Born in 1972. Member since 2015. M.Sc. in Economics and Bachelor of Laws. CEO of Discovery Networks Sweden AB. Other significant appointments: Board member of the NTM Group. Shareholding: 800 shares. 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. Tommy Åsenbrygg Skebobruk. Born in 1968. Member since 2015. Employee representative, PTK. Deputy chairman of Ledarna, Hallsta Paper Mill. Shareholding: 100 shares. Christer Johansson Iggesund. Born in 1959. Deputy member since 2017. Employee representative, LO. Chairman of the Swedish Paper Workers Union branch 15. Per-Arne Berg Forsa. Born in 1955. Deputy member since 2015. Employee representative, PTK. Chairman of the Holmen-Iggesund Trade Union Club. Information at 31 December 2017. Auditors: KPMG AB Principle Auditor: Joakim Thilstedt, Authorised Public Accountant HOLMEN ANNUAL REPORT 2017 / BOARD OF DIRECTORS 71 Group management Stina Sandell Senior Vice President Sustainability and Communications Born in 1966. Joined Holmen in 2017. Shareholding: 0 shares. Lars Ericson Senior Vice President Legal Affairs Company secretary. Born in 1959. Joined Holmen in 1988. Shareholding: 650 shares. Daniel Peltonen Senior Vice President Paperboard Born in 1971. Joined Holmen in 1997. Shareholding: 538 shares. Nils Ringborg Senior Vice President Paper Born in 1958. Joined Holmen in 1988. Shareholding: 2 514 shares. Johan Padel Senior Vice President Wood Products Born in 1966. Joined Holmen in 2014. Shareholding: 830 shares. Henrik Sjölund President and CEO 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 70. Anders Jernhall Executive Vice President, Chief Financial Officer Born in 1970. Joined Holmen in 1997. Shareholding: 4 900 shares. Sören Petersson Senior Vice President Forest Born in 1969. Joined Holmen in 1994. Shareholding: 4 400 shares. Gunilla Rolander Senior Vice President Human Resources Born in 1966. Joined Holmen in 2013. Shareholding: 362 shares. Ola Schultz-Eklund Senior Vice President Technology Born in 1961. Joined Holmen in 1994. Shareholding: 800 shares. 72 HOLMEN ANNUAL REPORT 2017 / 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, % Profit/loss before change in value, forest Profit/loss before change in value, forest Change in value of forests Operating profit/loss, forest Capital employed Equity Net financial debt Capital employed Return on capital employed Operating profit/loss excluding items affecting comparability Average capital employed 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 38 for what items affecting comparability refers to. 2017 2016 2 742 -991 415 2 166 - 2 166 2 166 16 133 13.4 654 415 1 069 22 035 2 936 24 972 2 166 24 874 8.7 552 2 775 39 -42 -32 -356 2 936 2 936 22 035 0.13 22 035 34 891 63.2 2 865 -1 018 315 2 162 -232 1 930 1 930 15 513 13.9 686 315 1 001 21 243 3 945 25 190 2 162 25 146 8.6 882 3 200 201 -39 -89 -210 3 945 3 945 21 243 0.19 21 243 34 891 60.9 HOLMEN ANNUAL REPORT 2017 / KEY FIGURES 73 Ten-year review, finance SEKm 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 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 Earnings 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 Earnings 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: 16 133 -13 379 -12 -991 415 2 166 - 2 166 -53 2 113 -445 1 668 19.9 5 535 5 526 5 408 1 562 315 -2 214 16 133 1 069 764 288 80 135 -170 2 166 - 2 166 2 113 418 -221 199 2 509 -644 1 865 - -1 008 15 513 -12 626 -22 -1 018 315 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 16 014 -13 348 7 -1 240 267 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 15 994 -13 270 -7 -1 265 282 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 16 231 -13 919 3 -1 370 264 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 17 852 -15 224 47 -1 313 350 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 18 656 -15 501 84 -1 260 - 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 17 581 -15 077 28 -1 251 52 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 18 071 -15 191 45 -1 320 16 1 620 - 1 620 19 334 -16 614 50 -1 343 -16 1 412 -361 1 051 -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 -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 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. 2015: Impairment loss on non-current assets, provision for costs and the effects of a fire totalling SEK -931 million. 2014: Impairment loss on non-current assets of SEK -450 million. 2013: Impairment loss on non-current assets and restructuring costs of SEK -140 million. 2012: Impairment loss on non-current assets and restructuring costs of SEK -193 million. 2011: Revaluation of forest of SEK 3 593 million. 2010: Impairment losses on non-current assets and restructuring costs of SEK -786 million and revaluation of forest amounting to SEK 1 050 million. 2008: Impairment loss on non-current assets, restructuring costs and the effects of a fire totalling SEK -361 million. 74 HOLMEN ANNUAL REPORT 2017 / 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 Capital employed Forest Paperboard Paper Wood Products Renewable Energy Group-wide and other* Capital employed Key figures Operating margin, %** Paperboard Paper Wood Products Group Return, capital employed, %** Forest Paperboard Paper Wood Products Renewable Energy Group Key figures 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 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 For a ten-year review of data per share, see page 37. 28 751 5 710 74 356 34 891 22 035 5 650 3 366 3 840 34 891 13 824 5 433 2 193 862 3 115 -455 24 972 14 5 5 13 8 14 12 9 4 9 8 0.13 2 904 526 1 117 852 1 169 28 701 5 852 128 210 34 891 21 243 5 613 4 283 3 752 34 891 13 536 5 546 2 507 859 3 153 -410 25 190 17 5 0 14 7 16 10 0 4 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 13 401 5 698 3 266 897 3 075 -684 25 653 15 -1 1 11 7 15 neg 1 6 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 13 212 5 841 4 366 874 3 118 -535 26 876 13 2 3 11 6 12 3 3 7 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 12 688 5 686 4 438 1 327 3 005 -173 26 970 9 -4 -6 7 7 8 neg neg 13 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 12 657 5 489 4 920 1 385 2 947 5 27 403 12 1 -12 10 8 12 2 neg 12 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 11 599 4 233 5 798 1 471 2 884 47 26 032 17 3 -16 11 8 23 4 neg 14 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 8 822 3 428 6 069 1 153 2 831 382 22 685 17 -8 4 8 10 24 neg 3 17 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 8 075 3 456 8 131 367 2 907 -748 22 188 8 4 4 9 7 12 4 7 15 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 8 170 3 687 9 670 341 2 748 -1 469 23 146 7 3 3 7 8 9 3 4 12 6 4 0.48 2 649 494 2 044 266 1 128 *Income and costs from the sale of newsprint from the Spanish mill sold in Q2 2016 are 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 2017 / TEN-YEAR REVIEW, FINANCE 75 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 2016. Linghem Sawmill was acquired in April 2017. Figures for this sawmill are included from May 2017. 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 envi- ronmental 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 Paperboard, ’000 tonnes Market pulp, ’000 tonnes Printing paper, ’000 tonnes Wood products, ’000 m3 Own production of hydro and wind power, GWh Electricity production at the mills, GWh Raw materials Wood, million m3sub1) Purchased pulp, ’000 tonnes Thermal energy, GWh Electrical energy, GWh Water use, million m3,4) Plastic granules/foiling material, ’000 tonnes Chemicals, ’000 tonnes5) Filler, pigment, ’000 tonnes5) Emissions to air, tonnes6) Sulphur dioxide (counted as sulphur, S) Nitrogen oxides Particulates Fossil carbon dioxide, ’000 tonnes Biogenic carbon dioxide, ’000 tonnes Emissions to water, tonnes6) AOX (chlorinated organic matter) Nitrogen Phosphorus COD (organic matter), ’000 tonnes Suspended solids (SS), ’000 tonnes By-products, ’000 tonnes To energy production, internally/externally Utilised or for recovery7) Tall oil8) Waste, ’000 tonnes Hazardous9) Sent to landfill (wet) Energy supplies Branches, treetops and peat, GWh10) Electrical and thermal energy, GWh11) 1) At Group level, wood consumption is computed net, taking into account internal deliveries of chips from the sawmills to the nearby mills. 2) Of which 4 615 GWh from production at mills from recovered liquors, bark and wood residues, 1 132 GWh from the TMP process at Braviken Paper Mill and Hallsta Paper Mill which generates thermal energy that is recovered and used in pro- duction, and 352 GWh from natural gas, oil and purchased thermal energy. 3) Of which 2 377 GWh from renewables and 1 610 GWh from nuclear. Emissions of fossil carbon dioxide from production of purchased electricity totalled 113 tonnes. 4) Almost 100 per cent use of surface water from lakes and watercourses. 5) 100 per cent active substance. Total quantity of commodities was 227 000 tonnes for chemicals and 206 000 tonnes for filler and pigment. 6) Relates to emissions at facilities. 7) By-products used, for example, as filling material, construction material or for the production of soil products. 8) For delivery to the chemical industry. 9) Hazardous waste is dealt with by authorised col- lection and recovery contractors. Certain fractions of the waste are recovered. In 2017, Holmen dealt with oil-containing waste from vessels that docked at two of its own ports. Such waste is included in the figures for hazardous waste. The volume of this waste in 2017 totalled 627 tonnes. 10) Branches, treetops and peat delivered from Holmen’s land to external energy producers. 11) For 2017: 138 GWh of electrical energy supplied from the mill at Workington to the local commu- nity. 212 GWh of thermal energy from Iggesund Mill and Braviken Paper Mill to Iggesund Sawmill and Braviken Sawmill. A total of 16 GWh thermal energy from Hallsta Paper Mill and Iggesund Mill was supplied to the district heating network of the local communities. 2017 2016 2015 2014 2013 530 54 1 088 827 1 169 621 5.63 79 6 0992) 3 9873) 73 2.9 147 146 48 907 30 73 1 545 48 177 14 20.1 2.8 995 202 14 1.8 1.8 116 366 503 56 1 176 776 1 080 784 5.36 70 6 375 3 949 70 2.6 151 148 41 960 39 124 1 539 52 208 14 20.4 3.2 872 270 13 2.2 16 155 380 502 56 1 287 734 1 441 781 5.10 79 6 288 3 994 68 2.5 138 146 52 891 48 180 1 441 57 226 19 21.0 3.3 823 303 12 1.9 13 230 348 500 67 1 325 742 1 113 740 5.16 75 6 230 4 067 74 2.1 146 147 57 1 181 29 126 1 551 54 203 19 20.4 3.6 824 296 13 1.6 5.6 275 305 478 50 1 545 710 1 041 769 5.25 99 6 451 4 420 77 2.6 146 178 91 1 557 52 254 1 449 47 215 15 20.4 4.3 885 367 13 2.4 12 294 199 76 HOLMEN ANNUAL REPORT 2017 / FIVE-YEAR REVIEW, SUSTAINABILITY 1) The high costs stated for 2013–2014 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 man- agement, 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 12 per cent of its productive forest for environ- mental reasons and thus refrains from harvest- ing around 12 per cent of the potential volume. The annual loss of income in 2017 is estimated at SEK 62 million. 5) Relates to permanent employees. 6) Relates to permanent and temporary employees. 7) No industrial accidents with a fatal outcome occurred during the year. 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) 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 accidents7) 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 2017 2016 2015 2014 2013 44 20 12 137 62 55 8 14 182 71 12 18 12 208 101 26 320 10 169 70 122 300 14 178 84 2 976 19.3 7.4 46.0 2 989 19.3 8.8 46.3 3 315 19.4 9.0 46.8 3 359 19.2 7.9 46.8 3 718 19.3 7.7 46.8 4.2 2.0 49 20.7 25 8.0 0.9 2.6 4.4 5.9 4.2 2.0 48 19.0 27 6.9 1.6 2.4 2.9 5.4 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 5.1 8.8 8.8 6.5 8.4 94 77 94 67 97 68 97 70 98 72 HOLMEN ANNUAL REPORT 2017 / FIVE-YEAR REVIEW, SUSTAINABILITY 77 Definitions and glossary Definitions Capital employed Net financial debt plus equity, which corresponds to fixed capital plus working capital less the net sum of deferred tax li- abilities and deferred tax assets. Average values are calculated on the basis of quarterly data. Cash flow after investments Cash flow from operating activities less cash flow from investing activities. Cash flow yield Profit/loss before change in value in relation to the book value of biological assets. Used for the Forest business area. Debt/equity ratio Net financial debt divided by total equity. Earnings per share Profit 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 impair- ment losses, disposals, fire and restructuring. The effects of maintenance and rebuilding shutdowns are not treated as an item affecting comparability. Net financial debt Non-current and current financial liabilities and pension provi- sions, less financial assets. 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. Profit/loss before change in value Operating profit/loss before change in value, excl. items affecting comparability. Used for the Forest business area. 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. Glossary Bio co-location A co-location of different operations for more efficient use of raw materials and energy, amongst other benefits. 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 Measure of the paper’s volume. Paper of the same basis weight can have different thicknesses depending on the pa- per’s bulk. High bulk means thick, but relatively light, 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 demanding substances. 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. FSC® Forestry certification system. 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. 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. Im- portant 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. PEFC™ Forestry certification system. Phosphorus (P) An element contained in wood. Excessive phosphorus in the water may cause over-fertilisation (eutrophication) and oxygen consumption. Precautionary principle Persons who pursue an activity or take a measure, or intend to do so, shall implement protective measures, comply with restrictions and take any other precautions that are necessary in order to prevent, hinder or combat damage or detriment to human health or the environment as a result of the activity or measure. For the same reason, the best possible technology shall be used in connection with professional activities. 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. 78 HOLMEN ANNUAL REPORT 2017 / 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 at holmen.com. The annual report, together with year-end and interim reports, is published in Swedish and English and the reports are sent to the shareholders who have indicated their wish to receive them. They are also available on holmen.com. How to order printed materials: • holmen.com • Holmen AB, Group Sustainability and Communications, P.O. Box 5407, SE-114 84 Stockholm, Sweden • e-mail: info@holmen.com • telephone: +46 8 666 21 00 Calendar For 2018 Holmen will publish the following financial reports: 25/4 15/8 24/10 Interim report January – March Interim report January – June Interim report January – September 2019 31/1 Year-end report 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 graphical products with a surface finish. 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, basis weight and shade. Both Holmen TRND and Invercote G are made from fresh fibres that can be recycled up to seven times. The cover is printed on Invercote G 280 gsm. It is laminated, partially varnished and finished with a foil laminate. The insert is printed on Holmen TRND, 2.0 – 80 gsm. Layout: BYN Kommunikationsbyrå AB. Graphic production: Gylling Produktion AB. Photos: Fredrik Schlyter, Ulla-Carin Ekblom, Lars-Göran Abrahamsson 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 Building the future in wood Wood is a versatile material and the only renew- able construction material. Replacing steel and concrete with wood reduces carbon emissions, is resource-efficient, and saves time and money. Research also shows that people’s wellbeing is improved by living in wooden houses. We use the whole tree, turning the parts that do not become construction materials into paper- board and paper. Read more about how Holmen’s operations and products from the forest help to create a better climate on page 20. 

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