Holmen
Annual Report 2018

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 Environment Employees UN Sustainable Development Goals 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, glossary and references Calendar 3 4 6 10 12 14 16 18 20 22 24 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 2018 financial year. The annual report com- prises the administration report (pages 2–3, 8–9, 23–24, 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, 23–24, 30, 31 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 sustainability issues identified as key in view of the materiality analysis conducted by Holmen during the year. The sustainability work is reported in accordance with the Global Reporting Initiative’s GRI guidelines at Core level. The Sus- tainability Report comprises pages 8–9, 20–27, 30, 31, 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 Aktiebolag (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 0.5 million tonnes a year. Paper Paper for magazines, books and advertising. The two Swedish mills produce a combined total of 1 million tonnes per year. Wood Products Wood products for the joinery and construction industries. The annual production at three sawmills amounts to just under 1 million cubic metres. The by-products are used in the Group’s paperboard and paper mills. Renewable Energy In a normal year, the renewable energy production from hydro and wind power amounts to over 1 TWh. A strong result Operating profit excluding items affecting com- parability increased by SEK 310 million to SEK 2 476 million as a result of higher profits from forest and wood products. Return on capital employed increased to 10 per cent. The financial position has been further strengthened, while at the same time additional forest holdings have been gained through acquisitions. Demand for raw material from the forest was high in 2018, with pric- es gradually rising. Despite difficult winter weather and fires over the summer, profit from the forest increased by just over SEK 100 million. Revenue from hydro power climbed almost SEK 50 million due to ris- ing electricity prices and a stepped reduction in property tax. Demand for paperboard grew solidly over the year, but profits dipped by SEK 75 million due to new capacity in the market increasing competition and making it difficult to pass on rising raw material costs to customers. The market situation for paper was good, with rising prices, but higher raw mate rial costs limited growth in profits to SEK 40 million. The wood products market was strong, with significant price increases, which drove up the profit from wood products by over SEK 160 million. Outlook. There is major competition for wood and the prices of imported wood in particular are high. Holmen is establishing new logistics solutions aimed at increasing the supply of wood from our own forests. Demand for paperboard is good, but competition has grown. Holmen intends to develop its position in the premium seg- ment, while also gradually ramping up production through targeted investments to eliminate bottlenecks. The market balance for paper is good, but structural demand is falling. Holmen’s aim is to capture mar- ket share by offering cost-effective alternatives to established products for books, magazines and advertising. Demand for wood products has seen strong growth over the past couple of years, but the market situa- tion softened towards the end of 2018, leading to price drops in some markets. Holmen’s ambition is to develop the wood products business based on a strong cost position and good control over the raw mate rial, not least through the ongoing investment in increased production at Braviken Sawmill. The water levels in Holmen’s reservoirs were slightly lower than normal by the end of 2018, which will restrict production in the first few months of 2019. Net sales and operating margin Operating profit/loss and return SEKm 20 000 16 000 12 000 8 000 4 000 0 % 20 16 12 8 4 0 SEKm 2 500 2 000 1 500 1000 500 0 16 055 15.4 13 14 15 16 17 18 9.7 % 10 2 476 8 6 4 2 0 13 14 15 16 17 18 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 3 000 2 000 1 000 0 2 500 1 005 1 092 13 14 15 16 17 18 0.5 0.4 0.3 0.2 0.1 0.0 Investments Dividend Cash flow before investments and change in working capital 0.12 13 14 15 16 17 18 Operating profit/loss* Business area, % Capital employed* Business area, % Key figures Net sales, SEKm Operating profit/loss, SEKm Operating profit/loss excl. items affecting comparability, 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 (FTE) 2018 16 055 2 382 2017 16 133 2 166 2 476 2 268 13.5 6.75* 9.7 2 286 1 005 2 807 0.12 2 955 2 166 1 668 9.9 6.5 8.7 2 509 644 2 936 0.13 2 984 7 9 13 45 26 Forest Paperboard Paper Wood Products Renewable Energy Total: 2 476 1 185 SEKm 689 SEKm 329 SEKm 246 SEKm 181 SEKm *Board proposal **2017 figures have been adjusted because of the share split (2:1) in 2018 ***Net after disposals and before changes in non-current financial receivables. * Excl. items affecting comparability and Group-wide 12 4 8 20 57 Total: 26 261 14 830 SEKm 5 316 SEKm 2 072 SEKm 927 SEKm 3 052 SEKm Forest Paperboard Paper Wood Products Renewable Energy *Excl. Group-wide HOLMEN ANNUAL REPORT 2018 / THE YEAR IN BRIEF 3 Dear shareholder 2018 was a favourable year for us as forest owners. Demand for raw material from the forest has risen steadi­ ly, driven by major expansions in the pulp and packaging industries across the Nordic region. Competition in the wood market became considerably tougher over the year with substantial price rises, which in turn drove up costs in our industry. Thanks to price rises for our end products, we have nevertheless managed to improve the Group’s profits by SEK 310 million and increase the return on capital employed to 10 per cent. 4 HOLMEN ANNUAL REPORT 2018 / CEO’S MESSAGE Customers and consumers are increasingly demanding sustain- able products and production methods. And we have a genuinely sustainable business. Strength in our own forest land The weather in 2018 was challenging for Swedish forestry. The begin- ning of the year was cold and wet with heavy snowfall, which hampered harvesting and led to a nationwide wood shortage. Then came a histori- cally hot and dry summer with extensive wildfires. Holmen was one of the forest owners hit, but thanks to fast and decisive damage limitation work, the fires will have no significant impact on our future harvests. The forest is extremely resilient. It can handle being managed and should be managed, not least for the sake of the climate. We are constantly working to improve our forest holdings. A prime example is the sale of a remote area of forest near the Norwegian bor- der, which was followed by the purchase of Långvind, a forest property located 30 km south of Holmen’s sawmill and paperboard mill in Igge- sund. This acquisition strengthens our control over the raw material and reduces the amount of transport required. Our ambition is to increase the forest holdings close to our plants, where opportunities for a good deal exist, but this process will take time since quality properties are hard to come by. The large-scale investments that have been made in pulp and pack- aging capacity in the Nordic region have shifted the balance in the wood market. Competition for local raw material in Sweden has grown and wood imports have become an increasingly important part of the raw material supply. Here at Holmen we are currently establishing rail-based logistics solutions that will enable us to supply more of our mills with raw material from our own forests in northern Sweden. As well as cut- ting our dependence on expensive imported wood, having our own train is also the key to developing our manufacturing while retaining control over raw material costs. With the ongoing expansion of Braviken Saw- mill, for example, we are in a position to step up production by 30 per cent without affecting the local raw material market. Our extensive land holdings are a valuable asset, not only because of the trees on the productive forest land, but also due to the other opportunities that our land has to offer. Our hydro power delivers fos- sil-free energy that can be steered towards times when it can be of most use. This is an excellent asset that we have built up over a long time, making full use of our land holdings. The expansion of wind power is another opportunity that is now gathering pace in Sweden. We will be actively working to get wind turbines built on our land, as they provide a good return and help with society’s transition to a renewable energy system. Growing demand for sustainable products The general public has quickly become aware of the enormous problems that plastics pose in our oceans and the issue has climbed high up the political agenda. Interest in reducing the plastic in consumer goods pack- aging has also risen dramatically, as we have noted in our dialogue with customers. Demand for paperboard is progressing well, but new capaci- ty in the market is increasing competition and making it difficult to pass on rising raw material costs to our customers. Alongside our structured cost-cutting work, our ambition is to gradually increase production as we grow with customers in the premium segment. Holmen has succeeded in shifting its business from newsprint to book and magazine paper. Although demand for printing paper is gener- ally falling, the segments that we have focused on remain comparative- ly stable. Over the year, we have been able to implement substantial price increases, which have more than compensated for rising raw material costs. The focus is now on ensuring good profitability for the long term by advancing our position in book and magazine paper towards prod- ucts that make the best use of fresh fibre. Wood construction has made great progress over the past few years and we are seeing an increased interest in building in wood. I am positive about future developments in this area, since building in wood has so many advantages and brings clear benefits for the climate and the envi- ronment. Prices have been on a strong upward trend and the year’s profit from wood products is historically high. We did, however, notice a slow- down towards the end of the year. With a strong cost profile and good access to raw material, we are confident that we will be able to further develop our wood products business even in a weaker market. The future is growing in the forest The issue of climate change is more pressing than ever and requires a complete shift in the way we live. More and more people are realising that managed forests and the renewable, fossil-free products that the for- est provides form a vital part of the solution. Customers and consumers are increasingly demanding sustainable products and production meth- ods. And we have a genuinely sustainable business. With our own pro- duction of renewable energy, resource-efficient mills and climate-smart products, I would say that Holmen is well placed to meet the needs of the future. Finally, I would like to thank Holmen’s employees for all their great work over the year. Particular thanks go to those who made such an invaluable contribution during the severe summer wildfires. Together, we are growing a sustainable future. Stockholm, 12 February 2019 Henrik Sjölund President and CEO HOLMEN ANNUAL REPORT 2018 / 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 climate­smart building to renewable packaging, magazines and books. 6 6 HOLMEN ANNUAL REPORT 2018 / STRATEGY AND TARGETS 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 products are combined with large-scale production and good service. Paper Cost-effective alternatives The paper business will be developed by exploiting the properties of fresh fibre and offering cost- and resource-efficient alter- natives to traditional products for books, magazines and advertising. 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. 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 sustainable energy production and be managed with a focus on long-term profitability. HOLMEN ANNUAL REPORT 2018 / STRATEGY AND TARGETS 7 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 2018 was 9.7 per cent which means that, as in 2017, the target was exceeded. Capital structure Our financial position is to be strong in order to secure room for manoeuvre when making long- term commercial decisions. The target is to not exceed a debt-to-equity ratio of 0.5. In 2018, the debt/equity ratio was 0.12. 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 6.75 per share in 2019. The proposed dividend corre- sponds to 4.8 per cent of equity. Over the past five years the dividend has increased by 6 per cent annually. Return on capital employed, % Debt/equity ratio, times Dividend per share 10 8 6 4 2 0 9.7 0.5 0.4 0.3 0.2 0.1 0.0 0.12 13 14 15 16 17 18 13 14 15 16 17 18 Excl. items affecting comparability SEK 8 6 4 2 0 Proposal, SEK 6.75 4.8 13 14 15 16 17 18 % 8 6 4 2 0 Dividend Dividend as percentage of equity The historical dividends have been adjusted because of the share split (2:1) in 2018. 8 HOLMEN ANNUAL REPORT 2018 / 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 of our production is to be reduced by phasing out fossil fuels and increasing the production of 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 16 per cent to date, with harvesting up 23 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 the base year 2005. The proportion of company-generated renewable electricity in 2018 amounted to 45 per cent. Volume of standing timber, m3 growing stock per hectare productive forest land +1%/year 1948 1965 1988 2000 2020 2040 1955 1975 1993 2010 2030 2050 160 120 80 40 0 Use of fossil fuels (base year 2005),% Renewable electricity production relative to electricity use (base year 2005), % 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 18 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Assessment of tax Forecast HOLMEN ANNUAL REPORT 2018 / STRATEGY AND TARGETS 9 Active and sustainable forestry Holmen’s forest holdings are the foundation of our business. Active and sustainable management of the forest boosts its growth and the opportunities for harvesting. As well as being a stable source of revenue, the forest brings major climate benefits by capturing and storing carbon dioxide and pro- viding the industry with renewable and fossil-free raw material. Strength in our own forest Holmen’s forests cover 1.3 million hectares, of which a little over a million hectares con- sist of productive forest land. The strategy is to increase the revenue from and future value of the forest holdings through active and sustain- able forestry with a clear focus on costs. As one of Sweden’s biggest landowners, we are large- ly able to supply Holmen’s Swedish production units with renewable raw material from our own sources. Economies of scale and efficient logistics give us a strong position in the wood market, which contributes to the Group’s com- petitiveness. Growing forests create value The growth of the forest and its value are dependent to a large extent on how the forest is managed and how much is harvested. Holmen’s annual harvesting is governed by a long-term plan based on forest inventories that are con- ducted every 10 years. In the latest plan from 2011, the annual harvest is forecast to grow from today’s 3.0 million m³sub to 3.5 million m³sub by 2050, while the volume of standing timber is expect- ed to rise from 122 million m³ to 160 million m³ growing stock, solid over bark. The volume of standing timber is thus growing by 1 per cent per year. Social benefit. Forestry is of significant regional importance. It creates employment in rural areas and enables many people to live and work outside the major urban regions. The construction and maintenance of forest roads for management and harvesting activities also 10 makes it easy to get out into the countryside and travel between different areas. Climate benefit. Active forestry enables us to create climate benefits on numerous fronts. A managed forest combats the greenhouse effect, since younger trees absorb significantly more carbon dioxide than older forest, where growth has tailed off. In addition, the larger the area managed, the more carbon dioxide is captured. Furthermore, the benefit to the climate becomes many times greater when the forest’s renewa- ble products replace fossil materials. Forest that is not managed does not deliver anywhere near the same long-term benefits for the climate, not least because there is no substitution of products that are harmful for the climate. Forest matters. The significance of forest- ry for both the climate and the Swedish econo- my makes it an issue that matters to many peo- ple. Holmen and other industry players have joined forces to make politicians, authorities and the general public aware that the forest is vital with regard to the climate and that active forestry is the very foundation of an emerging bioeconomy. Forestry constantly developing Under Holmen’s active forest management, the volume of standing timber is built up over a period of 70–90 years, with a new growth cycle beginning after harvest. The most important silviculture measures come in the years imme- diately after harvest, when the soil is prepared and the land is reforested through planting or sowing with fortified material. The forest is cleaned and thinned in order to select trees with the best potential for continuing their growth. Around 10–30 years before the forest is harvested, it can be fertilised to further boost growth. Holmen’s forestry is certified accord- ing to PEFC™ and FSC® and all the wood is traceable. Holmen’s nature conservation strategy sets out how we work to combine high growth with preserving biodiversity. We improve our methods and know-how on a continuous basis through collaboration with research organisa- tions and other industry actors. The aim is to ensure that all naturally occurring species are able to thrive in Sweden’s forest landscape. Investing in the future. Holmen invests around SEK 150 million a year in future growth through silviculture and fertilisation. Together, our two nurseries produce 35 million seedlings each year, with the majority planted on the Group’s land. At least two new trees are planted for every tree harvested. With active improvement measures, the new trees also grow faster than the old ones. Our nurseries use organic arginine instead of traditional nitrate-heavy fertiliser. Arginine is better at delivering nitrogen to the seedling than other fertilisers, where the nitrogen leach- es out more and contaminates the surrounding watercourses. In 2018, Holmen received funding from the Swedish Environmental Protection Agen- cy’s Klimatklivet initiative in order to replace the oil-fired boilers that heat the greenhouses at the nursery in Friggesund with district heat- ing. This switch, which is scheduled for 2019, will make the heating entirely fossil-free. Robust against climate change. Conifers have been on the planet for millions of years and are highly adaptable. Seeds for Holmen’s seedling cultivation are also selected to grow and thrive in a changing climate. A warmer cli- mate may, however, impact on the forest in var- ious ways: growth may increase in certain are- as while at the same time the periods of ground frost may become shorter, which makes har- vesting more difficult. Strong demand for forest raw material An active construction industry and a grow- ing interest in building in wood have led to greater demand for logs in recent years. Due to a strong trend for various types of packaging material and the recent large-scale investments in pulp mills, competition for pulpwood has also become tougher, leading to price rises. Holmen’s forest holdings Holmen’s Swedish industries Volume of standing timber, m3 growing stock per hectare productive forest land +1%/year 1948 1965 1988 2000 2020 2040 1955 1975 1993 2010 2030 2050 Assessment of tax Forecast 160 120 80 40 0 HOLMEN ANNUAL REPORT 2018 / FOREST Holmen’s forests 2018 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 122 million m3 growing stock, solid over bark * Analysis performed by the Swedish National Forest Inventory, according to the international definition of forest land: Land with an area of more than 0.5 hectares, a tree canopy cover of more than 10 per cent for trees with a minimum height of 5 metres at maturity. ** Forest land that on average can produce 1 m3 growing stock, solid over bark per hectare and year (on average during the growth period of the forest stand). Control over the raw material The acquisition of Långvind forest holding in autumn 2018 was a natural step in Holmen’s strategy to increase the amount of forest we own near our mills. Långvind is a large, contiguous area of 5 700 hectares productive forest land located 30 km south of Holmen’s sawmill and paperboard mill in Iggesund. Proximity to our own production site makes the new acquisition an excellent addition to Holmen’s holdings in the region. In 2018, the decision was also taken to establish a climate-smart and cost-effective transport solution that uses rail to carry logs from our own forests in northern Sweden to our manufacturing sites in the south. With this level of control over the raw material, the strength of being a forest-owning manufacturing company becomes increasingly clear. Operating profit/loss and return Key figures SEKm 1 200 900 600 300 0 8.3 1 185 13 14 15 16 17 18 % 8 6 4 2 0 Operating profit/loss Return on capital employed 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 (FTE) Harvesting in own forests, ’000 m3sub 2018 2017 2 633 760 2 571 654 1 185 1 069 357 49 14 830 13 824 363 2 904 365 2 831 * Of which acquisition of forest properties SEK 317 million. 57% of the Group’s capital is employed in the Forest business area Rising prices Demand for raw material from the forest was high in 2018, with prices gradually rising. Despite diffi- cult winter weather and fires over the summer, prof- it from the forest increased by just over SEK 100 million to SEK 1 185 million. This profit makes up almost half of the Group’s earnings. In addition, our own forests provide the basis for the supply of wood for our own production, which has been increasing- ly important over the past year amid greater compe- tition for raw material. 11 HOLMEN ANNUAL REPORT 2018 / FOREST Leading position in the premium segment Holmen is a market leader in the manufacture of 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 products. Customer-led product development creates strong brands Holmen markets paperboard under two brands – Invercote and Incada – which are produced at our paperboard mills in Iggesund, Sweden and Workington, UK respectively. With its high and consistent quality, the paper- board ensures stable results in the customer’s production process. In 2018, Invercote and Incada were named Europe’s two most valua- ble paperboard brands in market analyst Opti- com’s regular survey of converters. Tailored to specific needs. Products are con- stantly being developed in close collaboration with customers, in order to meet the ever-grow- ing demand for custom packaging solutions. The longstanding relationship with Apple is one such example. The collaboration began in 2005 and has since 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 and have a deep understand- ing of customers’ needs and wishes. This ena- bles 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 facil- ities 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 products with unique properties Both Invercote and Incada are manufactured using fresh fibre, which brings multiple prod- uct benefits. Higher strength, better brightness and a neutral effect on smell and taste in con- tact with food are just a few of the properties that add clear value to the end product. The addition of fresh fibre is necessary to keep the recovered fibre ecocycle going, since wood fibre can only be recycled a limited num- ber of times before it wears out and ends up as biofuel. The inherent properties of fresh fibre make it possible to manufacture attractive and functional packaging solutions that offer an excellent substitute for environmentally harm- ful packaging based on fossil raw materials. Sustainable production. Both of Holmen’s paperboard mills earned the highest marks for sustainability in a review that analysis firm EcoVadis conducted in 2018. This puts both paperboard mills among the top one per cent of all companies evaluated by EcoVadis. Both mills hold chain-of-custody certification and all the wood raw material comes from sustain- ably managed forests. The plants are largely self-sufficient in renewable thermal energy. Iggesund Mill forms a bio co-location with Iggesund Sawmill, ensuring that every part of the tree is put to use on site. Wood chips from the sawmill are used as raw material for the paperboard production, while bark and wood shavings are used as biofuel to produce 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. Two strong trends in the packaging market are the drive to reduce impacts on the climate and the drive to avoid plastic packaging that contributes to pollution of the oceans. This is leading to the phasing out of fossil packaging materials such as various kinds of plastic. 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 mar- kets. 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 particular growth in markets with an emerging middle class and rising living stand- ards, 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 12 HOLMEN ANNUAL REPORT 2018 / PAPERBOARD perfect 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 sheet- ing in Taiwan. North America. Holmen is growing in the premium segment, with a greater presence and a better service level. Thanks to warehousing and sheeting in three strategic locations, local distribution and short delivery times are now offered from coast to coast. European paperboard market 2018 0.5 2.4 e c i r P 2.4 3.6 Million tonnes SBB Prestige products for graphical printing, perfumes, confectionery and tobacco. FBB Confectionery, pharmaceuticals, 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 material: Softwood and hardwood pulpwood. Workington Mill Products: Multi-layered paperboard, surface layer of chemical pulp, core of mechanical pulp (FBB). Brand: Incada. Raw material: Spruce pulpwood and purchased sulphate pulp. Paperboard products replacing plastic Replacing plastic with renewable materials is a clear trend, not least in the packaging industry. Replacing fossil plastic materials with paperboard cuts our customers’ carbon footprint while also reducing the amount of plastic that can end up polluting the natural environment. As companies begin to look at packaging with more environmental awareness, they are also realising that it is possible to reduce their environmental impact in other areas too, such a gift cards. IKEA and SF Bio are two companies that have opted to change the material in their gift cards – from plastic to paper- board from Holmen. The Invercote paperboard card functions well in the card manufacturers’ processes and shows that it is perfectly possible to switch a whole product category to a sustainable alternative. The transition means less plastic waste, plus 97 per cent lower carbon emissions from the cards. Operating profit/loss and return Key figures SEKm 1 000 750 500 250 0 % 20 689 15 12.4 10 5 0 13 14 15 16 17 18 Operating profit/loss excluding items affecting comparability Return on capital employed, excluding items affecting comparability Net sales, SEKm Operating profit/loss excl. items affecting comparability, SEKm Investments, SEKm Capital employed, SEKm Average number of employees (FTE) Deliveries, ’000 tonnes 20% of the Group’s capital is employed in the Paperboard business area 2018 2017 5 785 689 5 526 764 471 5 316 1 346 525 375 5 433 1 383 526 Higher raw material costs Demand for paperboard progressed well over the year, but profit fell by SEK 75 million to SEK 689 million as it was not possible to pass on rising raw material costs to customers, owing to increasing competition. Production was established at a higher level and Holmen advanced its position in the premium segment for packaging. An ongoing cost-cutting programme includes reducing the workforce by 150 people. HOLMEN ANNUAL REPORT 2018 / PAPERBOARD 13 Innovative paper products using fresh fibre By refining and exploiting the unique properties of fresh fibre, Holmen is able to offer sustaina- ble and resource-efficient paper products for books, magazines and advertising. The focus lies on securing and constantly develop- ing a profitable business that can be sustained over time. Fresh fibre creates sought-after products Holmen is an industry leader in the deve l- opment of new products based entirely on fresh fibre, using its unique properties to challenge traditional alternatives. In contrast to recovered fibre products, fresh fibre pro- duces paper grades with a naturally high brightness that lifts text and images, and with high bulk – paper that is thick but light at the same time. This means that the customer gets more paper with the same feel, but without the higher costs. A lighter paper also leads to lower distribution costs. Efficient production units, continued spe- cialisation and a strong marketing organisa- tion will see Holmen strengthen its position in existing and new markets. Customers around the world include publishers, printing firms and retailers looking for resource-efficient paper solutions with a focus on bulk, bright- ness and overall feel. We take a long-term approach in work- ing to meet customer demand and create profitable segments for our product brands in three product areas: books, magazines and advertising. Investments and high utilisation of capacity allow us to keep production efficient and flexible in order to meet varied demands. brand and the introduction of Holmen VIEW Matt, we are able to offer wood-containing paper with high whiteness and opacity, plus practically unbeatable image reproduction. Book paper. Holmen BOOK is a carbon- neutral paper with high bulk that helps customers to achieve cost-efficiencies in both production and distribution. Publishers 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, bulky papers create opportunities for retailers seeking an attractive overall cost profile – either in the form of pure cost savings for both paper and distribution, or through the option of stepping up the format, numbers of pages or print run, without adding to the cost. Sustainability at every stage Our papers are manufactured using wood fibre from sustainably managed forests and are produced at two Swedish mills, Braviken and Hallsta. 100 per cent of the wood raw material is used in the resource-efficient mills. Hallsta Paper Mill has almost zero emis- sions of fossil carbon dioxide. The mill’s energy solutions include recovering heat from the wastewater and the paper machines, selling the bark to heating plants and composting the sludge to create topsoil. Braviken Paper Mill and Braviken Sawmill make an energy-efficient bio co-location. The paper mill receives raw material in the form of wood chips from the sawmill, which in turn is supplied with energy and heat from the mill. Surplus bark and wood shavings are sold for the production of renewable energy. The majority of the products can be produced at both mills, which ensures highly reliable deliveries. Favourable locations in terms of logistics mean short wood transport distances, and the mills are close to ports with good capacity and efficient handling. 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 forever. After a limited number of times, the fibres are exhausted. The ecocycle therefore needs a constant injection of fresh fibre from the forest. Environmental and chain- of-custody certification enables Holmen to ensure that our products always come from sustainably managed forests. Magazine paper. Holmen EPIC, Holmen UNIQ, Holmen VIEW and Holmen TRND provide a broad range of cost-effective maga- zine papers that challenge coated and woodfree grades. With the new Holmen EPIC product Successful transition creating demand Our successful transition from newsprint to book and magazine paper has reinforced Holmen’s competitiveness and generated high 14 HOLMEN ANNUAL REPORT 2018 / PAPER demand for our products. Targeted investments have opened up increased capacity in selected product areas and we are developing our position in a challenging market through a keen focus on employees, processes and unique product properties. A changing magazine market. Holmen is continuing to grow in a magazine market that is undergoing major change. With publishers reviewing their costs as circulations and adver- tising revenues shrink, our resource-efficient uncoated product alternatives have proven a great success. Stable book paper market. The market for book paper has remained on a positive tra- jectory in Europe and Holmen BOOK is the leading wood-containing product for paper- backs and hardback books. Our strong focus on quality and service has helped us to steadily capture market share. Our sales also continued to grow globally, with the products now estab- lished in both Asia and Latin America. Printed advertising for retailers. Direct mail is still considered a vital communications chan- nel for driving customers into physical stores. Since the business model for retailers is based on broad and high-frequency exposure to the end user, their needs have primarily been based on low overall cost (bulk and grammage). We have continuously developed products that meet these requirements. 100 75 50 25 0 Production, % 89 11 13 14 15 16 17 18 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. Product development with higher whiteness The newly launched Holmen EPIC and Holmen BOOK Fine, papers that represent a serious challenge to woodfree alternatives when it comes to whiteness, are the latest examples of how we turn fresh fibre into innovative, sustainable and resource-efficient paper products. Wood-containing paper has a much better cost profile than the woodfree alternatives right from the start, and Holmen’s thick but light papers make it possible to reduce the grammage without losing that all- important feeling that the paper conveys. The combination of high bulk and a whiteness and brightness that are unique for a wood-containing paper make these products a cost-effective choice with unparalleled image reproduction – perfect for textbooks, magazines, direct mail and notebooks. Operating profit/loss and return Key figures 2018 2017 SEKm 400 200 0 -200 -400 14.7 329 13 14 15 16 17 18 % 16 8 0 -8 -16 Operating profit/loss excluding items affecting comparability Return on capital employed, excluding items affecting comparability Net sales, SEKm Operating profit/loss, SEKm Investments, SEKm Capital employed, SEKm Average number of employees (FTE) Deliveries, ’000 tonnes 5 571 329 173 2 072 860 1 036 5 408 288 141 2 193 866 1 117 8% of the Group’s capital is employed in the Paper business area Continued product restructuring The market situation for paper was good in 2018, although rising prices were largely offset by high- er raw material costs. Profit increased by just over SEK 40 million to SEK 329 million and the return on capital employed rose to 15 per cent. The product mix improved, with an increased proportion of book and magazine paper. HOLMEN ANNUAL REPORT 2018 / PAPER 15 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 oth- er forest owners, ensuring an efficient logis- tics chain from forest to sawmill. The decision to establish a rail-based transport solution that will carry logs from Holmen’s forest holdings in northern Sweden down to Braviken Saw- mill strengthens our control over the raw mate- rial supply. 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. Efficient, large-scale production Modern sawmills with a high technological level and gradually expanding value-add- ing processing are delivering a stronger prod- uct range. Investing in optical log sorting has brought greater precision, efficiency and vol- umes to Iggesund and Linghem Sawmills. With customer-centric working methods, Holmen is building a platform for long-term and prof- itable customer relations with the capacity to meet demand in different wood product mar- kets. Proximity to the raw material combined with efficient wood purchasing is a key fac- tor for profitability, while competitiveness is underpinned by the fact that production is co-located with the Group’s paperboard and paper mills. Holmen’s sawmills are strategical- ly located to benefit from a transport network that reaches around the globe by rail, road and not least sea. A large proportion of the prod- ucts are transported by ship. Investment in Braviken. In late 2018, the decision was taken to invest in increased pro- duction at Braviken Sawmill. Since it opened in 2011, the sawmill has been through sever- al stages of augmentation. The next step in the mill’s development is now being taken with an investment in dryers and a new trimming saw for sorting, which will increase capacity by 150 000 m³. 2018 also saw the opening of the wood treatment plant at Braviken Sawmill, which now delivers pressure-treated wood direct- ly to builders’ merchants. This category forms a vital and steadily growing component of the product range at Swedish builders’ merchants. Positive market trend Holmen manufactures and supplies high-qual- ity wood products to joinery and construction industry customers, mainly in Scandinavia, the UK, the rest of Europe, the Middle East and North Africa. 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 for several years. Demand for wood products is currently strong in all major mar- kets, although a slowdown was noted towards the end of the year. Construction market driving development. For a long time, the rise in the use of wood in Sweden has largely been attributable to reno- vation work and extensions. Now demand is increasingly being driven by the construction of new homes, which in turn is affected by pop- ulation growth, urbanisation and the aim to build sustainable cities. There is great poten- tial for growth, mainly in high-rise buildings, and the proportion of housing built in wood is expected to rise as the capacity for industri- al building in wood is expanded. New wood building techniques are also under develop- ment, which could lead to a further increase in demand. Wood products for climate-smart building Holmen supplies wood products to the joinery and construction industry and to builders’ mer- chants. The business is being developed by increasing the value added and making better use of the wood raw material in combina- tion with large-scale production. Building the future in wood Wood is a strong and versatile material and the only construction material that is renewable. Over the lifetime of the trees, they capture car- bon dioxide, which then remains stored in the wood products that we manufacture. Build- ing in wood is therefore significantly better for the climate than building in concrete and steel. Manufacturing concrete and steel requires sub- stantial amounts of energy and generates size- able emissions of carbon dioxide, in contrast to products from the forest, which instead deliv- er carbon storage. In addition, the whole chain from manufacture to transport is much more energy-efficient and cost-effective. We thus cre- ate benefit for the climate on multiple fronts. The wood treatment plant at Braviken Sawmill came on stream in spring 2018. 16 HOLMEN ANNUAL REPORT 2018 / 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 joinery products. Raw material: Pine saw logs. Linghem Sawmill Products: Spruce and pine wood products for joinery and construction. Raw material: Spruce and pine saw logs. Wood offers major advantages Several independent studies have shown that the use of wood in the structure of buildings has major climate benefits com- pared with other construction materials. A study by Linköping University presented calculations showing that an apartment building in wood has 40 per cent lower carbon emissions than a concrete building. The study took into account raw material extraction, transport and the production of the construction material. The researchers also state that if the effect of the carbon that is stored in wooden buildings is included in the calculation, the climate benefit of building in wood doubles. The wood products that Holmen supplied to the construc- tion sector in 2018 represent the storage of 720 000 tonnes carbon dioxide, which will remain bound in products with a lifetime in excess of 50 years. By building in wood more often, we can significantly reduce emissions from the construction sector while also building more quickly and cheaply, not to mention creating more jobs in the rural areas where the forest raw material is located. For references, see page 78. Operating profit/loss and return Key figures 2018 2017 SEKm 300 200 100 0 -100 246 27.1 13 14 15 16 17 18 % 30 20 10 0 -10 Operating profit/loss excluding items affecting comparability Return on capital employed, excluding items affecting comparability Net sales, SEKm Operating profit/loss, SEKm Investments, SEKm Capital employed, SEKm Average number of employees (FTE) Deliveries, ’000 m3 1 747 246 76 927 261 828 1 562 80 100 862 251 852 4% of the Group’s capital is employed in the Wood Products business area High return The wood products market has been strong for a few years now and prices have risen significantly. Profit for 2018 increased by just over SEK 160 million, providing a return on capital employed of 27 per cent. Direct sales to Swedish builders’ merchants rose thanks to the new wood treatment plant at Braviken Sawmill. HOLMEN ANNUAL REPORT 2018 / WOOD PRODUCTS 17 Green energy from water and wind Holmen’s production of renewable hydro and wind power contributes to a sustainable energy supply and provides a good revenue stream over time. Strength in own energy assets In a normal year Holmen produces over 1 TWh of renewable hydro and wind power. Together with the renewable electrical energy that is produced at the Group’s mills, this equates to nearly 50 per cent of Holmen’s overall energy consumption. Hydro power provides a reliable electricity supply. Holmen’s energy production is dominated by the renewable hydro power from our 21 wholly or partly owned power stations located on the Umeälven, Faxälven, Gideälven, Iggesundsån, Ljusnan and Motala Ström rivers. In contrast to other renewable energy sources, hydro power is uniquely controllable. Energy 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 climate impact of the operation is also marginal, with minimal emissions. Another benefit of hydro power is service life. A hydro power station can deliver energy for a very long time. The investment required is relatively small compared with other types of power and the operating and maintenance costs are low since the plants are almost entire- ly automated. Overall, hydro power brings major benefits to society as part of the move towards a totally renewable electricity system. Wind power a supplement. Wind power is the fastest growing energy type in the EU and the third largest source of electricity in Sweden. Land-based wind power is now a mature tech- nology and electricity generation costs are among the lowest of all the options, including generation using fossil fuels. Expansion is being driven by rapid developments in the wind power industry and a new generation of more efficient wind turbines. As a major landowner, Holmen has great potential to play its part in the expansion of wind power. Sweden switching to renewables As part of its commitment to the UN’s 2030 Agenda for sustainable development, the Swedish Government has decided to implement the biggest investment in the environment and the climate in Swedish history, setting a target that Sweden’s energy production will be based 100 per cent on renewable energy by 2040 and the nation will be entirely carbon neutral by 2045. As the owner of hydro power stations and wind farms, Holmen has a key role to play in this transition – through our direct provision of fossil-free energy, but also by making our knowledge and our extensive land holdings available to other actors so that they can establish themselves and grow in the energy market. Most of Sweden’s current electricity gene- ration is based on nuclear and hydro power, each of which account for around 40 per cent of total production. With average energy consumption rising, the population growing and the planned partial decommissioning of nuclear capacity, renewable energy production is set to take on increasing importance in the future. Volatile energy market. In 2018, the price of electricity climbed to much higher levels than have been seen for many years, averaging out at SEK 460 per MWh. This was caused by dry weather, which led to a poor hydrological balance – low reserves of water and snow in the Nordic countryside. Restrictions on nuclear power due to audits, plus rising prices for emission allowances and imported coal- based power contributed to the price hike. Sweden’s electricity production, % 9 11 40 40 Hydro power Nuclear power Wind power Thermal power 40% 40% 11% 9% Wind analysis of Holmen’s land holdings More effective wind turbines and low operating costs are driving the expansion of wind power in Sweden. This is also creating the conditions for viable expan- sion of wind power on Holmen’s land. In 2018, we therefore conducted a survey and wind analysis of the Group’s land holdings to identify favourable areas for future wind power installations. The analysis shows that about twenty sites are judged suitable for wind farms. Holmen already has permits for approximately 900 GWh of wind power in Västerbotten and Västernorrland. An application for an additional 300 GWh in Västerbotten is under review. 18 HOLMEN ANNUAL REPORT 2018 / 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 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 Year of construction 1957–58 1962 1985–96 –”– –”– –”– –”– –”– 1961–74 –”– –”– –”– 1915 2009 1949–75 –”– –”– –”– –”– 1990 1927 Owner Varsvik Wind farms Varsvik *Refers to normal production Holmen’s production share GWh* 83 % 50 Year of construction 2014 2018 2017 319 181 22 3 052 12 315 135 26 3 115 11 1 145 1 169 Rising profits Low rainfall and higher prices for emission allowances contributed to high electricity prices in Sweden in 2018. Profit rose by almost SEK 50 million to SEK 181 million thanks to higher electricity prices and a gradual reduction in property tax, taking the rate down to the same level as for other energy types. Operating profit/loss and return Key figures SEKm 500 375 250 125 0 % 16 12 8 4 0 181 5.8 13 14 15 16 17 18 Operating profit/loss Return on capital employed Net sales, SEKm Operating profit/loss, SEKm Investments, SEKm Capital employed, SEKm Average number of employees (FTE) Own production of hydro and wind power, GWh 12% of the Group’s capital is employed in the Renewable Energy business area HOLMEN ANNUAL REPORT 2018 / RENEWABLE ENERGY 19 How we grow a sustainable future We are operating in a rapidly developing and changing world. This prompted us to conduct an in-depth stakeholder analysis in 2018, which showed that our great- est opportunity to influence and create a sustainable future can be summarized three areas. The Holmen Sustainability Management Group, an offshoot of Group management, is charged with validating and quality assuring work on sustainability with the sup- port of sustainability experts from all the business areas. We contribute to a better climate The forest is a valuable resource that binds carbon and provides a renewable alternative to fossil material. Young, growing trees bind more carbon than old trees whose growth has slowed down. Our goal is for the growth of our forest stands to increase, provid- ing higher future harvests and higher carbon absorption. We plant at least two new trees for every tree harvested, and because our annual harvest equates to 80 per cent of the growth, the amount of wood in our forests increases year on year. The growth of the forest and its value largely depend on how it is managed. We practise active silvicul- ture, encouraging biodiversity, to produce healthy forests, rich in plant and animal species. This ensures that we pre- serve important natural assets for future generations. Phasing out fossil fuels and increasing the production of our own renewable electricity see us reducing the climate impact of our production. We work actively to cut mate- rial, energy and water consumption, minimise emissions and use waste products to produce renewable energy. The geographical locations of our mills and sawmills mean we can transport goods by sea and rail, cutting emissions to air, land and water. We help our customers in their sustainable business The key to profitable, long-term, and sustainable business is our climate-smart products, which form part of the transition to an economy in which bio-based raw materials and products replace fossil-based ones. Our customers can be confi- dent in the knowledge that we protect the forest we manage and that our produc- tion methods are sustainable. We are transparent about our working methods and our customers know the origin of our products. They can also have confidence in our business relationship. Holmen has been here for hundreds of years and has its sights set on the future. Many of our customer relationships have developed into close partnerships in which we work together to meet changing needs in an increas- ingly complex and global world. Despite our long-term focus, we know that a better tomorrow demands inno- vative thinking today. This is why we focus on developing smart solutions and a forward-thinking product offering. At the same time, we work active- ly with other industry actors to make decision-makers, authorities and the general public aware of the forest’s importance for the climate and that sustainable forestry is the very foundation of the emerging bioeconomy. We are committed to our employees and our local communities It takes a healthy workplace to create a sustainable future. We therefore work actively to attain gender equality and inclusivity, promote diversity, combat discrimination and prevent accidents. We want our employees to develop and grow with us, which is why we focus on skills development through training programmes, take a positive view of employee initiative and encourage internal career moves. Forestry is also of significant regional importance. It creates employment in rural areas and in many cases enables people to live and work outside the big cities. Holmen has an important role as an employer in several locations, and our engagement and partner- ships help to create thriving local communities, which in turn helps us to attract and retain competent employees. The materiality analysis conducted in 2018 included interviews and workshops with about 50 stakeholders, such as employees, customers, investors, authorities, politicians, universities and voluntary organisations. A number of sustainability issues were identified as important to Holmen playing its part in the transition to a sustainable future. These form the basis of our three focus areas linked to economic, environmental and social sustainability. 20 HOLMEN ANNUAL REPORT 2018 / A SUSTAINABLE BUSINESS Circularity – integral to our business Growing, healthy forests, efficient management of raw materials and circular ecosystems are vital to our profitability. They are also the cornerstones of a genuinely sustainable business. We manage the forest preserving biodiversity Our products replace fossil-based products and can be recycled to produce recovered paper and energy Our growing forests capture carbon dioxide We use all the raw material Our mills and sawmills are resource and energy efficient We produce renewable energy We take care of the whole harvest Holmen’s two nurseries produce 35 million seedlings each year, with the majority planted on the Group’s own land. After 70–90 years, as growth slows and the forest’s capacity to absorb and store carbon has fallen, it is mature enough to be harvested. 80 per cent of the growth is harvested, which means that the amount of wood in our forests increases every year. About half of the harvest consists of large logs that are used to produce construction material. The narrower part of the tree and wood from thinning represents 45 per cent of the harvest and is used to manufacture paperboard and paper. The remainder comprises branches, tops, bark and sawdust, which are used to produce renewable energy. We saw as much wood as technically possible from the trees we harvest. Nothing goes to waste, everything is used. Circularity means that resources are used, reused and recycled to avoid final waste. Holmen owns and adds value to the forest by using renewable raw material to make climate-smart products in a business model that is almost entirely circular. Holmen’s forest management has chain-of-custody certification, which means that all the wood can be traced back to its origin in sustainably managed forests. Holmen manages its forests with as little environmental impact as possible through long-term, clear silviculture plans. We use the whole harvest in our sawmills and mills, in which production is largely based on fossil-free electrical and thermal energy. Since 2005, emissions of fossil carbon from the mills have fallen by 86 per cent and our own renewable energy production corresponds to almost half of Holmen’s total electricity consumption. Close collaboration with paperboard and paper recycling organisations means we take responsibility for the final stage of our value chain. By-products become new resources Our production plants are among the most resource-efficient in the world. Over the years, we have developed methods to effectively reduce our use of energy, water and chemicals, and to recover and re-use the waste that arises. For example, wood waste products from the sawmill are used to generate electrical and ther- mal energy in the mills, organic material from the water treatment process is used to make natural fertiliser, which is sold on, and steam from the mills at Iggesund and Braviken is used in the drying processes at the integrated sawmills. Distribution of by-products and waste, % 0.7 0.3 15 84 Division of the stem Wood – Planks and boards Chips – Paper pulp Bark – Bioenergy Wood shavings – Bioenergy To energy production, internally/externally Utilised or sent for material recovery Waste sent to landfill Hazardous waste 84 15 0.7 0.3 HOLMEN ANNUAL REPORT 2018 / A SUSTAINABLE BUSINESS 21 Active environmental work creates climate benefit Holmen’s work to contribute to a better climate has three overarching business objectives, which are presented on page 9. The aims are to increase growth in our forests, reduce the use of fossil fuel at our mills and increase the proportion of self-generated renewable energy. INCREASE GROWTH IN THE FOREST REDUCE THE USE OF FOSSIL FUELS INCREASE THE PROPOR- TION OF RENEWABLE ELECTRICAL ENERGY The volume of standing timber in Holmen’s forests is increasing by 1 per cent a year. Carbon dioxide is bound into the increase in volume. Based on Sweden’s official reports of greenhouse gases for forest and land in 1990–2018, uptake for Holmen’s forests and forest land is estimated at approximately 1.3 million tonnes per year. Over the foreseeable period, annual growth in Holmen’s forests is expected to exceed harvests, and an in- creasing amount of carbon dioxide will be bound in while harvesting of renewable forest raw material will increase. The measures to encourage growth that are estimated to have the greatest impact are increasing the use of improved seedlings and seeds in regeneration and limiting grazing damage. Extensive investments in bio-based energy pro- duction at the paperboard mills, and the adjusted energy strategy at the other mills have resulted in a reduction in fossil fuel use of 86 per cent since 2005. Emissions of fossil carbon dioxide from the mills have thus also fallen considerably, and amounted to 75 000 tonnes in 2018. Annual emissions of fossil carbon dioxide from forest machinery, manufacture of input goods and transport of raw materials and prod- ucts are estimated at just over 340 000 tonnes. Together with emissions from production facilities, this represents the negative climate impact of Holmen’s operations. Holmen produces renewable electricity in the form of hydro power and wind power, as well as bio-based electricity in our mills. The goal is to increase company-produced renewable electrical energy as a proportion of total electricity use by Holmen. By 2020 the target is to attain produc- tion equivalent to 50 per cent of Holmen’s total electricity usage. This proportion reached 45 per cent in 2018. Technical advances and a new generation of more efficient wind turbines create opportunities for the future establishment of wind power on Holmen’s extensive land holdings and thus higher production of renewable electricity. A carbon-positive business With the climate targets we have set, we see Holmen’s operations contribut- ing major climate benefits by reducing the amount of carbon dioxide in the atmosphere by just over 2.9 million tonnes while also contributing renewable forest raw material, climate-smart products and green energy. Greater use and development of the products of today and tomorrow based on forest raw material mean the positive climate effects will be even greater in the future. Holmen’s production of wood products in 2018 is equivalent to 720 000 tonnes of carbon dioxide stored in products with a lifetime of more than 50 years. Wood products also contribute a substitution effect when they replace climate-negative construction materials. The substitution effect for 2018 is estimated to amount to approximately 1 340 000 tonnes of carbon dioxide. 22 Key figures climate impact 2018 Emissions of fossil carbon dioxide (tonnes) Nurseries and forestry Input goods Production facilities Transport of raw materials and products Absorption of carbon dioxide (tonnes) Volume of standing timber and forest land Wood products for construction purposes Substitution of climate-negative construction materials Net, capture of carbon dioxide and substitution effect (tonnes) -26 100 -68 900 -75 000 -248 000 -418 000 1 300 000 720 000 1 340 000 3 360 000 2 942 000 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. The substitution factor used in the calculations comes from a study completed in 2010. Work is in progress in several industries to reduce the climate impact of construction material manufacture and use. An updated version of the previous study is expected to be published in 2019. For references, see page 78. HOLMEN ANNUAL REPORT 2018 / ENVIRONMENT Environmental permits 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 2018 2017 2000 2002 2014 2010 2003 1) Port activity at Skärnäs Terminal, alongside Iggesund Mill, is included in the environmental permit. In addition, operations subject to notification requirements take place at the production unit in Strömsbruk. The CDP CLIMATE PROGRAM is the name of an international federation that in 2018 represented over 650 institutional investors with assets totalling almost SEK 800 billion. Using information from more than 7 000 listed companies, CDP has built up the world’s largest database of climate information. This information is made available to support strategic business and investment decisions. Holmen has reported to the CDP Climate Program since 2007 and also to the CDP Forest Program since 2013. Surveys over the years have shown that Holmen has good management in place and a strategy to reduce the negative impacts of climate change. In the evaluation of forest management, Holmen has been placed in the group for good leadership that ensures sustainable use of the forest’s resources for several years now. Strategic choices and investments for the future have boosted Holmen’s sustainability profile and our capacity to tackle risks and opportunities in the field of climate and sustainability. For more information about our work on sustainability, see holmen.com. 2018 Holmen’s environmental responsibility For Holmen, environmental and energy concerns play a natural role in planning production and investments. Operations are characterised by resource-efficient use of renewable raw material and energy, and by protecting the environment, applying the precautionary principle. Energy, chemicals and fibre are recovered as far as possible, in order to minimise the environmental 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. 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 and 77. Holmen’s environmental work is char- acterised by constant improvement measures within the framework of certified environmen- tal and energy management systems (see page 77), which ensure compliance with legislation and requirements set by authorities. Respon- sibility for the management systems rests with the respective business area, as does environ- mental responsibility. Permits At the end of 2018 Holmen was running pro- duction operations that require environmen- tal permits at seven facilities. The permits spec- ify 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 facil- ities’ turnover amounted to 81 per cent of the Group’s net sales in 2018. The EU’s Industrial Emissions Directive (IED) from 2013 requires that pulp, paper and paperboard mills comply with tougher emis- sions requirements by October 2018. The envi- ronmental status of Holmen’s Swedish mills is good and the mills meet the new criteria. The mill in Workington has been granted a dero- gation whereby the mill is to have invested in measures to ensure that the emission require- ments for water are met by 2021. Iggesund Mill gained a new environmental per- mit in October 2018 with associated condi- tions regarding increased production of pulp and paperboard. At Braviken Paper Mill the production of bright products will gradually be stepped up. In 2018 the Land and Environment Court granted a temporary amendment to emissions require- ments in 2018–2020. The mill will invest in an additional treatment stage in the process. In 2018 Holmen gained a permit to build approximately 400 GWh of wind power pro- duction on Holmen land in Västerbotten. An application for a permit to build an addition- al approximately 300 GWh of wind power in Västerbotten is under examination. The Government adopted a decision on new environmental legislation mainly for hydro power in 2018. This legislation entered into force on 1 January 2019. The legislation means that hydro power operators will need to apply for a review under the Swedish Envi- ronmental Code before the end of 2039. It was also stated that the opportunities in EU law to set less far-reaching requirements that favour socially beneficial operations are to be exploit- ed to the full. In 2018 Holmen conducted studies in the watercourses in which we have wholly owned hydro power stations with the aim of produc- ing factual data on ecological status. The sur- veys show that the aquatic environment is bet- ter than the classification of the watercourses by the authorities would suggest. Exceedances and complaints The environmental manager within each operation 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. 32 (29) industrial incidents were reported by the mills to the supervisory authorities dur- ing 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. 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. This is a result of investments in bio-based energy production and energy savings at the mills. 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 received such green certificates in 2018. Discontinued operations In consultation with the environmental author- ities, studies are being conducted at contam- inated discontinued industrial sites where Holmen has operated in the past. In 2018, 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 two landfill sites, one in Kvillsfors and one at Hults Bruk. Remediation of land and buildings at the for- mer industrial site of a surface treatment plant in Iggesund took place in 2017. In 2018 the concluding phase of remediation work began, in which polluted groundwater will undergo a treatment process. 23 HOLMEN ANNUAL REPORT 2018 / ENVIRONMENT Employees with courage, commitment and responsibility Competent employees and a value-driven company culture are important to attaining our business objectives. Employees are the key to successful, long- term sustainable business. Holmen places great emphasis on ensuring their safety, delegating responsibility and stimulating a desire for personal growth and skills develop ment founded on the company’s core values. The Group works systematically to provide employees with opportunities to influence and develop operations through ongoing feedback and dialogue between manager and employee. HR is run both across the whole Group and at business area level. The Senior Vice President Human Resources is responsible for coordinating the work. Core values Holmen’s core values of Courage, Commit- ment and Responsibility are an important part of our corporate culture. The core val- ues guide us in our work and form a natural element of our processes and tools, includ- ing in appraisal talks, as a complement to the management by objectives model, and as a basis for the leadership programme. The val- ues are also used in employee surveys and in our processes to develop, retain and attract new talent. Health and safety in focus Health and safety is a priority for Holmen. The aim of our work in this respect is to achieve a pleasant, accident-free workplace for our employees and the contractors who work for us. Safety is consistently high on the agenda and all new employees are trained in health and safety. Work on health and safe- ty is constantly monitored at management level. Holmen carries out systematic Group- wide health and safety work in line with OSHAS 18000 (see page 77) and all our pro- duction units are certified, apart from Ling- hem Sawmill, which was acquired in 2017. Work on certification began that same year. The Group’s focus areas in 2018 were safe behaviours, communication, shared rules and health. In 2018 sickness absence was 4.1 per cent, which is on a par with previous years. Long-term sickness absence (over 60 days) is 1.6 (2.0) per cent. Equality With respect for human rights, Holmen works for a workplace climate that is founded in the equal value of all people. All employees must have the same rights, obligations and opportunities irrespective of their sex, trans- gender identity or expression, ethnicity, politi- cal opinion, union membership, religion or other belief, disability, sexual orientation, health status, age or family responsibilities. This is set out in Holmen’s Code of Conduct. A few events linked to the Code were report- ed during the year. All have been addressed in line with Holmen’s internal processes. Steps have been taken and no further action is required. 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 to improve our work on equality and actively combat dis- crimination. The forest industry has long been a male-dominated sector and the proportion of women remains relatively low. How ever, we are working to increase the proportion of women at all levels of the company. In 2018 women made up 20.3 (19.3) per cent of Holmen’s employees. Women account- ed for 40 (25) per cent of new employees and 20 (21) per cent of managers. Recruitment and development To maintain competitiveness over time, attracting and retaining the right employees is of the utmost importance. We ensure that Holmen continues to be a business with a focus on innovation and development and we work actively to identify current and future skills needs. Internally we invest in employee development at all levels, employee skills training programmes, leadership devel- opment and development programmes for specialists engaged in change projects. Ques- tions such as gender equality, product devel- opment and sustainability are important areas in improving our attractiveness to new talent. A ZERO VISION FOR ACCIDENTS The number of accidents per million hours worked fell from 5.1 in 2017 to 4.9 in 2018. The dominant causes of accidents are slips, trips, pinch accidents, cuts and lacerations. In the past few years we have successfully managed to reduce the number of accidents and we are taking a focused, long-term approach to maintaining and improving on this positive trend. The long-term vision is zero accidents. Some units have been at this level for more than a year. Industrial accidents with more than 8 hours of absence per million hours worked 20 15 10 5 0 13 14 15 16 17 18 Average number of employees (FTE) per business area, % 0.4 4 9 12 29 46 Forest Paperboard Paper Wood Products Renewable Energy Group-wide Total: 2 955 365 1 346 860 261 12 112 24 HOLMEN ANNUAL REPORT 2018 / EMPLOYEES Thriving rural communities Forestry has major regional importance and creates employment in rural areas. Silviculture has enabled many people 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. This means that Holmen contributes significant tax revenue in Sweden and in the other countries in which we operate. This sees us fulfilling a responsibility to society and we pay our taxes in line with the legislation and rules in force in all the countries in which we operate. We also choose to report this contribution to society on page 77. Ongoing dialogue with local communities and stakeholder organisations, and partnerships with higher education institutions and universities see us working for sustainable development. One example of such collaboration is the ‘Grow your income’ project, which seeks to increase the supply of biomass for the biofuel boiler at the mill in Workington by encouraging local farmers to grow energy crops. This project has generated a dialogue with a whole new stakeholder group, strengthening the mill’s local engagement. Besides creating a new source of income for local farmers, planting energy crops has had several positive side effects as the energy crops prevent flooding and increase local biodiversity. Sustainably managed forests are not only important from an environmental and economic perspective, they are also important for people’s wellbeing and a place for recreation, hunting and fishing. Holmen pays particular attention to forests that are valuable in terms of aesthetics and experiences, and forests that many people visit for outdoor pursuits, relaxation and exercise. HOLMEN ANNUAL REPORT 2018 / EMPLOYEES 25 Global contributions and local challenges Holmen is an export company and part of Sweden’s basic industries. With high carbon absorption and exports of climate-smart products, our contribution to sustainable development is global. The challenges and the direct impact we have on the environment and people are largely local. In 2015 the UN member states adopted the 2030 Agenda, a universal agenda that encom- passes 17 sustainable development goals (SDGs). These goals cover social, economic and environmental sustainability. We only have one planet and it is only by sustainable use of the Earth’s resources that humanity can survive. This is made clear by Johan Rockström and Pavan Sukhdev from the Stockholm Resilience Centre in their ‘wedding cake’ model, produced to show the importance of protecting the world’s resources to secure food supplies. The lowest level, the base, repre- sents goals linked to environmental sustaina- bility. The centre contains the social goals, with the economic ones higher up. The planet sets the boundaries and these are non-negotiable. Even if Holmen’s operations are more geared towards sustainable consumption than sustainable food supplies, the principle of the importance of sustainable management of the world’s resources remains the same. Sustaina- ble bio-based operations and innovation with- in the planet’s limits are crucial to combat cli- mate change and thus fundamental to attaining the social and economic goals. Holmen and the SDGs The basis of Holmen’s operations is active forestry where the growing forest absorbs car- bon and provides industry with renewable raw materials. The forest raw material is turned into products that bind carbon and can replace fossil- based plastic packaging and climate- negative construction material. We protect bio- diversity and we work actively to cut emissions to air and water. Although we have come a long way in our work on sustainability, chal- lenges still remain. Water consumption, trans- port and the right to manage our forests are key issues that Holmen, like other forest indus- try businesses, is actively monitoring and working on. Holmen’s mission is to create a sustainable future. We do this is by contributing to several of the UN’s Sustainable Development Goals. With carbon-positive operations, climate- smart products and a long-term environmental approach, our foremost contributions are linked to SDGs 13, 14 and 15. These are goals that are fundamental to all life on Earth. But our work cannot stand alone. For the climate and environmental benefits to be realised, our partnerships and relationships with customers and suppliers are central. For this reason, SDG 17, which covers implementation and partner- ship, is an important aspect of our work for a sustainable future. “At Holmen we are proud to be part of a sustainable bioeconomy and that our business creates benefits locally and globally. All the UN’s sustainable development goals must be attained to achieve sustainable development and Holmen’s work goes hand in hand with several of them. Our greatest contribution is on the SDGs relating to climate and the environment, which are also vital to a sustainable future.” Elin Swedlund, Sustainability Manager, Holmen Illustration based on a design by Azote Images (Jerker Lokrantz) for the Stockholm Resilience Centre. “ 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 principles and sets out the progress made. Work on the ten principles also helps to attain the UN Sustainable Development Goals. 26 HOLMEN ANNUAL REPORT 2018 / UN SUSTAINABLE DEVELOPMENT GOALS SDG: 13 CLIMATE ACTION Growth in Holmen’s forests exceeds har- vest, which means that large quantities of carbon are stored in our forests every year. Holmen’s wood products that are used as joinery and construction timber also contribute a substitution effect when used to replace climate-negative construction materials. Our investments in higher production of wood products create greater opportunities for sustain- able construction. We contribute towards a sustainable energy supply by produc- ing renewable energy in the form of hydro power and wind power. SDG: 14 LIFE BELOW WATER The environmental situation in the water outside Holmen’s mills has improved con- siderably over the past 40 years thanks to new process technology and technical water treatment measures. Holmen en- gages in industry-wide environmental research to investigate steps that lead to lasting environmental improvements. Replacing products made from plastic with paperboard products means we also reduce dependence on fossil raw mate- rials, while reducing the amount of plastic waste that can end up in the sea. SDG: 15 LIFE ON LAND Holmen’s aim is to ensure that all natural- ly occurring species are able to thrive in the forest landscape. We set aside or car- ry out natural nature conservation meas- ures on just over 20 per cent of our for- est land. We also restore the environ- ment at sites of discontinued operations, which has resulted in reinstating environ- ments that previously suffered negative impacts. Our products based on fresh fi- bre provide the recovered paper industry with a necessary injection of raw materi- als in the form of fresh fibre from sustain- ably managed forests in which biodiversi- ty is safeguarded. SDG: 17 PARTNERSHIPS FOR THE GOALS The climate and sustainability chal- lenges faced by our planet cannot be tackled by an individual company like Holmen alone. This is why we work with our suppliers and customers to meet the ambitions of the SDGs. In many cases the environmental benefit first manifests itself in our customers’ processes or products, making great- er cooperation to exchange knowledge and ideas central to attaining the sus- tainable development goals. HOLMEN ANNUAL REPORT 2018 / UN SUSTAINABLE DEVELOPMENT GOALS 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 gov- ernance report complies with the rules and instructions stipulated in the Swedish Code of Corporate Governance. Shareholders Holmen had 33 573 shareholders at year-end 2018. Private individuals with Swedish citizen- ship accounted for the largest category of own- ers with 31 586 owners. 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 Lundbergföretagen AB (corporate ID num- ber 556056-8817), whose registered office is in Stockholm, and Holmen. The Kempe Foun- dations constituted the second-largest owner and their holdings of Holmen shares amounted to 17.0 per cent of votes and 7.0 per cent of capital at the same date. No other individual shareholder 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 2018 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. The 2018 AGM approved an increase in the number of shares in the company by means of a share split. This resulted in each share, regardless of series, being divided into two shares (a 2:1 split) of the same series. The record date for the share split was 2 May 2018, in accordance with the AGM’s decision. 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 earlier than six and no later than four weeks before the meeting. The notice contains: a) information 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 proposals. 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 Extraordinary 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 28 September 2018 that the 2019 AGM would take place in Stock- holm on 11 April 2019. 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 con- trol the most votes at 31 August each year. The composition of the nomination committee for the 2018 and 2019 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 appli- cable, 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 putting for- ward proposed Board members, which means the composition of the Board should reflect the company’s business operations, phase of devel- opment and other circumstances, and should be diverse and wide-ranging in terms of the expertise, experience and background of the members elected by general meetings. An even gender distribution is sought. The nomination committee has observed this policy in its pro- posals to the Board. Further information about the work of the nomination committee will be provided at the 2019 AGM. For the 2019 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, Louise Lindh, Ulf Lundahl, Henriette Zeuchner, Henrik Sjölund and the new election of Alice Kempe. Carl Kempe did not stand for re-election. 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 sev- en 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, AGM 2018 The 2018 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 Ramsay Brufer, Alecta and Martin Wallin, Lannebo funds. It was not possible to follow or participate in the meeting from other locations using communication technology. No changes in this regard are planned for the 2019 AGM. Board meetings The Board held eight meetings in 2018, four of which were in con- nection with the company’s publication of its quarterly reports. One meeting was dedicated to reviews of strategic issues and the Group budget for 2019. One meeting was held in connection with the Board’s visit to Iggesund Mill and Iggesund Sawmill, with discussion being dedicated in particular to development of the paperboard mar- ket. Two meetings were held in connection with the company’s AGM. In addition, the Board paid particular attention to strategic, financial and accounting issues, the monitoring of business operations, the ac- quisition of a large forest holding in Hälsingland and the decision to expand Braviken Sawmill, as well as other major investment matters. On one occasion 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 2018 / CORPORATE GOVERNANCE REPORT NOMINATION COMMITTEE SHAREHOLDERS GENERAL MEETING OF SHAREHOLDERS BOARD OF DIRECTORS CEO GROUP MANAGEMENT AUDITORS FIVE GROUP STAFFS FIVE BUSINESS AREAS or restrictions on how long members can serve on the Board. The 2018 AGM re-elected Fredrik Lundberg, Carl Bennet, Lars G Josefsson, Lars Josefsson, Carl Kempe, Louise Lindh, Ulf Lundahl, Henriette Zeuchner and Henrik Sjölund to the Board. Fredrik Lundberg was re-elected Chairman. At the statutory first meeting of the new Board in 2018, Carl Kempe was elected Deputy Chairman and Lars Ericson, Senior Vice President Legal Affairs, was appointed Secretary of the Board. Over and above the nine members elected by the AGM, the local labour organisations have a statutory right to appoint three members 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, one of whose aims is to ensure that the Board obtains all requisite information. Each year the Board decides on written working proce- dures and issues written instructions. The lat- ter relate to the division of responsibilities between the Board and the CEO and the infor- mation that the Board is to receive continual- ly regarding financial developments and other key events. Employees of the company partici- pate in Board meetings to submit reports. In order to develop the work of the Board, an annual evaluation is undertaken involv- ing each member answering a questionnaire containing relevant questions concerning the Board’s work and having the opportuni- ty to make suggestions on how to enhance the Board’s work. Their responses were presented and discussed at a Board meeting. The results of the 2018 evaluation will form the basis for planning the Board’s work for the coming year. The chairman 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 committee pre- pared matters pertaining to the remuneration 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 2018 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 2019 AGM. These guidelines and informa- tion about remuneration are presented in Note 4 on page 50. The 2018 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. The programme expires in May 2019 and the Board proposes that the 2019 AGM approve a new three-year programme. Further information about the existing share savings programme is provided in Note 4. Board members as of the 2018 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 Board Audit committee Remuneration committee (SEK ’000) Attendance at meetings: Member Member Member Member Member Member Chairman Member - Chairman - Member - - - - - - 8/8 8/8 8/8 8/8 8/8 8/8 8/8 8/8 8/8 5/5 5/5 5/5 5/5 5/5 5/5 5/5 5/5 - 2/2 - 2/2 - - - - - - 710 355 355 355 355 355 355 355 - 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 company 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 29 HOLMEN ANNUAL REPORT 2018 / CORPORATE GOVERNANCE REPORT 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 and guideline documents. Group management The Board has delegated operational responsi- bility for management of the company and the Group to the CEO. The Board annually decides on instructions covering the distribution of tasks between the Board and the CEO. Holmen’s Group management comprises the company’s CEO, the heads of four of the five business areas, the heads of the five Group staffs and the head of international affairs. Information about the CEO and other mem- bers of Group management is provided on page 72. Group management met on nine occasions in 2018. The meetings dealt with matters such as earnings performance and reports before and after Board meetings, strategic issues, budgets, investments, internal control, work environment, sustainability issues and the impact of the new General Data Protection Regulation (GDPR). Meetings were also dedi- cated to reviews of market conditions, eco- nomic developments, possible consequences of Brexit and other external factors affecting the business, as well as discussion about govern- ance of the Group and the tools, such as the management-by-objectives model and Group- wide policies, used in such governance. Audit KPMG, which has been Holmen’s auditor since 1995, was re-elected by the 2018 AGM as auditor for a period of one year. Author- ised Public Accountant Joakim Thilsted was appointed as the principal auditor. Under applicable regulations KPMG can be re-elect- ed 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 examina- tion and audit of the final annual accounts and the annual report, including the sustainability report, take place in January–February. Holmen’s audit committee consists of external Board members and is chaired by Ulf Lundahl. The audit committee met five times in 2018. 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 satisfac- tory supervision of accounting, management of funds and other aspects of the company’s financial circumstances. The auditors report- ed to the audit committee at three meetings in 2018. In addition to the audit assignment, Holmen has consulted KPMG on matters per- taining to taxation, accounting and for vari- ous investigations. The remuneration paid to KPMG for 2018 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. Use of a simple and well-implemented management-by-objectives tool for continuous follow-up ensures that the entire organisation is applying appropriate pri- orities to attain the objectives established. The business areas guide the operating businesses towards these targets using pro- cesses for purchasing, production and sales, and supported by HR, financial management, research and development, IT, environment and communication processes. Operations are followed up through reg- ular reporting of financial performance and KPIs, along with additional qualitative analy- sis. During the year, sustainability data was integrated into the financial reporting process. Code of Conduct. Holmen’s Code of Con- duct is in line with the UN Global Compact and provides guidance on day-to-day opera- tions and clarifies what expectations are made of employees. Holmen’s operations should be characterised by responsible behaviour towards both internal and external stakehold- ers. The Supplier Code of Conduct complies with the UN Global Compact and covers the areas of anti-corruption, human rights, health and safety and the environment. With respect for human rights, Holmen works for a workplace climate that is founded in the equal value of all people. All Holmen’s employees must have the same rights, obliga- tions and opportunities irrespective of their sex, transgender identity or expression, ethnici- ty, religion or other belief, disability, sexual ori- entation and age. Holmen is subject to the UK Modern Slavery Act and a report relating to this is available at holmen.com. Composition of the nomination committee Name Mats Guldbrand Fredrik Lundberg Alice Kempe Torbjörn Widmark Hans Hedström Representing L E Lundbergföretagen* Chairman of the Board Kempe Foundations* Kempe Foundations* Carnegie funds* Independent of the: Company Before AGM: 2019 2018 x (chairman) x (chairman) Yes Yes x x Yes x - Yes - x Yes x x Largest shareholder (in terms of votes) No No Yes Yes Yes * At 31 August 2018, L E Lundbergföretagen controlled 61.6 per cent of the votes, the Kempe Foundations controlled 17.0 per cent and Carnegie funds (Sweden) controlled 1.5 per cent. 30 HOLMEN ANNUAL REPORT 2018 / CORPORATE GOVERNANCE REPORT Policies. Holmen uses policies, guidelines and Group instructions to clarify how employees should act within key, critical and Group-wide areas. The Group’s 11 policies cover matters such as expectations of employee participation and leadership, specify the scope of manage- ment by objectives, talent management, inter- action with trade union organisations, equal- ity and employment terms and conditions. In addition to this, a good work environment is covered in terms of health and safety, anti- corruption and competition issues, and how good business practice is maintained in rela- tion to external contacts on different markets. Employees in departments at risk of encoun- tering unauthorised behaviour receive special training on business ethics. The policies speci- fy how raw materials should be used efficient- ly, how pollution should be prevented and that we should aspire to make continuous improve- ments. Financial risk is managed centrally and should be characterised by a low level of risk. The policies should also ensure that the com- pany’s assets are managed in accordance with Group rules, minimise risks of errors in finan- cial reporting and prevent irregularities. The Group’s purchasing should contribute to long- term profitability. The sustainable sale of raw materials, products and services should be ensured in both the short and long term. Com- munication must be accurate, transparent and easily accessible and comply with legal require- ments and commercial confidentiality. Compliance. Holmen’s Code of Conduct, policies and values are part of every employee’s induction programme, and are reiterated by managers at employee meetings. Compliance is monitored partly through employee surveys and appraisal talks, pay surveys, safety statis- tics and audits of the organisational 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. 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 con- trol and financial reporting is regulated by the Swedish Companies Act and the Swedish Corporate Governance Code. Under this code, the Board is also responsible for ensuring that the company is managed in a sustainable and responsible manner. Day-to-day responsibility for all these matters is delegated to the CEO. Purpose and structure. The purpose of inter- nal control is to ensure that Holmen achieves its financial reporting objectives (see box), en- sure the company’s assets are managed accord- ing to Group rules and to prevent irregulari- ties. Group Finance coordinates and monitors the internal control process concerning finan- cial reporting. This work adheres to guidelines issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in respect of internal control over financial reporting. The framework comprises five basic elements: control environment, risk assessment, control activities, information and communication, as well as monitoring activities and evaluations. The framework has been modified to suit the estimated needs of Holmen’s various opera- tions. 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 dis- tribution 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 respective process and whether or not they are met. Information and communication. Holmen’s financial information provision, both exter- nal and internal, adheres to a communication policy established by the CEO. The provision of financial information for Holmen’s share- holders and other stakeholders must be accu- rate, comprehensive, transparent and consist- ent, 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. 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. Holmen’s MSCI ESG ‘AAA’ rating ESG stands for environmental, social and governance. MSCI ESG ratings are designed to help investors under- stand ESG risks and opportunities and incorporate these factors into their portfolio structure and management process. Holmen’s MSCI ESG rating for 2018 remains unchanged at the highest level, ‘AAA’. See page 78 regarding use of the MSCI logo. 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 audit com- mittee and Board during the year. Follow-up is an important tool to identify possible deficiencies within the Group and to address these through the development of new control requirements. Statement on internal audit. The Board of Directors does not believe that particular circumstances in the business or other condi- tions exist to justify an internal audit function. The internal control managed by the Group, together with the activities carried out by the external auditors, is deemed to be sufficient. 31 HOLMEN ANNUAL REPORT 2018 / CORPORATE GOVERNANCE REPORT 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 profit- ability. Facilities. Production equipment can be seriously damaged for example in the event of a fire, machine breakdown or power outage. This can lead to supply problems, unexpected costs and reduced customer confidence. Forest. Forest fires, grazing by wild animals and insect pests are risks in growing forests. Changes in prices and deliveries largely depend on the develop- ment of the European market. This in turn is influenced by several factors, such as demand, production among European producers and changes in imports into Europe, as well as the opportuni- ties for exporting profitably from Europe. Holmen has limited opportunities for making rapid significant changes to its range of products, but the company adapts its product focus, steering it towards the products and markets deemed to have the best long- term potential. Holmen aims to have a broad customer base and an offering that spans several product areas. This aim, combined with long-term customer relationships, reduces vulnerability to changes in the market. The harvest of logs from our own forests essentially corresponds to consumption at our own sawmills. Pulpwood from our own forests and wood chips from our own sawmills supply just under 50 per cent of consumption at our paperboard and paper mills. 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 genera- tion 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 being reduced and used chemicals are recycled at mills. Damage prevention measures, regular maintenance and continual upgrades can minimise the risk of damage to facilities. Training of employees promotes participation, knowledge and awareness about these risks and how they can be countered. Holmen insures its facilities at replacement value against damage to property and interruption of business. The insurance excess varies from one facility to another but the maximum is SEK 30 million for a single 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. The product mix has developed in line with the strategy for all business areas, which for Paper, for example, means increased sales of book and magazine paper, while sales of newsprint paper have decreased. Costs for input goods increased signifi- cantly in 2018. The market for pulp was difficult, with high import prices. In order to reduce dependence on expensive imported wood, in 2019 Holmen will use more fibre from its own forests by means of a new transport solution from its northern forest holdings. The price of net electricity consumption is 80 per cent hedged for 2019–2020 and 65 per cent hedged for 2021. The nominal amount for financial hedging is SEK 505 million. No event causing significant damage occurred in 2018. In 2018 there were an unusually large number of forest fires in Sweden and on Holmen’s land. Holmen’s costs for dealing with the fire damage and replanting the areas affected are estimated at SEK 30 million. 32 HOLMEN ANNUAL REPORT 2018 / RISK MANAGEMENT Customer credits. The risk of the Group’s customers being unable to ful- fil their payment obligations constitutes a credit risk. The risk that the Group’s customers will not fulfil their payment obligations is limited by means of creditworthi- ness 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. Environment. Production disruptions can cause breaches of emissions conditions set for the business by environmental authorities, which could impact the environment. 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 author- ities and environmental risk analyses, as well as through the use of certified environmental and energy management systems and chain-of-custody certification. Health and safety. Incidents and ac- cidents at the workplace have an effect on human life and health. This could also lead to production disruptions and increased costs. Work involving over- head cranes and vehicles constitutes the most significant areas of risk. 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. Talent management. Skilled and motivated employees are key in being able to conduct long-term business operations with good profitability. Retire- ments increase the need to attract new personnel, which can be challenging. Business ethics. Both nationally and internationally, 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 produc- tion disruptions. Suppliers that do not meet Holmen’s requirements can also have a negative effect on operations. IT systems. Sales and purchasing require efficient IT support in order to manage and plan production. Disrup- tions in IT support and unauthorised access to information can have signifi- cant negative effects on the business. Regulatory risks. 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 legislation regarding water-based operations, could have an impact on the Group’s competi- tiveness. Based on Group-wide employer branding efforts, we mar- ket Holmen as an employer using digital channels and by meeting people in person. Communication is applied both generally and directly at the primary target groups. 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 man- agement 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 Conduct is included in all new contracts. It contains require- ments on sustainable development, including by respecting internationally recognised principles on anti-corruption measures, human rights, health and safety and the environ- ment. 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 environ- ment, business ethics and sustainable purchasing. Operating disruptions and unauthorised access are pre- vented 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 con- tinually developing these protective measures to address changes in the risk profile. Holmen participates in national and international industry organisations whose purpose is to handle the monitoring of social trends, advocacy and put forward Holmen’s position and view on certain political issues. 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 meetings with decision-makers. On issues regarding the right to manage the forest and water-based operations, Holmen has participated actively in work with business organisations and in responses to consultation on relevant subjects. At 31 December 2018 the Group’s trade receivables totalled SEK 1 929 million, of which 43 per cent (37) were insured against credit losses. During the year, credit losses on trade receivables had a SEK -1 million (-5) impact on earnings. Sales to the five largest customers accounted for 14 per cent of the Group’s total sales in 2018. The mills reported 32 (29) incidents to the supervi- sory authorities in 2018. The nonconformities were not of a significant nature in terms of environmental impact or impact on profits. The figure in 2018 was 4.9 (5.1) industrial acci- dents per 1 million hours worked. See also page 24. The most common accidents were slips, trips, pinch accidents, cuts and lacerations. Our efforts have resulted in slightly more appli- cants for those positions that we are looking to fill. Voluntary employee turnover is stable and surveys of new employees show that new employees have job satisfaction and that young people joining from university remain with the company, which is a plus. 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 2018. No cases regarding breaches of the Supplier Code of Conduct were reported in 2018. By the end of 2018, suppliers accounting for over 85 per cent (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 inci- dents in 2018. In 2018, forestry’s access to raw materials became a point of debate in Sweden. Holmen is monitoring developments closely and has contributed actively to increasing knowledge about how Swedish forestry makes a positive contribution to the UN’s climate targets. In late 2018 the EU also made progress on a new directive on single-use plastics. Holmen takes a positive view of the directive as it could mean opportunities for the forest industry’s renewable products. The UK’s exit from the EU could affect the markets on which Holmen sells its products. Holmen also has production operations in the UK. We are fol- lowing developments in the negotiations closely, but the outcome and consequences are hard to predict. HOLMEN ANNUAL REPORT 2018 / RISK MANAGEMENT 33 Financial risks Risk Risk management Comment Currency. The Group’s earnings are af- fected 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 for- eign exchange contracts. Net flows in euros, US dollars and sterling for the coming four months are always hedged. These normally cor- respond to trade receivables and outstanding orders. The Board can decide to hedge flows for a longer period if this is deemed suitable in light of the products’ profitability, competitiveness and the currency situation. Currency exposure arising when investments are paid for in foreign currency is distinguished from other transaction exposure. Normally, 90–100 per cent of the currency exposure associated with major investments is hedged. Translation exposure. Hedging exposure that arises when subsidiaries’ assets and liabilities are translated into Swedish kronor (known as equity hedging) is assessed on a case-by-case basis and is arranged based on the value of net assets upon consolidation. The Group’s non-current assets are mainly Swedish, with the exception of the paperboard mill in the UK, which accounts for 5 per cent of the assets. The hedges take the form of foreign currency loans or forward foreign exchange contracts. Exposure that arises when the earnings of foreign subsidiaries are translated into Swedish kronor is not normally hedged. For just over the next two years, 90 per cent of expected flows in EUR/ SEK are hedged at an average of 9.97. For other currencies, 4 months of flows are hedged. Hedging in pounds sterling amounted to GBP 5 million at year-end. Net assets in other currencies are 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 cost. 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 2018 was 1.1 per cent. The table below shows the Group’s fixed interest period by currency. The Group has fixed SEK 600 million until 2020 at a fixed interest rate of 3 per cent. SEKm SEK EUR GBP Other items <1 year Year 1–3 Year 3–5 >5 years -2 283  4 79 54 -2 146 -600 0 0 0 -600 0 0 0 0 0 0 0 0 0 0 Pension provisions -31 -7 -23 0 -61 Total -2 914 -3 56 54 -2 807 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 continually. Holmen’s financial counterparties are assessed using reputable credit rating agencies or, where a counterparty has no credit rating, the company’s own analyses. This calculation is based on the maturity and historical volatility of different types of derivative. The maximum credit risk for other financial assets is estimated to correspond to their nominal amount. At 31 December 2018, the Group had outstanding derivative contracts with a nominal amount of SEK 15 billion and a net fair value of SEK +162 million. 34 HOLMEN ANNUAL REPORT 2018 / RISK MANAGEMENT Liquidity and refinancing. The risk of the need for future funding and refinancing of maturing loans being required at a high cost. Holmen’s strategy specifies that its financial position should be strong in order to secure room for manoeuvre when making long-term commercial decisions. The target 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 budget and profit forecasts that are regularly updated. SEKm 4 000 3 000 2 000 1 000 0 2019 2020 >2020 Financial liabilities Credit facility Net financial debt decreased in the year by SEK 129 million and amounted at 31 December 2018 to SEK 2 807 million, SEK 61 million of which comprised pension pro- visions. The Group has a contracted credit facility of EUR 400 million (SEK 4 108 million) with a syndicate of nine banks, of which SEK 291 million expires in 2020 and the remainder in 2021. The credit facility remained unutilised at year-end. It is avail- able for use provided that the Group’s debt/ equity ratio is below 1.25. At year-end, the Group’s debt/equity ratio was 0.12. Sensitivity analysis Operational risks A 1 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. The adopted change is calculated based on five years’ historical volatility for each instrument, which is deemed a reasonable change going forward. Excluding hedging, a 5 per cent change in the krona would affect earnings before tax by SEK 425 million a year. Impact on operating profit, SEKm Paperboard Paper Wood products Wood from company forests Hydro and wind power Change +/-1% +/-1% +/-1% +/-1% +/-1% Price 56 56 17 13 3 Deliveries 29 18 6 8 3 Input goods Wood* Electricity* Chemicals Other variable costs Delivery costs Employees Other fixed costs +/-1% +/-1% +/-1% +/-1% +/-1% +/-1% +/-1% 30 13 14 6 14 23 13 * Taking account of harvesting of company forests and generation of own electricity, net earnings sensitivity for the Group was SEK 18 million for wood and SEK 10 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 price hedging Interest rate hedging Change +/-5% +/-5% +/-5% +/-5% +/-5% +/-25% +/- 0.5% unit Change +/-5% +/-5% +/-5% +/-25% +/- 0.5% unit *Estimated effect for 2019 including hedging SEKm 179 28 57 43 51 35 5 SEKm 493 5 3 244 4 HOLMEN ANNUAL REPORT 2018 / RISK MANAGEMENT 35 Shareholder information Holmen’s two series of shares are listed on Nasdaq Stockholm, Large Cap. Over the past five years, Holmen’s total share- holder return (dividend paid and share price performance) has been 78 per cent, com- pared with 28 per cent for OMX Stockholm 30. For Holmen, this corresponds to an annual return of 12 per cent. 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. At the end of 2018 Holmen A was trading at SEK 178 (220) and Holmen B at SEK 175 (218), corresponding to a market capitalisation of SEK 29.5 billion (36.6). The highest closing price for Holmen’s class B shares was SEK 240, on 24 April. The lowest closing price was SEK 175, on 28 December. The daily average number of class B shares traded was 242 000, which corresponds to a value of SEK 64 million. The daily average number of class A shares traded was 1 700. Just over 70 per cent of trading took place on Nasdaq Stockholm. The Holmen shares have also been traded on other trading platforms, such as BATS Europe, Chi-X and Turquoise. Dividend Decisions on dividends are based on an apprais- al of the Group’s profitability, future investment plans and financial position. The Board propos- es that the AGM to be held on 11 April 2019 approve a dividend of SEK 6.75 (6.5) per share, corresponding to 4.8 per cent of equity. Share structure During the year a share split was carried out, resulting in each share, regardless of series, being divided into two shares (a 2:1 split) of the same series. In this annual report, figures regard- ing share prices, dividend and earnings per share have been restated on the basis of the new num- ber of shares. The new number of shares fol- lowing the share split is 167 992 324, with 45 246 468 class A shares and 122 745 856 class B shares. The company also has 1 520 000 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. Share savings programme The 2016 AGM decided on a targeted share savings programme for around 40 key indi- viduals in the Holmen Group. The purpose of the programme was to strengthen the interests between the owners and the management of the company and to create long-term commit- ment to Holmen. The number of shares allocat- ed under the programme depends on the return on capital employed for 2016–2018. The pro- gramme expires in May 2019 and approxi- mately 75 000 shares will then be transferred from the company to participants. The compa- ny’s commitment to allocate shares to partici- pants will be fulfilled through the use of previ- ously repurchased shares. The Board proposes that the 2019 AGM approve a new similar share savings pro- gramme. 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 comple- ment to dividend payments to adjust the capi- tal structure when circumstances are deemed favourable. The 2018 AGM renewed the Board’s authorisation to both take decisions on acquiring as many class B shares so that the company’s holding of its own shares does not exceed 10 per cent of all shares and to sell the company’s holding of its own shares as liquid assets for acquisitions. No shares were repur- chased during the year. As previously, the com- pany holds 0.9 per cent of all shares. The Board proposes that the 2019 AGM provide the same authorisation. Earnings per share, 2018 SEK 13.5 Proposed dividend per share, 2018 SEK 6.75 Share price performance, Holmen class B and OMX Stockholm Total shareholder return for Holmen B and OMX Stockholm, incl. reinvested dividend but excl. tax. No. of shares (thousands) Index 9 000 300 6 000 200 3 000 100 0 0 14 15 16 17 18 Source: Macrobond Holmen B OMX Stockholm 30 (OMXS30) 14 15 16 17 18 Holmen B Total number of class B shares traded (thousands) OMX Stockholm 30 (OMXS30) HOLMEN ANNUAL REPORT 2018 / SHAREHOLDER INFORMATION SEK 300 200 100 0 36 Communication with shareholders The website holmen.com contains informa- tion about the company and financial informa- tion in the form of reports, presentations and financial data, performance of Holmen shares, which brokerage firms monitor Holmen and contact information. Ownership structure Holmen had a total of 33 573 shareholders at year-end 2018. In terms of numbers, Swedish private individuals account for the largest owner category with 31 586 share- holders. Shareholders registered in Sweden own 81 per cent (82) 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, respectively. The largest owner at the turn of 2018/2019, with 61.6 per cent of votes and 32.9 per cent of capi- tal, was L E Lundbergföretagen AB. Shareholder categories Share of capital, % 11 18 19 52 Swedish institutions Swedish equity funds Swedish private individuals Foreign shareholders 52% 19% 11% 18% Annual return at 31 Dec 2018, % 1 year 3 years 5 years 10 years Holmen B OMX Stockholm 30 -17 -7 14 3 12 5 10 7 Holmen’s total shareholder return has averaged 10 per cent a year over the past 10 years, which is 3 percentage points better than the OMX Stockholm 30. Share structure Equities Votes No. of shares No. of votes A B Total no. of shares Holding of own class B shares repurchased Total number of shares outstanding 10 1 45 246 468 124 265 856 169 512 324 452 464 680 124 265 856 576 730 536 -1 520 000 -1 520 000 167 992 324 575 210 536 Quotient value 25 25 SEKm 1 131 3 107 4 238 Changes in share capital 2000–2018 2001 Cancellation of shares repurchased 2004 Conversion and subscription 2018 share split Change in no. of shares Total no. of shares Change in share capital, SEKm Total share capital, SEKm 79 972 451 -8 885 827 4 783 711 84 756 162 84 756 162 169 512 324 -444 239 - 3 999 4 238 4 238 Shareholder structure at 31 December 2018 % of capital % of votes L E Lundbergföretagen Kempe Foundations Carnegie funds (Sweden) Nordea funds Alecta Swedbank Robur funds Lannebo funds DFA funds (US) Vanguard (US) SEB funds Total Other Total* *Of which non-Swedish shareholders. 32.9 7.0 5.4 3.4 2.9 2.3 2.2 1.7 1.6 1.3 60.7 39.3 100.0 17.7 61.6 17.0 1.6 1.0 0.8 0.7 0.7 0.5 0.5 0.4 84.7 15.3 100.0 5.5 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 No. of shares 1–1 000 1 001–100 000 100 001– Total Data per share (adjusted for the 2:1 share split in 2018) 2018 2017 2016 2015 2014 2013 Diluted earnings per share, SEK1) Dividend, SEK Dividend as % of: Equity Closing listed price Profit/loss for the year Return, equity, %1) Return, capital employed, %6) Equity per share, SEK Closing listed price, B, SEK Average listed price for year, B, SEK Highest listed price for year, B, SEK Lowest listed price for year, B, SEK Total closing market capitalisation, SEK ’000 m P/E ratio2) EV/Profit before depreciation/amortisation3) 6) Closing beta value (48 months), B, at year-end4) Number of shareholders at year-end 13.5 6.755) 9.9 6.5 8.5 6 3.3 5.5 5.4 5 4.3 4.5 5 4 50 10 10 140 175 213 240 175 29.5 13 11 0.74 33 573 5 3 65 8 9 131 218 186 218 157 36.6 22 14 0.74 30 903 5 4 71 7 9 127 164 141 163 114 27.4 19 11 0.72 28 159 4 4 158 3 6 124 131 132 153 110 22.3 39 10 0.68 28 176 4 4 93 4 6 125 133 118 136 105 22.3 25 10 0.71 27 788 4 4 106 3 5 124 117 99 118 87 19.7 28 11 0.67 27 692 Shareholders Share of capital, % 29 532 3 964 77 33 573 4 11 85 100 2012 11.1 4.5 4 5 41 9 7 124 96 93 102 85 16.2 9 9 0.67 28 440 2011 23.6 4 3 4 17 23 9 118 99 101 126 78 16.6 4 7 0.67 28 899 2010 2009 4.2 3.5 6.0 3.5 3 3 83 4 6 101 111 98 113 87 18.5 26 10 0.67 28 339 4 4 58 6 7 98 92 90 103 68 15.4 15 7 0.71 30 425 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 OMX 30 Stockholm over a period of 48 months. 5) Board proposal. 6) Excl. items affecting comparability. HOLMEN ANNUAL REPORT 2018 / 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 *2017 figures have been adjusted because of the share split (2:1) in 2018. Note 2 3 4 5, 20 9, 10 9 11 12 6 6 7 8 8 2018 16 055 1 284 439 -9 027 -2 306 -3 443 -1 012 -25 425 -9 2 382 13 -38 2 356 -89 2 268 2017 16 133 1 136 -128 -8 945 -2 252 -3 189 -991 - 415 -12 2 166 2 -55 2 113 -445 1 668 2 268 1 668 13.5 13.5 168.0 168.0 9.9 9.9 168.0 168.0 Operating profit was SEK 2 382 million (2 166). The increase in profit was due to higher earnings from Forest and Wood Products. Net financial items for 2018 totalled SEK -25 million (-53). Average net debt was lower than in the previous year. Tax recognised totalled SEK -89 million (-445) in 2018. Tax recognised was affected positively in an amount of SEK 315 million as a result of lower future corporation tax in Sweden reducing the deferred tax liability. 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 2018 2 268 2017 1 668 -52 10 -42 115 222 -8 55 -8 -23 -69 284 242 2 510 121 -24 97 -88 124 -1 36 -49 -4 3 21 119 1 786 2 510 1 786 HOLMEN ANNUAL REPORT 2018 / FINANCIAL STATEMENTSGROUP Balance sheet at 31 December, SEKm Note 2018 2017 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 13 17 18 7 13 19 7 18 19 68 9 077 18 400 1 740 1 468 1 29 755 3 628 1 929 328 959 35 278 - 7 157 36 912 4 238 281 70 18 865 23 453 1 033 61 483 5 839 7 416 2 494 2 232 13 197 1 108 6 044 13 459 36 912 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 39 HOLMEN ANNUAL REPORT 2018 / FINANCIAL STATEMENTSGROUP Changes in equity, SEKm Opening equity balance 1 Jan 2017 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 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 2018 Share capital Other contributed capital 281 - 4 238 - Reserves Translation reserve -95 - Hedge reserve -141 - Retained earnings incl. profit/loss for the year 16 960 1 668 Total equity 21 243 1 668 - - - - - - - - - - 4 238 - - - - - - - - 0 - - 4 238 - - - - - - - - - - 281 - - - - - - - - 0 - - 281 - - 36 -49 - 11 -2 -2 - - -97 - - - 55 -8 - 2 49 49 - - -48 - 35 - - -4 -8 24 24 - - -117 - - 329 - - -23 -71 235 235 - - 118 121 - - - - -24 97 1 765 -1 008 13 17 731 2 268 -52 - - - - 10 -42 2 226 -1 092 0 18 865 121 35 36 -49 -4 -21 119 1 786 -1 008 13 22 035 2 268 -52 329 55 -8 -23 -60 242 2 510 -1 092 0 23 453 40 HOLMEN ANNUAL REPORT 2018 / 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 Increase in non-current financial receivables Repayment of non-current financial receivables Acquisition of shares and participating interests Disposal of shares and participating interests Cash flow from investing activities Financing activities Raised long-term borrowings Repayments of long-term borrowings** Change in current financial liabilities Change in current financial receivables Dividend paid to owners of the parent company Cash flow from financing activities Cash flow for the year Cash and cash equivalents at beginning of year Exchange gains/losses on cash and cash equivalents Cash and cash equivalents at end of year Note 25 25 *Other adjustments primarily consist of currency effects and the marking to market of financial instruments, profit from associates, as well as gains on the sale of non-current assets. **Refers to repayments of loans that were long-term loans when raised. 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 2018 -2 936 2 286 -1 005 -1 092 -47 -13 -2 807 GROUP 2018 2017 2 356 1 012 25 -425 -39 -33 -396 2 500 -705 230 262 2 286 -972 98 -15 -150 38 -456 24 -3 0 -1 436 1 000 -300 -539 0 -1 092 -930 -81 356 3 278 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 2017 -3 945 2 509 -644 -1 008 120 32 -2 936 41 HOLMEN ANNUAL REPORT 2018 / FINANCIAL STATEMENTSPARENT COMPANY Income statement, SEKm Note 2018 2017 Cash flow statement, SEKm Note 2018 2017 Net sales Other operating income Change in inventories Raw materials and consumables Personnel costs Other external costs Depreciation and amortisation according to plan Impairment losses Operating profit/loss Profit/loss from investments in Group companies Profit/loss from investments in associates 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 2 3 4 5, 20 9, 10 9 6, 23 6,12 6 6 24 7 14 384 628 391 -7 636 -1 921 -4 367 -47 -25 1 407 467 -20 32 -45 1 841 -1 373 467 47 514 14 345 565 -166 -7 969 -1 877 -4 031 -25 - 841 497 - 18 -99 1 257 787 2 044 -197 1 847 Statement of comprehensive income, SEKm Note 2018 2017 Profit/loss for the year Other comprehensive income Cash flow hedging Revaluation Transferred from equity to the income statement Transferred from equity to non-current assets Tax attributable to other comprehensive income Total items that will be reclassified to profit/loss for the year Total comprehensive income 7 514 1 847 95 230 0 -70 255 769 -71 109 -1 -8 29 1 876 The parent company includes Holmen’s Swedish operations with the exception of the majority of the non-current assets, which are recognised in other companies in the Group. The item ‘Interest expense and similar costs’ in the income statement includes the result of SEK -8 million (-49) from hedging equity in foreign subsidiaries. Operating activities Profit/loss after financial items Adjustments for non-cash items Depreciation and amortisation according to plan Impairment losses Change in provisions Other* Income tax paid Cash flow from operating activities before changes in working capital Cash flow from changes in working capital Change in inventories Change in operating receivables Change in operating liabilities Cash flow from operating activities Investing activities Shareholders’ contribution paid Acquisition of property, plant and equipment Disposal of property, plant and equipment Increase in non-current financial receivables Repayment of non-current financial receivables Disposal of shares and participating interests Cash flow from investing activities Financing activities Raised long-term borrowings Repayments of external long-term borrowings** Change in other financial liabilities Change in other financial receivables Dividend paid to owners of the parent company Group contributions received Group contributions paid Cash flow from financing activities Cash flow for the year Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 25 1 841 1 257 47 25 -17 -113 -297 25 - -109 855 -131 1 485 1 897 -597 140 207 1 235 -3 -67 9 -456 24 100 -395 1 000 -300 -502 2 384 -1 092 191 -2 584 -904 -64 294 230 74 97 260 2 329 -1 -32 11 - - 0 -22 - -1 400 -479 241 -1 008 530 0 -2 116 190 104 294 * Other adjustments primarily consist of impairment losses on the value of shares in Group companies, currency effects and the marking to market of financial instruments as well as gains/losses on the sale of non-current assets. **Refers to repayments of loans that were long-term loans when raised. 42 HOLMEN ANNUAL REPORT 2018 / FINANCIAL STATEMENTSPARENT COMPANY Note 2018 2017 Balance sheet at 31 December, SEKm Note 2018 2017 9 10 12, 23 13 14 15 7 13 13 25 2 974 10 787 7 419 21 205 2 926 2 424 327 35 230 5 942 27 147 8 2 930 10 702 3 018 16 658 2 322 2 210 29 32 294 4 888 21 545 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 Operating liabilities Total liabilities Total equity and liabilities 16 24 17 18 18 7 13 13 19 4 238 1 577 100 4 966 514 11 395 4 238 1 577 100 3 956 1 847 11 718 1 012 2 032 20 45 708 635 1 407 7 817 2 494 3 022 13 333 27 147 Restricted equity Non-restricted equity Share capital 4 238 Statutory reserve 1 577 Revaluation reserve 100 Hedge reserve -123 Retained earnings 3 847 Profit/loss for the year 1 197 - - - - - - - - 4 238 - - - - 0 0 - - 4 238 - - - - - - - - 1 577 - - - - 0 0 - - 1 577 - - - - - - - - 100 - - - - 0 0 - - 100 - - 38 -8 29 29 - - -93 - - 326 -70 255 255 - - 162 1 197 - - - 0 1 197 -1 008 13 4 049 1 847 - - - 0 1 847 -1 092 0 4 805 -1 197 1 847 - - 0 649 - - 1 847 -1 847 514 - - 0 -1 333 - - 514 12 45 725 610 1 392 880 2 775 2 749 6 403 21 545 Total equity 10 836 - 1 847 38 -8 29 1 876 -1 008 13 11 718 - 514 326 -70 255 769 -1 092 0 11 395 43 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 1 Jan 2017 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 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 2018 HOLMEN ANNUAL REPORT 2018 / 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 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 2018 IFRS 15 Revenue from Contracts with Customers is a new revenue standard with associated disclo- sure requirements which has replaced IAS 18, IAS 11 and IFRIC 13. This standard came into force on 1 January 2018. Under IFRS 15 income items are recognised when the customer gains control over the goods, which for Holmen has not resulted in any change compared with previous policies. Consequently, this has not resulted in any impact from the transition to IFRS 15 at 1 January 2018. Other regulatory changes relate to accounting of discounts and the right of return, which have only had a marginal impact on Holmen’s accounting. IFRS 9 Financial Instruments addresses the accounting of financial instruments and has replaced IAS 39. This standard encompasses classification, valuation and impairment of financial instru- ments and hedge accounting. This standard came into force on 1 January 2018. The material changes that have affected Holmen compared with previous regulations are that 1) the new catego- ry of financial instruments, 2) impairment of financial assets is based on a model based on expect- ed future losses, 3) hedge accounting rules have changed, with requirements for hedging relation- ships to be the same as the Group’s risk management targets. The introduction of IFRS 9 has not had any effect on Holmen’s recognised values. See Note 13 for further information. New and amended accounting policies not yet applied IFRS 16 Leases is replacing the previous IAS 17 Leases and the related interpretations IFRIC 4, SIC-15 and SIC-27 from 1 January 2019. This standard requires assets and liabilities attributable to all leases, with some exceptions, to be recognised in the balance sheet. The leasing cost allo- cated by depreciation, amortisation and interest expense is recognised in the income statement. Holmen will use the simplified forward-looking method, which involves an asset and liability being set at the same value in connection with the transition. An asset and liability will be recognised for an amount of SEK 205 million at 1 January 2019. Under the new regulations, in 2019 depreciation and amortisation are estimated to increase by approximately SEK 80 million, interest expense by around SEK 5 million, while other external costs are expected to decrease by approximately SEK 85 million. Profit before tax will be largely unchanged. The change will have some effect on key indica- tors such as net debt, capital employed and profit before depreciation/amortisation. Agreements for Holmen that are affected by the new regulations mainly relate to office rent, leased vehicles and vessels. 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. 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 re- covered or paid within 12 months of the balance sheet date. 44 HOLMEN ANNUAL REPORT 2018 / NOTES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 en- tails the parent company indirectly acquiring the subsidiary’s assets and assuming the liabilities of the subsidiary, valued at fair value. The difference between the cost of the shares and the fair value of the acquired identifiable net assets is treated as goodwill. The subsidiary companies’ income and expenses, and their assets and liabilities, are stated in the consolidated accounts as of the date when the Group gains control (acquisition date) until such time as the Group no longer has control. Intra-Group receivables and liabilities, transactions between companies in the Group and related unrealised gains are eliminated in their entirety. Holdings recognised in accordance with the equity method Associates. Shareholdings in associates, in which the Group controls a minimum of 20 per cent and a maximum of 50 per cent of the votes, or otherwise exercises a significant influence, are stated in the consolidated accounts in accordance with the equity method. Jointly owned companies/joint ventures. In accounting, joint ventures are those companies for which the Group, through cooperation agreements with one or more parties, has joint control whereby the Group has rights to the net assets instead of direct rights to assets and commitments in liabilities. Holdings in joint ventures are consolidated in the consolidated accounts using the equity method. 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, respective- ly, is stated in the consolidated income statement as ‘Share of profits of associates and joint ven- tures’. Dividends received from an associate or joint venture reduce the book value of the invest- ment. 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 func- tional currency, 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 approximation of the exchange rates prevailing at the date of each transaction. Dif- ferences arising during the currency translation of foreign operations and the related effects of hedging net investments are recognised in other comprehensive income and are accumulated in a separate component of equity called the translation reserve. In the disposal of a foreign operation, the accumulated translation differences attributable to the business are realised, less any currency hedging, in the consolidated income statement. Companies operating on behalf of the parent company The parent company’s business is largely conducted through companies operating on its behalf: Holmen Paper AB, Iggesund Paperboard AB, Holmen Timber AB, Holmen Skog AB and Holmen Energi AB. The parent company is liable for all commitments entered into by these companies. All income, expenses, assets and liabilities, which arise in the operations conducted by the companies, are recognised in Holmen AB’s accounts, except for the majority of investments made as well as some sales of forest properties, which are instead recognised in some of the Group’s subsidiaries. Income The Group’s sales mostly relate to goods sold to customers, which is specified in the tables in Note 2. The services provided are limited and essentially relate to silviculture services. Holmen acts al- most exclusively as principal and the sales transactions are based on agreements. For Holmen, the vast majority of contracts are separate undertakings and comprise one undertaking per contract. NOTE 1 Holmen’s guarantees in connection with sales should not be regarded as separable and are there- fore recognised in accordance with IAS37. The transaction price is the price of the goods or service. Variable consideration mainly occurs in the form of rights of return, or volume or cash discounts. All returns relating to defective goods are recognised as they arise. Volume discounts give customers a discounted price provided that a cer- tain amount of goods are purchased over a period. A cash discount entitles customers to a lower price if payment is made by a certain date. Discounts are recognised as a reduction in net sales. The income item is recognised when Holmen fulfils its commitment by transferring control of the pledged goods and, where applicable, services to the customer. The date of transfer of control, and the transfer of risk, is critical to when an income item is recognised. The transfer of risk differs de- pending on the shipping terms applied. The sale of energy differs from other sales as supply takes place in conjunction with generation, when it is also recognised as revenue. Payment terms vary from market to market and Holmen usually follows applicable practice on the respective market. See Note 1 Accounting Policies and Note 15 Operating Receivables for manage- ment of credit losses. Other operating income Income from activities not forming part of the company’s main business is stated as other operat- ing 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 estimated fair value. State grants State grants are recognised in the balance sheet as accrued income when it is reasonably cer- tain 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. 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 dis- tributed 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 at- tributable 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 sub- stantial period of time to get ready for its intended use and that is relevant for the Group in connec- tion 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, us- ing 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. 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 2018 / NOTESNOTE 1 Financial instruments Financial instruments are measured and recognised according to IAS 9. 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. 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. Classification and measurement of financial instruments Financial instruments are classified and measured based on the company’s business model and the nature of contractual cash flows. See Note 13 for the company’s classifications of financial in- struments. Financial assets - are measured initially at fair value less any transaction costs. Normally, the as- sets are measured on a current basis at amortised cost using the effective interest method. In those cases where funds issued fall short of the repayment amount, the difference is allocated over the duration of the loan using the effective interest method. Derivatives are recognised on an on- going basis at fair value. Changes in the value of derivatives that are not hedged are recognised in profit/loss. Financial liabilities - are measured initially at the value of funds received after deduction of any transaction costs. Normally, the liabilities are measured on a current basis at amortised cost us- ing 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. Derivatives are recognised on an ongoing basis at fair value. Changes in the value of derivatives that are not hedged are recognised in profit/loss. Impairment of financial assets - For financial assets for which there is an indication that the entire book value cannot be recovered, an individual assessment of the respective instrument is made. Missed payments from counterparties usually constitute such an indication. Any impairment is re- cognised based on an individual estimate. For financial instruments for which there are no indica- tions of low credit quality, a provision is made for credit losses based on historical outcomes. Hedge accounting - All derivatives, such as forward foreign exchange contracts, electricity deriva- tives and interest rate swaps, are measured at fair value and recognised in the balance sheet. Essentially all derivatives are held for hedging purposes. The effective portion of changes in value from cash flow hedges is recognised in other comprehensive income and accumulated in equity until such time as the hedged item influences the income statement, when the accumulated chan- ges 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. Interest rate swaps are used as a cash flow hedge for interest rates. Changes in the value of hedges relating to net investments in foreign businesses are recognised in other comprehensive income for the Group. Accumulated changes in value are recognised as a component in the Group’s equity until the business is disposed of, at which point the accumulated changes in value are recognised in the income statement. In the parent company, changes in value are recognised in the income statement, as hedge accounting is not applied. Holmen’s cash flow hedges mainly relate to the hedging of sales in foreign currency, future interest payments, the purchase of electricity and purchases in foreign currency in conjunction with investments. Hedging instruments comprise forward foreign exchange contracts, forward electricity contracts and interest rate swaps. The hedged items comprise forecasts of future sales, interest payments, electricity purchases and capital expenditures. The hedge ratio is set on an ongoing basis by com- paring hedged amounts with actual forecasts. For hedging of net investments in foreign operations, the book value of the net investment is a hedged item and the hedge ratio is set by comparing the hedged amounts with the net investment. Any inefficiency is based on an estimate of the hedge ratio. The Group’s risk management of financial instruments is described on pages 34–35. 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 intan- gible assets are amortised over periods of between 5 and 20 years, except for goodwill. Any good- will 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 good- will. The Group does not currently recognise any goodwill. Non-current intangible assets in the par- ent 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 46 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 capital- ised only if it is estimated to generate financial benefits for the company. The key factor determining whether or not additional expenditure is capitalised is if it relates to the replacement of identified com- ponents or parts thereof, in which case the expenditure is capitalised. The cost is also capitalised in cases where a new component is created. Any undepreciated book values for replaced components 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 condi- tion and based on normal terms, and it is highly likely that a sale will take place. Such assets are recognised 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. De- preciation 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 Administrative and warehouse buildings, residential properties Production buildings, land installations and machinery for sawmills, pulp, paper and paperboard production Other machinery Forest roads Equipment 10–40 10–33 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 recover- able 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 cir- cumstances 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 depreciation, if there had been no impairment. Borrowing costs attributable to the purchase or construction of qualifying assets are to be capi- talised 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, leases 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 leases are classified as operating leases. On 1 January 2019 IFRS16 Leases comes into force, which means that assets and liabilities attributable to all leases, with some exceptions, are recognised in the balance sheet. The leasing cost allocated by depreciation, amortisation and interest expense is recognised in the income statement. 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. In the parent company, biological assets are valued in accordance with RFR 2. This means that bio- logical assets classified as non-current assets are recognised at cost adjusted for revaluations tak- ing into account the need, if any, for impairment in value. Felling rights are stated as inventories. They are acquired with a view to securing Holmen’s raw material requirements through harvesting. No measurable biological change occurs between the acquisition date and harvesting. HOLMEN ANNUAL REPORT 2018 / NOTESInventories Inventories are valued at the lower of cost and production cost after deduction for necessary obso- lescence, or net realisable value. The cost of inventories is calculated by using the First in, First out method (FIFO). The net realisable value is the estimated selling price in operating activities after deduction of the estimated costs of completion and affecting the sale. The cost of finished prod- ucts manufactured by the company comprises direct production costs and a reasonable share of indirect costs. Emission allowances received are initially recognised at market price when allotted among 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 produc- tion, 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 ac- tuarial 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 ac- count 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 (discount rate). Other components are recognised in operating profit/loss. The revaluation effects consist of actuarial gains and losses and the difference between the actual return on plan assets and the amount included in net interest. Revaluation effects are recognised in other comprehen- sive income. Payroll tax constitutes part of the actuarial assumptions and is therefore recognised as part of net obligations. Policyholder tax is recognised as it is incurred in profit/loss for the period to which the tax relates and is consequently not included in the calculation of liabilities. In the case of funded plans, this tax is levied on the return on plan assets and is recognised in other comprehensive income. In the case of unfunded plans or partially unfunded plans, this tax is levied on profit for the year. In the parent company’s accounts, different grounds are used for computation of defined benefit pension plans from those referred to in IAS 19. The parent company complies with the provisions of the Swedish Pension Obligations Vesting Act and the Swedish Financial Supervisory Authority’s regulations, because this is a condition for the right to make deductions for tax purposes. The main differences in relation to the rules in IAS 19 relate to how the discount rate of interest is established, the calculation of the defined benefit obligation on the basis of the current pay level without any as- sumption regarding pay increments in the future, and the recognition of all actuarial gains and loss- es 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 ex- pected 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. NOTE 1 Estimates are based on the value of the shares at the allocation date, which is defined as the pe- riod 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 dur- ing this period was used as the basis for the valuation of the shares at the allocation date. The vest- ing 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 contamina- tion arises or is discovered, it is likely that a payment obligation will arise, and the amount can be estimated reliably. 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 2018 / NOTESNOTE 2 Note 2. Operating segment reporting 2018 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 Acquisition of non-current assets Net sales by market Scandinavia Rest of Europe Asia Rest of the world Total Forest Paperboard Paper Wood Products Renewable Energy Group-wide and other Eliminations Total Group 2 633 3 311 251 -5 404 -31 - 425 - 1 185 1 185 20 8 20 313 -1 520 -3 963 14 830 357 2 598 35 - - 2 633 5 785 - 770 -5 430 -507 -25 - - 595 689 12 12 7 324 -934 -1 074 5 316 471 137 4 108 1 114 427 5 785 5 571 - 184 -5 090 -336 - - - 329 329 6 15 3 235 -735 -428 2 072 173 449 4 410 537 175 5 571 1 747 - 305 -1 716 -92 - - 1 246 246 14 27 1 176 -197 -52 927 76 624 644 218 261 1 747 319 - 28 -132 -24 - - -10 181 181 57 6 3 500 -114 -334 3 052 22 319 - - - 319 - - 219 -350 -22 - - - -154 -154 - - 1 045 -995 13 64 42 - - - - - - -3 311 -473 3 784 - - - - - - - - -461 461 - - - - - - - - 16 055 - 1 284 -14 337 -1 012 -25 425 -9 2 382 2 476 15 10 36 132 -4 033 -5 838 26 261 1 140 4 127 9 198 1 868 863 16 055 *Items affecting comparability refer to restructuring costs of SEK -94 million in the Paperboard business area. Forest Paperboard Paper Wood Products Renewable Energy Group-wide and other Eliminations Total Group 2 571 2 965 164 -5 016 -30 415 - 1 069 19 8 19 380 -1 305 -4 251 13 824 49 2 564 6 - - 2 571 5 526 - 742 -5 012 -492 - - 764 14 14 7 174 -832 -909 5 433 375 133 4 136 967 290 5 526 5 408 - 147 -4 928 -339 - - 288 5 12 3 210 -696 -320 2 193 141 560 4 129 564 155 5 408 1 562 - 275 -1 673 -86 - 1 80 5 9 1 080 -169 -49 862 100 562 566 205 228 1 562 315 - 16 -161 -24 - -11 135 43 4 3 464 -91 -258 3 115 26 315 - - - 315 751 - 246 -1 144 -21 - -2 -170 - - 549 -1 143 139 -455 11 - 751 751 - -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 4 135 9 589 1 736 673 16 133 2017 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 Acquisition of non-current assets Net sales by market Scandinavia Rest of Europe Asia Rest of the world Total 48 HOLMEN ANNUAL REPORT 2018 / NOTESNOTES 2–3 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 million m3sub. The Renewable Energy business area is responsible for the Group’s hydro power and wind power assets. In a normal year generation amounts to just over 1 TWh of electricity. The business areas are also responsible for the Group’s supply of wood and electricity in Sweden. The Paperboard business area produces paperboard for consumer packaging for the premium seg- ment at one Swedish and one UK mill. The Paper business area produces paper for books, maga- zines and advertising 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 2018, the Group produced 0.5 million tonnes of paper- board, 1.1 million tonnes of paper and 0.9 million m3 of wood products. These business areas are responsible for managing the operating assets and liabilities, which to- gether with the net amount of deferred tax assets and tax liabilities constitutes their capital em- ployed. 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 li- abilities 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. Dur- ing 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. Non-current assets per country Sweden UK Other Total Net sales by market Scandinavia Rest of Europe Asia Rest of the world Total Group Parent company 2018 27 674 1 604 6 29 284 2017 27 041 1 701 6 28 748 2018 13 786 - - 13 786 2017 13 639 - - 13 639 Group Parent company 2018 4 127 9 198 1 868 863 16 055 2017 4 142 9 582 1 736 673 16 133 2018 4 103 7 763 1 713 805 14 384 2017 4 114 7 947 1 608 675 14 345 Income from external customers is allocated to individual countries according to the country in which the customer is based. Net sales by product area Consumer paperboard Pulp Book and magazine paper Newsprint Wood products, pine Wood products, spruce Wood Energy Other Total Group Parent company 2018 5 607 179 5 053 517 989 758 2 633 319 0 16 055 2017 5 347 164 4 787 1 344 871 685 2 571 315 49 16 133 2018 3 496 329 4 959 517 989 758 2 598 319 419 14 384 2017 3 527 279 4 725 1 344 875 685 2 565 315 30 14 345 Sales of consumer paperboard and pulp are made within the Paperboard business area, while book and magazine paper and newsprint are attributable to the Paper business area. Spruce and pine products are sold within the Wood Products business area. Wood is sold by the Forest business area and energy by the Renewable Energy business area. 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 Parent company 2018 335 479 41 28 39 63 300 1 284 2017 360 405 21 22 47 67 214 1 136 2018 174 64 40 9 37 63 241 628 2017 231 37 21 9 31 67 169 565 Of the sales of by-products in the Group, SEK 41 million (101) relates to rejects from production, SEK 130 million (123) to sawdust, bark, chips etc., and SEK 164 million (137) 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 479 million (405). The Group has been allotted emission allowances that have been used partly within its own production. The surplus resulted in a gain of SEK 41 million (21). 49 HOLMEN ANNUAL REPORT 2018 / 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 2018 1 609 638 2017 1 579 617 2018 1 297 584 2017 1 275 561 Group Parent company AGM’s guidelines for determining salaries and other remuneration for senior management The 2018 AGM decided on the following guidelines for determining the salaries and other remunera tion of the CEO and other senior management, namely the heads of the business areas and heads of Group staffs who report directly to the CEO. The guidelines apply to agreements entered into after the AGM’s resolution. Salary and other benefits The remuneration of the CEO and the senior management shall consist of a fixed market-based salary. Other benefits, mainly car and accommodation, shall, insofar as they are provided, represent a limited part of the remuneration. No variable remuneration shall be paid other than possible share-related incentive programmes determined by the AGM. Pension The retirement age is normally 65 years. Pension benefits are based on defined contributions and comply with the ITP plan. Additional defined-contribution pension solutions may occur. Notice and severance pay The period of notice is six months, regardless of whether notice is given by the company or the member of senior management. In the event of notice being given by the company, severance pay can be paid corresponding to no more than 18 months’ salary. Remuneration committee A remuneration committee appointed from among the members of the Board shall handle matters pertaining to the CEO’s salary and other conditions of employment and submit proposals on such issues to the Board for decision. Detailed principles for determining the salaries, pension rights and other remuneration for senior management shall be laid down in a pay policy adopted by the remuneration committee. Deviations in individual cases The Board shall be entitled to depart from these guidelines in individual cases should special reasons exist. In the event of such a deviation, information thereon and the reasons therefor shall be submitted to the next AGM. Share savings programme The 2016 AGM decided on a targeted share savings programme for around 40 key individuals in the Holmen Group. The purpose of the programme is to strengthen the interests between the own- ers and the management of the company and to create long-term commitment to Holmen. Participation in the programme required the relevant employees to have invested in Holmen shares (known as ‘savings shares’) during the period 27 April to 20 May 2016. For each savings share invested, half a matching share will be assigned after the end of the vesting period. In addition, a number of performance shares may be assigned to each participant. These are linked to the Group’s return on capital employed. The allocation of the number of performance shares may vary, depending on the employee’s position within the Group, up to a maximum of 3–6 shares per 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 en- tire 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 30 million. Costs corresponding to SEK 9 million (13) have been recognised for 2018. 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, how- ever, does not receive any Board fee. For 2018, fees to the Board amounted to SEK 3 195 000 (3 060 000). The chairman received a fee of SEK 710 000 (680 000), and each of the other seven (seven) members received SEK 355 000 (340 000). Senior management Salary and other benefits for the CEO in 2018 amounted to SEK 9 052 744 (8 566 098). The total pension cost for the CEO, calculated in accordance with IAS 19, amounted to SEK 4 992 483 (4 985 519). Recognised wages and salaries for the share savings programme for the CEO amounted to SEK 1 581 019 (1 676 738). No variable remuneration was paid. In 2018, 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 and the head of international affairs from October 2018 who report directly to the CEO, totalled SEK 22 211 926 (22 829 993). The total pension cost for this group, calculated in accordance with IAS 19, amounted to SEK 10 160 508 (10 201 247) in 2018. Recognised wages and salaries for the share savings programme for this group amounted to SEK 2 188 461 (2 320 957). 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 seven people. For one person no severance is paid. For three 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 for these people, severance pay corresponding to up to 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 19 million (15) at 31 December 2018 and for other members of senior management to SEK 35 million (28), calculated in accordance with IAS 19. The pension obligations are secured using plan assets managed by an independent pension fund. Average no. of employees (FTE) Of which women 2018 Average no. of employees (FTE) Of which men Of which women 2017 Of which men 2 379 454 1 925 2 377 450 1 927 6 12 5 7 2 74 8 2 2 6 415 23 14 2 5 1 2 - 43 4 2 - 3 49 9 6 4 7 4 5 2 31 4 - 2 3 366 14 8 6 12 5 8 2 74 11 1 3 6 442 23 14 2 5 1 3 - 39 7 1 1 3 49 11 6 4 7 4 5 2 35 4 - 2 3 393 12 8 576 2 955 126 580 450 2 374 607 2 984 128 578 479 2 406 Parent company Sweden Group companies Estonia France Hong Kong Italy Japan Netherlands Poland Russia Switzerland Singapore UK Germany US Total Group companies Total Group Proportion of women, % Board (excl. deputy members) Senior management Total Group 2018 17 18 17 2017 17 20 18 Parent company 2017 17 20 18 2018 17 18 17 50 HOLMEN ANNUAL REPORT 2018 / NOTESNote 5. Auditors’ fee and remuneration The income from financial instruments included in operating profit/loss is shown in the following table: NOTES 5–6 Exchange gains/losses on trade receivables and trade payables Net gain/loss on derivatives stated in working capital Group 2018 2017 Parent company 2017 2018 285 40 280 34 -222 -126 -231 -111 Interest income on trade receivables Interest expense on trade payables 1 0 0 0 1 0 0 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 2018 amounted to SEK -324 million (-90), with the remainder being rec- ognised in other comprehensive income as hedge accounting is applied. The fair value of outstand- ing currency hedges at 31 December 2018 was SEK -244 million (-135). Gains on financial electricity hedges are recognised in the income statement when they expire; for 2018 they totalled SEK 102 million (-36). The fair value of outstanding financial electricity hedges at 31 December 2018 was SEK 473 million (55). The change in fair value 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 compre- hensive income until expiry, at which point the gain/loss is added to the cost of the non-current as- set that was hedged. The fair value of outstanding hedges for investment purchases amounted to SEK 5 million (5) at 31 December 2018. In 2018 there was a SEK 8 million positive effect on the cost of hedged items owing to results from hedging. Results from hedging of foreign net assets amounted to SEK -8 million (-49) in 2018 and are rec- ognised in other comprehensive income as hedge accounting is applied. In the parent company ac- counts, this gain is recognised in the income statement. The translation of net foreign assets had an impact of SEK 55 million (36) on consolidated equity. The fair value of outstanding hedges of net assets at 31 December 2018 was SEK 2 million (3) and relates to financial derivatives. The fair value of the derivatives used to manage the fixed interest periods amounted to SEK -26 mil- lion (-47) at 31 December 2018, which was recognised in other comprehensive income as hedge accounting is applied. This value is expected to be recognised in the income statement in 2019 and 2020. The audit firm KPMG was elected by the 2018 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 2018 6 1 0 7 0 8 Parent company 2017 4 0 - 4 2018 4 1 0 6 - 6 - 4 2017 6 1 - 7 0 7 ‘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 Financial income Dividend income from Group companies Gains on sales of Group companies Gains on sales of associates Interest income* Total financial income Financial costs Impairment losses on value of shares in Group companies Impairment losses on value of shares in associates Net profit/loss Assets and liabilities measured at fair value through profit/loss Cash and cash equivalents Assets and liabilities measured at amortised cost Total net profit/loss Interest cost** Financial costs Net financial items Group 2018 - 0 - 12 13 - - -9 1 8 0 -38 -38 -25 2017 - - - 2 2 - - 42 1 -45 -2 -53 -55 -53 Parent company 2017 2018 367 100 8 23 499 1 314 - - 18 1 332 - -817 -20 -12 1 7 -24 -41 -65 434 - -4 1 -46 -866 -50 -916 416 *SEK 12 million relates to interest income calculated using the effective interest rate method from financial items valued at amortised cost. **SEK -23 million (-31) in the Group and parent Company relates to interest expense for derivatives valued at fair value through other comprehensive income. SEK -6 million (-5) relates to interest ex- pense for derivatives recognised at fair value through profit/loss for the year. Remaining interest ex- pense is calculated using the effective interest rate method and relates to financial items valued at amortised cost. The net gains and losses stated in net financial items mainly relate to currency revaluations of in- ternal loans and hedging of internal lending. The parent company’s net financial items also include currency revaluation of 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 com- ponent in forward foreign exchange contracts as well as value changes in accrued interest and re- alised 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 2018 / NOTES NOTE 7 Note 7. Tax Taxes stated in income statement Current tax Deferred tax Total Group 2018 36 -125 -89 2017 -436 -10 -445 Parent company 2017 -208 11 -197 2018 1 46 47 Tax recognised totalled SEK -89 million, corresponding to 4 per cent of profit before tax. There was a positive effect of SEK 315 million on recognised tax owing to a decision on lower future corpora- tion tax in Sweden reducing the deferred tax liability. Taxes stated in income statement Recognised profit/loss before tax 2018 SEKm 2 356 Group % 2017 SEKm 2 113 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 -518 5 54 -30 -2 3 87 315 -2 -89 22.0 -0.2 -2.3 1.3 0.1 -0.1 -3.7 -13.4 0.1 3.8 Tax attributable to other comprehensive income Cash flow hedging Share in joint ventures’ other comprehensive income Translation difference on foreign operations Hedging of currency risk in foreign operations Revaluations of defined benefit pension plans Other comprehensive income Group After tax Before tax Before tax Tax 2018 329 -23 55 -8 -52 302 -71 - - 2 10 -60 258 -23 55 -6 -42 242 35 -4 36 -49 121 140 -465 6 7 -5 -2 11 -8 10 0 -445 Tax 2017 -8 - - 11 -24 -21 Parent company 2018 SEKm 467 -103 0 107 -8 -2 0 1 40 11 47 % 22.0 0.0 -23.0 1.8 0.3 0.0 -0.2 -8.6 -2.4 -10.0 2017 SEKm 2 044 -450 0 328 -182 -2 0 107 0 1 -197 % 22.0 -0.3 -0.3 0.2 0.1 -0.5 0.4 -0.5 0.0 21.1 After tax Before tax 28 -4 36 -38 97 119 326 - - - - 326 Tax 2018 -70 - - - - -70 Parent company After tax Before tax 255 - - - - 255 38 - - - - 38 Tax 2017 -8 - - - - -8 % 22.0 0.0 -16.0 8.9 0.1 0.0 -5.3 0.0 -0.1 9.7 After tax 29 - - - - 29 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 2018 2017 Parent company 2017 2018 1 328 329 1 36 37 3 811 1 754 225 44 4 5 839 13 5 852 3 943 1 278 444 -27 11 5 650 21 5 671 - 327 327 594 2 - 44 -6 635 - 635 - 29 29 635 -1 - -26 2 610 - 610 52 HOLMEN ANNUAL REPORT 2018 / NOTESNOTES 7–9 Change in the net amount of deferred tax assets and deferred tax liabilities Group Stated in the income statement 131 -473 219 - -3 -125 Stated in other comprehen- sive income - - - -71 10 -61 Group Stated in the income statement -89 39 57 - -17 -10 Stated in other comprehen- sive income - - - -8 -24 -32 Opening balance -3 943 -1 278 -444 27 -10 -5 648 Opening balance -3 854 -1 319 -502 35 32 -5 608 Translation differences and other - -3 - 0 -4 Translation differences and other - 2 - - 0 1 Closing balance -3 811 -1 754 -225 -44 -3 -5 838 Closing balance -3 943 -1 278 -444 27 -10 -5 648 Parent company Stated in the income statement 40 -3 - - 8 46 Stated in other comprehen- sive income - - - -70 - -70 Parent company Stated in the income statement 0 0 - - 11 11 Stated in other comprehen- sive income - - - -8 - -8 Opening balance -635 1 - 26 -2 -610 Opening balance -634 1 - 35 -13 -612 Closing balance -594 -2 - -44 6 -635 Closing balance -635 1 - 26 -2 -610 2018 Biological assets* Property, plant and equipment Tax allocation reserve Transactions subject to hedge accounting Other Deferred net tax liability 2017 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 a change in the tax rate in Sweden and changes in temporary differences. The amount recognised in other comprehensive income includes deferred tax related to changes of SEK 71 million (-8) in hedging reserves and an impact of SEK 10 million (-24) 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 350 million. No deferred tax asset has been recognised. There are no other loss carry-for- wards of significance in the Group. Note 8. Earnings per share Note 9. Non-current intangible assets 2017 167 992 324 167 992 324 Total number of shares outstanding, 1 January - - Buy-back of company’s own shares during the year Total number of shares outstanding, 31 December 167 992 324 167 992 324 2018 Group Weighted average number of shares during the year, basic 167 992 324 167 992 324 Effect of share savings programme - Weighted average number of shares during the year, diluted 167 992 324 167 992 324 - 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 2 268 1 668 167 992 324 167 992 324 9.9 13.5 2 268 1 668 167 992 324 167 992 324 9.9 13.5 The 2018 AGM approved a share split, meaning that each share, irrespective of series, is divided into two shares (2:1 split) of the same series. The share split was carried out in May 2018. Compar- ative figures in the table above have been adjusted for the new number of shares. See Note 16 for information about share capital prior to the share split. In previous years 1 520 000 class B shares were repurchased, which corresponds to approximately 0.9 per cent of the total number of shares outstanding, and to approximately 0.3 per cent of the total number of votes. In 2016, Holmen introduced a share savings programme. The programme involves previously repur- chased 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 pe- riod. The programme expires in May 2019 and approximately 75 000 shares are expected be trans- ferred from the company to the owners. The company’s commitment to allocate shares to partici- pants will be fulfilled through the use of previously repurchased shares. The allocation of repurchased shares in order to meet the undertaking 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 Translation differences Total Accumulated amortisation, depreciation and impairment losses 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 2018 212 18 0 231 2017 194 18 0 212 Parent company 2017 26 - - 26 2018 26 55 - 81 123 16 25 - 0 163 68 107 15 - 0 0 123 90 19 12 25 - - 56 25 19 - - - - 19 8 Non-current intangible assets mainly comprise IT systems at SEK 13 million (50) and rights of use for certain energy assets at SEK 42 million (32). These assets were largely acquired from external sources. They have determinable useful lives and are amortised over 5–20 years. No goodwill ap- plies for the Group. 53 HOLMEN ANNUAL REPORT 2018 / NOTESNOTE 10 Note 10. Property, plant and equipment Group Accumulated acquisition costs Opening balance Investments Reclassifications Disposal and retirement of assets Translation differences Total Accumulated depreciation, amor- tisation and impairment losses Opening balance Depreciation and amortisation according to plan for the year Disposal and retirement of assets Translation differences Total Residual value according to plan at end of year Forest land 2018 Buildings, other land and land installations 2017 2018 2017 Machinery and equipment 2018 2017 Work in progress and advance payments to suppliers 2018 2017 140 167 - -7 0 301 - - - - 146 0 - -6 0 140 - - - - - 5 633 54 - -5 13 5 695 3 316 99 -5 8 3 418 5 594 51 - -7 -5 5 633 28 031 723 4 -280 95 28 573 27 572 559 67 -132 -35 28 031 3 228 21 471 20 739 96 -7 -1 3 316 898 -277 62 22 154 879 -127 -20 21 471 61 22 -4 - 1 80 - - - - - 44 84 -67 - 1 61 - - - - - Total 2018 2017 33 865 966 - -291 110 34 649 33 356 693 - -145 -39 33 865 24 787 23 967 997 -282 70 25 572 976 -134 -21 24 787 301 140 2 277 2 317 6 418 6 560 80 61 9 077 9 078 Parent company Accumulated acquisition costs Opening balance Investments Disposal and retirement of assets Total Accumulated depreciation and amortisation according to plan Opening balance Depreciation and amortisation according to plan for the year Disposal and retirement of assets Total Accumulated revaluations Opening balance Disposal and retirement of assets Total Residual value according to plan at end of year Forest land 2018 Buildings, other land and land installations 2017 2018 2017 Machinery and equipment 2018 2017 Total 2018 2017 464 4 0 469 - - - - 464 1 0 464 - - - - 2 389 0 2 388 2 857 2 389 0 2 389 2 853 150 17 -1 166 131 2 0 133 1 - 1 34 139 11 0 150 130 1 0 131 1 - 1 20 210 59 -19 251 154 33 -19 168 - - - 83 220 21 -30 210 158 24 -29 154 - - - 56 825 81 -20 886 285 35 -19 301 823 32 -30 825 288 25 -29 285 2 389 0 2 389 2 974 2 389 0 2 389 2 930 The Group’s investment commitments for approved and ongoing projects amounted to SEK 601 million (590) at 31 December 2018. In 2018, the company’s capitalised borrowing costs totalled SEK 3 million (2). An interest rate of 1.5 per cent (1.1) was used to determine the amount. 54 HOLMEN ANNUAL REPORT 2018 / 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 2018, this amounted to SEK 425 million (415). 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 780 1 170 -630 260 430 -230 -500 620 930 -500 210 340 -180 -400 Annual change refers to the annual rate of change used in the valuation of each parameter. For example, an increase of 0.1 per cent means that the annual price inflation will be increased from 2.0 per cent to 2.1 per cent in the calculations. Change in level means that the level for each parameter and year changes. For example, a 1 per cent price increase means that the wood prices in the calculations are raised by 1 per cent for all years (change in level). Note 11. Biological assets Forest assets are recognised in the consolidated accounts as growing forest, which is stated as a biological asset at fair value, and land, which is stated at cost. Holmen’s assessment is that no relevant market prices are available that can be used to value forest holdings as extensive as Holmen’s. The valuation is therefore made by calculating the present value of future expected cash flows from the growing forests. Fair value measurement is based on measurement level 3. This calculation of cash flows is made for the coming 100 years, which is regarded as the forests’ harvesting cycle. The cash flows are calculated on the basis of harvesting volumes according to Holmen’s current plan and assessments of future price and cost changes. The cash flows are discounted using 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 122 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 until 2030. It is then calculated that it may gradually increase to just over 4 million m3sub in 2110. 50 per cent of the harvest consists of logs that are sold to sawmills, 45 per cent consists of pulpwood that is sold to the pulp and paper industry, and the remainder 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 2019 is 445 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 18 400 million (17 831) before tax. A deferred tax liability of SEK 3 811 million (3 943) 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 14 589 million (13 888). 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 2018 17 831 150 -9 -654 1 079 - 3 18 400 2017 17 448 11 -19 -614 1 029 -23 -1 17 831 Harvest ’000 m3sub/year Prices SEK/m3sub 600 500 400 300 200 100 2001- 2010 2011- 2018 2019- 2020 2021- 2030 2031- 2040 2041- 2050 2051- 2060 2061- 2070 2071- 2080 2081- 2090 2091- 2100 2101- 2110 1999 2003 2007 2011 2015 2019 2023 4 000 3 000 2 000 1 000 0 Average harvest Planned harvest Real Nominal Price used in valuation (nominal) The Nominal price series shows the average selling price for Holmen. The Real series shows nominal prices recalculated at 2018 monetary value using historical Swedish CPI. 55 HOLMEN ANNUAL REPORT 2018 / 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 ventures Total comprehensive income from associates and joint ventures Group 2018 -9 -9 -23 -32 2017 -12 -12 -4 -16 The combined value of Holmen’s share in the profits of associates amounted to SEK 5 million (-4) for the Group and to SEK 11 million (0) for the parent company. The combined value of Holmen’s share in the profits of joint ventures amounted to SEK -27 million (-13) for the Group and to SEK -27 million (-13) for the parent company. Associates Book value at start of year Investments Share of earnings Translation difference Impairment losses Book value at end of year Group 2018 1 636 11 -21 0 - 1 626 2017 1 646 - -9 0 - 1 636 Parent company 2017 123 - - - - 123 2018 123 11 - - -20 114 Joint ventures Book value at start of year Investments Share of earnings Book value at end of year Group 2018 113 31 -30 113 2017 127 - -14 113 Parent company 2017 92 - - 92 2018 92 93 - 185 Parent company and Group holdings of shares and investments in associates and joint ventures 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 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 Book value in the parent company Holding %* Value of holding in consolidated accounts Book value in the parent company 2018 2017 36 0 1 461 14 85 29 0 0 1 626 113 1 740 - 0 - 2 85 26 - 0 114 185 299 13.9 9.9 49.4 36.0 6.8 17.7 46.8 50.0 36 0 1 463 13 75 49 0 0 1 636 113 1 749 - 0 - 2 75 46 - 0 123 92 215 Other shares and participating interests Book value at start of year Disposals Translation difference Impairment losses Book value at end of year Group 2018 2 0 0 - 1 Parent company 2017 1 0 - - 0 2018 0 0 - - 0 2017 2 0 0 - 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 1 461 million (1 463). Holmen purchased 471 GWh (491) of electrical power from Harrsele AB in 2018, giving Holmen an operating profit of SEK 107 million (94) from market sales. Harrsele AB owns power assets that generate 950 GWh of electrical power in a normal year. These assets were originally constructed in 1957–58 and the book value of the non-current assets in Harrsele AB amounts to SEK 122 million (122). The company has non-current liabilities to its owner of SEK 25 million (25). Ownership in remaining associates relates to activities in the areas of sales, research and development. The interests in Brännälvens Kraft AB, Gidekraft AB, Vattenfall Tuggen AB and VindIn AB are classified as associates even though the holdings are less than 20 per cent, since shareholder agreements provide significant influence over each company’s activities. Ownership in the joint venture, Varsvik AB, relates to wind power operations. 56 HOLMEN ANNUAL REPORT 2018 / NOTESNote 13. Financial instruments Non-current financial receivables consist of interest-bearing financial receivables from other companies, prepayments for credit facilities and the fair value of non-current derivatives. The parent company’s receivables from Group companies include a significant share of interest- free receivables between Swedish wholly owned Group companies. The partly owned wind power company Varsvik AB has loans amounting to SEK 452 million, which Holmen acquired from creditor bank for the nominal value in 2018. Current financial receivables are recognised as fixed income investments and lending for du- rations 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. Financial 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 companies include a significant amount of interest-free liabilities between Swedish wholly owned Group companies. In addition to the financial assets and liabilities identified above, the pension liability (see Note 17) is also included in net financial debt. The maturity structure and average interest for the Group’s lia- bilities are stated in the section on Risk on pages 32–35. SEK -2 494 million of the parent compa- ny’s liabilities are due for payment within one year. 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 176 million. Assets and liabilities are not offset in the report. Recognised derivatives totalled SEK 557 million (200) on the asset side and SEK -381 million (-351) on the liability side. No provision has been made for expected credit losses for the financial assets included in the net lia- bility, based on no losses arising over the past 10 years and assets held at the balance sheet date being deemed to be of good credit quality. See Note 15 for information about impairment testing of trade receivables. The fair value of financial instruments traded on an active market is based on listed market prices and belongs to measurement level 1 as per IFRS 13. Where there are no listed market prices, fair value has been calculated using discounted cash flows. In calculating discounted cash flows, vari- ables 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 dis- count 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. Currency options are val- ued using the Black & Scholes formula, where appropriate. Holmen uses valuation level 2 when measuring financial instruments in accordance with 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 receiva- bles and trade payables, the book value is stated as the fair value, as this is judged to be a good re- flection of the fair value. For further information about financing and quantitative data on Holmen’s hedge accounting see the section on Risk on pages 32–35 and Note 6 on page 51. NOTE 13 Group Maturity structure, undiscounted amounts Financial liabilities Derivatives Derivatives attributable to working capital Trade payables Other financial liabilities Financial receivables Derivatives Derivatives attributable to working capital Trade receivables Other financial receivables Parent company Maturity structure, undiscounted amounts Financial liabilities Derivatives Derivatives attributable to working capital Trade payables Other financial liabilities Financial receivables Derivatives Derivatives attributable to working capital Trade receivables Other financial receivables 2019 2020 2021 2022 2023– -25 -273 -2 232 -2 489 17 286 1 929 342 -18 -73 - -8 - 178 - 32 - -3 - -1 - 77 - 42 - - - - -501 - - -500 - - - 50 - - - 392 2019 2020 2021 2022 2023– -25 -273 -2 033 -2 489 17 286 1 594 295 -18 -73 - -7 - 178 - 32 - -3 - -1 - 77 - 42 - - - - -501 - - -500 - - - 50 - - - 392 Financial instruments have been reclassified in conjunction with the introduction of IFRS 9. Reclassification has not had any effect on the book value of the financial instruments. The table below shows how financial assets and liabilities were classified under IAS 39 and how they are now classified under IFRS 9. See pages 58–59 for specification of financial instruments. Classification of financial assets and liabilities Previous classification Current classification Derivatives recognised at fair value through profit/loss Derivatives with hedge accounting Trade and loan receivables Available-for-sale assets Other liabilities Recognised at fair value through profit/loss Hedging instruments recognised at fair value through other comprehensive income Recognised at amortised cost 57 HOLMEN ANNUAL REPORT 2018 / 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) Total financial instruments Recognised at fair value through profit/loss* 2018 2017 Hedging instruments recognised at fair value through other comprehensive income 2017 2018 Recognised at amortised cost Total book value 2018 2017 2018 2017 Fair value 2018 2017 - 468 468 0 - 18 18 0 278 278 -1 000 - -7 -1 007 -1 951 -24 - -12 -500 0 -2 487 - 42 42 0 - 24 24 0 356 356 -500 - -7 -507 -2 099 -10 - -11 -650 0 -2 770 0 468 468 0 17 18 35 0 278 278 -1 000 -26 -7 -1 033 -1 951 -24 -7 -12 -500 0 -2 494 0 42 42 0 8 24 32 0 356 356 -500 -45 -7 -552 -2 099 -10 -4 -11 -650 0 -2 775 0 468 468 0 17 18 35 0 278 278 -1 000 -26 -7 -1 033 -1 951 -24 -7 -12 -500 0 -2 494 0 42 42 0 8 24 32 0 356 356 -500 -45 -7 -552 -2 099 -10 -4 -11 -650 0 -2 775 - 1 929 - 2 089 1 1 929 2 2 089 1 1 929 2 2 089 - - - - - - - - - - -26 - -26 - - - - - - - - - 0 - 0 - - - - - - - - -45 - -45 - - - - - - - - - 536 192 - - 541 192 541 192 - -303 233 - -2 232 -1 957 -2 232 -1 957 -2 232 -1 957 -267 -75 - -303 - 132 -348 109 -301 25 -348 109 -301 25 207 -121 -3 033 -2 723 -2 855 -2 872 -2 855 -2 872 - - - - 17 - 17 - - - - - - - - - -7 - - - -7 1 - 5 - -45 -39 -29 - - - - 8 - 8 - - - - - - - - - -4 - - - -4 2 - 1 - -34 -31 -28 *Refers to instruments compulsorily valued at fair value in accordance with IFRS 9. 58 HOLMEN ANNUAL REPORT 2018 / NOTES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) Total financial instruments - - - - - 17 - 17 - - - - - - - - -7 - - - -7 0 - 5 - -45 -40 -30 0 - - 0 - 8 - 8 - - - - - - - - -4 - - - -4 0 - 4 - -34 -30 -27 *Refers to instruments compulsorily valued at fair value in accordance with IFRS 9. NOTE 13 Recognised at fair value through profit/loss* 2018 2017 Hedging instruments recognised at fair value through other comprehensive income 2017 2018 Recognised at amortised cost Total book value 2018 2017 2018 2017 Fair value 2018 - 6 954 465 7 419 0 - 18 18 230 230 -1 000 -6 791 - -7 331 -1 951 -24 - -12 -500 0 -2 487 - 2 916 102 3 018 0 - 24 24 294 294 -500 -334 - -834 -2 099 -10 - -11 -650 0 -2 770 - 6 954 465 7 419 0 17 18 35 230 230 -1 000 -6 791 -26 -7 817 -1 951 -24 -7 -12 -500 0 -2 494 0 2 916 102 3 018 0 8 24 32 294 294 -500 -334 -45 -880 -2 099 -10 -4 -11 -650 0 -2 775 - 6 954 465 7 419 0 17 18 35 230 230 -1 000 -6 791 -26 -7 817 -1 951 -24 -7 -12 -500 0 -2 494 2017 0 2 916 102 3 018 0 8 24 32 294 294 -500 -334 -45 -880 -2 099 -10 -4 -11 -650 0 -2 775 - - - - - - - - - - - - -26 -26 - - - - - - - - - - - - - - - - - - - - - -45 -45 - - - - - - - - - - 1 594 - 1 769 0 1 594 0 1 769 0 1 594 0 1 769 536 194 - - 541 198 541 198 - -304 232 - -2 033 -1 814 -2 033 -1 814 -2 033 -1 814 -267 -73 - -439 - -45 -350 -248 -301 -148 -350 -248 -301 -148 206 -118 -2 590 -313 -2 875 -458 -2 875 -458 59 HOLMEN ANNUAL REPORT 2018 / NOTESNOTES 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 2018 873 282 1 804 613 56 3 628 Parent company 2017 661 201 934 501 24 2 322 2018 660 239 1 369 603 55 2 926 2017 842 212 1 319 507 24 2 905 During the year impairment losses on finished stock had an effect of SEK -6 (8) 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 -2 million (-2) on the parent company. Note 15. Operating receivables Trade receivables Group companies Associates Other Total trade receivables Current receivables Group companies Associates Other Financial derivatives Prepayments and accrued income Total other operating receivables Total operating receivables Group 2018 2017 Parent company 2017 2018 - 61 1 868 1 929 - - 214 541 205 959 2 889 - 56 2 033 2 089 - 3 291 192 171 658 2 747 37 61 1 495 1 594 - - 184 541 104 830 2 424 59 56 1 654 1 769 - 3 168 198 72 442 2 210 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 consist of receivables from European customers. Trade receivables denominated in foreign currencies were valued at the balance sheet date. Contract assets attributable to goods delivered but not yet invoiced that are not included in the item ‘Trade receivables’ amounted to SEK 26 million (17). The provision for expected credit losses was SEK 34 million (41) at 31 December 2018. During the year, the provision was changed by SEK -1 million (-2) as a result of actual credit losses, and by SEK -6 million (6) as a result of changes in the provision for anticipated or expected credit losses. At 31 December 2018, SEK 27 million (33) of trade receivables were past due for more than 30 days. The credit quality of trade receivables that are neither past due nor impaired is deemed to be good and on a par with previous years. The fair values of derivatives relate to hedges of future cash flows. Registered share capital Class A Class B Total no. of shares Repurchased class B shares Total number of shares outstanding Number 45 246 468 124 265 856 169 512 324 -1 520 000 167 992 324 Registered share capital Class A Class B Total no. of shares Repurchased class B shares Total number of shares outstanding Number 22 623 234 62 132 928 84 756 162 -760 000 83 996 162 31 Dec 2018 Quotient value 25 25 31 Dec 2017 Quotient value 50 50 SEKm 1 131 3 107 4 238 SEKm 1 131 3 107 4 238 The 2018 AGM approved a share split, meaning that each share, irrespective of series, was divided into two shares (2:1 split) of the same series, which is why the number of shares has increased. The company’s share capital consists of shares issued in two classes: class A, each of which car- ries 10 votes, and class B, each of which carries one vote. In other respects, there are no restric- tions between classes of shares. At 31 December 2018 the Group’s own shareholding was 1 520 000 shares (760 000). None of the Group’s own shares were sold during the year. The increase was due to the share split being carried out. Assets and liabilities measured at fair value according to Chapter 4 Section 14a of the Swedish Annual Accounts Act had an impact of SEK 176 million (-145) on parent company equity. In the consolidated accounts, valuation of derivatives and other financial instruments had an impact of SEK 178 million (-151) 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 5 480 444 085. The Board proposes that the AGM on 11 April 2019 approve a dividend of SEK 6.75 per share. The pro- posed dividend totals SEK 1 134 million. The Board also proposes that the remaining amount of SEK 4 346 495 898 be carried forward. For the previous year the dividend was SEK 13 per share (SEK 1 092 million), which corresponds to SEK 6.5 per share following implementation of the share split. The debt/equity ratio was 0.12 (0.13). 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. 60 HOLMEN ANNUAL REPORT 2018 / 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. In the UK there are two defined benefit plans. Both 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 2018 2017 Parent company 2017 2018 -7 0 -7 -5 -4 -9 -18 0 -18 -12 0 -12 -117 -123 -128 -137 -93 -111 -106 -118 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 2018 -135 14 56 53 -5 -34 -52 2017 103 122 -101 14 1 -18 121 The change in the defined benefit obligations and the change in plan assets are specified in the ta- bles 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 two trusts. These are governed by boards consisting of representatives from Holmen and the beneficiaries. Holmen’s UK subsidiaries have commitments to cover any deficits that exist. This should be done over a period of time estab- lished between the respective trust and the company in consultation with its actuary. The assets in one trust exceed the commitment by SEK 52 million. This surplus has not been recognised as there are no offset rights. This adjustment is referred to as an asset ceiling in tables. The other trust has a deficit of SEK 23 million which will be covered over the next three years. Obligations Obligations at 1 January Current service cost Payroll tax Interest expense Actuarial gains/losses Benefits paid Exchange differences Obligations at 31 December Group 2018 2017 -2 198 -2 414 -5 2 -60 35 222 21 -2 063 -2 198 -7 -2 -55 122 127 -52 Parent company 2017 -167 -12 - -5 - 11 - -173 2018 -173 -18 - 5 - 11 - -176 The weighted average duration is 16 years. Of the Group’s total obligations, SEK 9 million (10) refers to those that are not funded, while the rest are wholly or partially funded obligations. Of the parent company’s obligations, SEK 20 million (12) are secured under the Swedish Pension Obligations Vesting Act. NOTE 17 Plan assets Fair value of assets at 1 January Interest income Expected return excl. recognised interest income Real return (parent company) Administrative expenses 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 2018 2 177 55 -135 - -2 24 -115 51 2 053 -52 -61 2017 2 213 55 103 - -3 37 -210 -19 2 177 -18 -39 Parent company 2017 155 - 2018 160 - - -5 - - - - 156 - -20 - 5 - - - - 160 - -12 Group 2018 1 007 1 040 6 2 053 2017 1 098 1 050 29 2 177 Parent company 2017 79 79 3 160 2018 70 83 2 156 The plan assets do not include any financial instruments issued by Group companies or assets used by the Group. Of equities, 46 per cent relate to the UK, 49 per cent to the rest of Europe and the US and 5 per cent to the rest of the world. Of bonds, 44 per cent relate to government bonds and 56 per cent to corporate bonds. Key actuarial assumptions, Group (weighted average), % Discount rate Rate of salary increase Rate of price inflation Group 31 Dec 2018 2.7 3.0 3.2 31 Dec 2017 2.5 3.0 3.1 The discount rate for pension obligations have been established based on high-quality corpo- rate bonds in the relevant currency and country of the commitment, i.e. mainly the UK. A discount rate of 0.6 per cent (0.6) and salary levels at the balance sheet date were used for calculating the amount of the parent company’s pension obligation. The table below shows how the obligation would be affected in the event of a change in key actuarial assumptions (- reduces debt, + increases debt). Sensitivity analysis Discount rate (+ 0.5%) Rate of salary increase (+ 0.5%) Rate of price inflation (+ 0.5%) Mortality (+ 1 year in life expectancy) Group 31 Dec 2018 -144 2 111 92 31 Dec 2017 -183 2 129 108 The Group’s payments into the funded defined benefit plans in 2019 are expected to amount to SEK 5 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 (31) and are included among personnel costs in the income statement. Holmen’s active members in the plan amounted to 672 people, which corresponds to 0.14 per cent of the plan’s active members. Premiums to Alecta are expected to amount to SEK 27 million in 2019. 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 150 per cent, measures will be taken to create the conditions to ensure the level of consolidation returns to the normal range. In the event of low consolidation, one measure may be to raise the agreed price for new policy subscriptions and an increase in existing benefits. In the event of high consolidation, one measure may be to introduce reductions in premiums. At the end of 2018, Alecta’s collective consolidation level was 142 per cent (154). 61 HOLMEN ANNUAL REPORT 2018 / NOTES NOTES 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 2018 185 - - -95 - 90 90 - 45 - - - 45 45 - 2017 45 140 - - - 185 185 - 45 - - - 45 45 - 2018 622 76 -110 - 3 590 393 197 725 180 -197 - 708 451 256 2017 856 6 -240 -2 3 622 477 144 833 105 -211 -2 725 532 193 2018 807 76 -110 -95 3 680 483 197 770 180 -197 - 753 496 256 2017 901 146 -240 -2 3 807 662 144 878 105 -211 -2 770 577 193 Other provisions mainly relate to uncertainties associated with obligations for environmental restoration, fixed price electricity supply contracts and restructuring costs. SEK 370 million of these provisions are expected to be settled within three years, while the remainder is expected to be settled over a longer time horizon. Note 19. Operating liabilities Note 20. Operating leases Group 2018 2017 Parent company 2017 2018 In 2018, the Group’s lease payments amounted to SEK 72 million (52), and the parent company’s to SEK 46 million (38). The Group’s leases mainly relate to transportation and office rent. 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 - - 1 957 1 957 - 6 186 301 563 1 056 3 012 36 1 996 2 033 0 7 159 350 472 989 3 022 53 - 1 761 1 814 0 6 170 301 458 935 2 749 2 232 2 232 8 171 348 581 1 108 3 340 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 210 million (191), discounts of SEK 54 million (52) and goods and services delivered but not yet invoiced of SEK 78 million (46). The fair values of derivatives relate to hedges of future cash flows. See Note 13. Breakdown of future lease payments Future lease payments Present value of future lease payments Group 2020 –2023 99 2019 72 Parent company 2024– 42 2019 46 2020 –2023 65 2024– 40 71 95 37 46 62 36 The contracts have remaining durations ranging from 1 to 10 years. The net present value of the Group’s future lease payments for existing leases amounted to SEK 205 million at the end of the previous year. Those in the parent company amounted to SEK 143 million. On 1 January 2019 IFRS16 Leases comes into force, which means that assets and liabilities attribu table to all leases, with some exceptions, are recognised in the balance sheet. See Note 1 for information about the transition method. 62 HOLMEN ANNUAL REPORT 2018 / NOTESNOTES 21–22 Note 21. Collateral and contingent liabilities Group Financial liabilities Total Parent company Financial liabilities Total Property mortgage Other collateral - - - - 6 6 6 6 Total collateral 2018 6 6 Total collateral 2017 143 143 Contingent liabilities Surety on behalf of Group companies Other contingent liabilities Total Group 2018 - 98 98 Parent company 2017 40 83 123 2018 38 83 122 2017 - 97 97 6 6 143 143 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. Note 22. Related parties Of the parent company’s net sales of SEK 14 384 million (14 345), SEK 151 million (115) relates to deliveries of goods to Group companies. The parent company’s purchases of goods from Group companies amounted to SEK 242 million (1 056). Parent company net sales also include income from the sale of silviculture services to subsidiaries for an amount of SEK 389 million (-). SEK -1 378 million (-1 208) of expenses for leasing of non-current assets from subsidiaries are recognised in the parent company. There are significant financial receivables and liabilities between the parent company and its Swedish subsidiaries, which do not carry interest. The parent company has a related party relationship with its subsidiaries (see Note 23). L E Lundbergföretagen AB is a major shareholder in Holmen (see page 37). Holmen rents office premises for SEK 6 million (8) from Fastighets AB L E Lundberg, which is a group company within L E Lundbergföretagen AB. In 2018, Fredrik Lundberg, who is CEO and principal shareholder in L E Lundbergföretagen, received a fee of SEK 710 000 (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 355 000 (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 re- lation 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. The partly owned wind power company Varsvik AB has loans amounting to SEK 452 million, which Holmen acquired from creditor banks for the nominal value in 2018. Transactions with related parties Group Associates Joint venture Parent company Subsidiaries Associates Joint venture Sale of products to related parties 2018 395 3 2017 333 3 151 395 3 115 333 3 Purchase of products from related parties Other (e.g. interest, dividend) 2018 71 - 242 71 - 2017 85 - 1 056 85 - 2018 0 17 374 0 16 2017 0 5 1 325 0 5 Liability to related parties 2018 37 - 2017 56 - Receivable from related parties 2018 85 454 2017 89 24 6 830 34 - 388 52 - 6 993 85 454 2 982 89 86 For fees and remuneration paid to members of the Board, see Note 4. 63 HOLMEN ANNUAL REPORT 2018 / NOTES NOTE 23 Note 23. Investments in Group companies Accumulated acquisition costs Book value at start of year Purchasing Shareholder’s contribution Sales Closing balance at 31 December Parent company 2018 17 142 1 - -1 17 142 2017 17 141 0 1 - 17 142 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 2018 6 655 - 6 655 10 487 2017 5 838 817 6 655 10 487 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’. 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 Holmens Bruk AB Holmen Skog Mitt AB Holmen Skog Syd AB Holmen Sågverk AB Holmen Vattenkraft AB Iggesunds Bruk AB Ljusnan Vattenkraft AB Holmen Holding AB MoDo Capital AB Holmen Energi Elnät AB Stavro Vind AB Other Swedish Group companies Total Swedish holdings Holmen UK Ltd, UK Holmen Paper Ltd** Iggesund Paperboard (Workington) Ltd** Holmen France S.A.S., France 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 Corporate ID No. Registered office Number of holdings Holding %* Book value in the parent company Holding %* Book value in the parent company 2018 2017 556220-0658 556088-5294 556005-6383 556099-0672 556524-8456 556537-4286 559165-6615 559165-6623 559165-6631 559165-6672 559165-6664 559165-6656 559165-6680 516406-0062 556499-1668 556878-3905 556953-6153 Örnsköldsvik Hudiksvall Norrköping Hudiksvall Örnsköldsvik Stockholm Stockholm Stockholm Stockholm Stockholm Stockholm Stockholm Stockholm Stockholm Stockholm Örnsköldsvik Stockholm Workington London Workington Paris Hamburg Madrid Madrid Singapore Amsterdam Tallinn Lyndhurst Hong Kong 1 000 1 000 100 1 000 1 000 - 1 000 1 000 1 000 1 000 1 000 1 000 1 000 10 000 1 000 500 500 1 197 100 - - 10 000 - 9 448 557 - 800 000 35 500 1 000 4 000 000 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 0 0 0 0 0 - 383 2 856 1 527 422 2 663 740 276 0 72 0 0 2 8 943 1 519 - - 0 1 0 - 4 7 0 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 0 2 8 942 1 519 - - 0 1 0 - 4 7 0 7 5 2 1 545 10 487 *The percentage of ownership corresponds to the percentage of votes for the total number of shares. **Indirect holdings. 64 HOLMEN ANNUAL REPORT 2018 / NOTESNote 24. Untaxed reserves Note 26. Critical accounting estimates and judgements NOTES 24–26 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 accounts, 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 2018 was SEK 18 400 million and the attributable deferred tax liability was SEK 3 811 million, giving a net value of SEK 14 589 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 350 million. No deferred tax asset has been recognised. See Note 7. Pension obligations The Group has benefit-based pension obligations measured at SEK 2 063 million and SEK 2 053 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 and demographic factors. These commitments 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 restoration, fixed price electricity supply contracts and corporation tax risks. See Note 18. Accumulated depreciation and amortisation in excess of plan Non-current intangible assets Property, plant and equipment Parent company 31 Dec 2017 Appropriations -23 -2 -24 - 12 12 31 Dec 2018 -23 11 -12 Tax allocation reserves 2013 fiscal year 2014 fiscal year 2015 fiscal year 2016 fiscal year 2017 fiscal year Total 280 610 370 290 470 2 020 2 032 -280 -610 -106 - - -996 -1 020 - - 264 290 470 1 024 1 012 Group contributions received amounted to SEK 191 million (530) and Group contributions paid amounted to SEK -2 584 million (0). Total appropriations of profit amounted to SEK -1 373 million. Note 25. Cash flow statement Interest paid and dividends received Dividends received Interest received Interest paid Total Group 2018 - 12 -28 -16 Parent company 2017 1 314 17 -36 1 294 2018 367 23 -29 362 2017 - 2 -36 -34 The change in current liabilities mostly relates to borrowing within the Group’s commercial paper programme. In 2018, a number of different short-term loans totalling SEK 6 585 million (7 160) were raised within the Group’s commercial paper programme, and SEK 6 733 million (6 770) was repaid. For a specification of cash and cash equivalents, see Note 13. Bond loans Commercial paper Other financial liabilities Pension liability Financial liabilities including pension liability Bond loans Commercial paper Liabilities to Group companies Other financial liabilities Pension liability Financial liabilities including pension liability 2017 1 150 2 099 77 39 3 365 2017 1 150 2 099 334 70 12 3 665 Group Cash flow 350* -148 -19 -25 Currency and market revaluation - - 17 47 2018 1 500 1 951 75 61 158 64 3 587 Parent company Currency and market revaluation - - - 17 21 2018 1 500 1951 6 791 68 20 38 10 330 Cash flow 350* -148 6 457 -19 -13 6 627 * Relates to SEK 300 million in repayment of loans which when raised were long-term but at the point of repayment were short-term, SEK 350 million in repayment of short-term loans and SEK 1 000 million in loans raised. The increase in the parent company’s liabilities to associates is affected by items attributable to an intra-group restructuring. 65 HOLMEN ANNUAL REPORT 2018 / 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 2018 financial year Retained earnings The Board of Directors proposes that a dividend of SEK 6.75 per share (167 992 324 shares) be paid to the shareholders and that the remaining amount be carried forward SEK 513 951 736 4 966 492 348 5 480 444 085 1 133 948 187 4 346 495 898 The Board of Holmen AB has proposed that the 2019 Annual General Meeting resolve in favour of paying a dividend of SEK 6.75 per share – SEK 0.25 per share higher than the preceding year – totalling SEK 1 134 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 50.0 per cent of net profit for 2018 for the Group and means that 4.8 per cent of equity in the Group at 31 December 2018 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 2018 was 0.12. Payment of the proposed dividend would raise the debt/equity ratio by 0.06. Holmen AB’s equity at 31 December 2018 amounted to SEK 11 395 million, of which non­ restricted equity was SEK 5 480 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 176 million on equity. The Group’s equity at 31 December 2018 amounted to SEK 23 453 million. In accordance with IFRS, no distinction is made at Group level between restricted and non­restricted 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 12 February 2019. 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 11 April 2019. Fredrik Lundberg Chairman Carl Bennet Board member Steewe Björklundh Board member Kenneth Johansson Board member Stockholm 12 February 2019 Lars G Josefsson Board member Lars Josefsson Board member Carl Kempe Deputy Chairman Louise Lindh Board member Our audit report was submitted on 14 February 2019. KPMG AB Joakim Thilstedt Authorised Public Accountant Ulf Lundahl Board member Henriette Zeuchner Board member Tommy Åsenbrygg Board member Henrik Sjölund Board member and Chief Executive Officer 66 HOLMEN ANNUAL REPORT 2018 / PROPOSED APPROPRIATION OF PROFITS Auditor’s report To the general meeting of the shareholders of Holmen AB, corp. id 556001-3301 Report on the annual accounts and consolidated accounts Opinions We have audited the annual accounts and consolidated accounts of Holmen AB for the year 2018, except for the sustainability report on pages 8­9, 23­24, 30, 31, 33. The annual accounts and consolidated accounts of the company are included on pages 2­3, 8­9, 23­24, 28­66, 70­71 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 2018 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 2018 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 the sustainability report on pages 8­9, 23­24, 30, 31, 33. 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 con­ trolled 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 See note 11, note 26 and the Accounting Principles on pages 44-47 of in 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 18 400 million as of 31 December 2018. 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 per­ formed 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 assump­ tions can affect the overall valuation. In addition to this we have compared the Group’s valuation to valuations performed by other companies via comparison of calculated value per cubic metre. We have also considered the completeness of the disclosures in the Annual Report and assessed whether they are in agreement with the assumptions made by Company management in their valuation of Biological Assets. Other provisions See note 18, note 26 and the Accounting principles on page 44-47 in the annual accounts and consolidated accounts for detailed disclosure and description of the matter. Description of key audit matter The carrying value of the other provisions per 31 December 2018 amounts to SEK 680 million in the Group and SEK 753 million in the parent company. The other provisions include among other environmental obligations, contractual commitments regarding delivery of electricity at a fixed price, restructuring costs and tax risks. 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. 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 also considered the completeness of the disclosures in the Annual Report and assessed whether they are, in all material respects, in agreement with IFRS require­ ments. HOLMEN ANNUAL REPORT 2018 / 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 4­7, 10­22, 25­27 samt 72­79. 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 procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the over­ ride of internal control. • Obtain an understanding of the company’s internal control relevant to our audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors and the Managing Director. • Conclude on the appropriateness of the Board of Directors’ and the Managing Direc­ tor’s, use of the going concern basis of accounting in preparing the annual accounts and consolidated accounts. We also draw a conclusion, based on the audit evidence obtained, as to whether any material uncertainty exists related to events or conditions that may cast significant doubt on the company’s and the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the annual ac­ counts 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 for the year 2018 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 Accounts Act or the Articles of Association. Our objective concerning the audit of the proposed appropriations of the company’s profit or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company’s profit or loss are not in accordance with the Companies Act. As part of an audit in accordance with generally accepted auditing standards in Sweden, we exercise professional judgment and maintain professional 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 2018 / AUDITOR'S REPORT The auditor’s opinion regarding the statutory sustainability report The Board of Directors is responsible for the sustainability report on pages 8­9, 23­24, 30, 31, 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 by the gen­ eral meeting of the shareholders on the 10 April 2018. KPMG AB or auditors operating at KPMG AB have been the company’s auditor since 1995. Stockholm 14 February 2019 KPMG AB Joakim Thilstedt Authorized Public Accountant Review of Sustainability Report Holmen’s Sustainability Report, as defined on page 2 of Holmen’s Annual Report 2018, 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 14 February 2019 KPMG AB HOLMEN ANNUAL REPORT 2018 / AUDITOR'S REPORT 69 Board of Directors 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. Carl Bennet Gothenburg. Born in 1951. Member since 2009. M.Sc. in Economics. D. Tech. h.c. CEO of Carl Bennet AB. Former President and CEO of Getinge AB. Chairman of Getinge AB, Lifco AB and Elanders AB. Other significant appointments: Board member of Arjo AB and L E Lundbergföretagen AB. Shareholding: 200 000 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: 9 834 shares. Louise Lindh Stockholm. Born in 1979. Member since 2010. M.Sc. in Economics. CEO of Fastighets AB L E Lundberg. Other significant appointments: Chairman of J2L Holding AB. Board member of Hufvudstaden AB and L E Lundbergföretagen AB. Shareholding: 200 000 shares. Fredrik Lundberg Chairman Djursholm. Born in 1951. Member since 1988. M.Sc. in Engineering and M.Sc. in Economics. Tech. h.c. and D. Econ. h.c. President and CEO of L E Lundbergföretagen AB. Other significant appointments: Chairman of Hufvudstaden AB and AB Industrivärden. Deputy Chairman of Svenska Handelsbanken AB. Board member of L E Lundbergföretagen AB and Skanska AB. Own and related parties’ shareholdings: 1 679 448 shares. Shareholding of L E Lundbergföretagen: 55 244 000 shares. Carl Kempe Deputy chairman Örnsköldsvik. Born in 1939. Member since 1983. Licentiate in Engineering. Dr. h.c. mult. Other significant appointments: Chairman of MoRe Research AB and permanent secretary of the Kempe Foundations. Own and related parties’ shareholdings: 772 000 shares. Tommy Åsenbrygg Skebobruk. Born in 1968. Member since 2015. Employee representative, PTK. Shareholding: 200 shares. 70 HOLMEN ANNUAL REPORT 2018 / BOARD OF DIRECTORS Per-Arne Berg Forsa. Born in 1955. Deputy member since 2015. Employee representative, PTK. Chairman of the Holmen-Iggesund Trade Union Club. 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: 1 600 shares. Daniel Hägglund Örnsköldsvik. Born in 1982. Deputy member since 2014. Employee representative, PTK. 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 Industrietreuhand KG and Brookfield Renewable Energy. Board member of Hand in Hand International and member of The Royal Swedish Academy of Engineering Sciences, IVA. Shareholding: 10 000 shares. Lars Josefsson Norrköping. Born in 1953. Member since 2016. M.Sc. in Engineering. Other significant appointments: Chairman of Ouman and TimeZynk. Board member of Metso. Deputy Chairman of Vestas. Shareholding: 5 000 shares. Ulf Lundahl Lidingö. Born in 1952. Member since 2004. Bachelor of Laws and M.Sc. in Economics. Other significant appointments: Chairman of Attendo AB, Fidelio Capital AB, Ramirent plc and SHB Regionbank Stockholm. Board member of Eltel AB, Indutrade AB and Nordstjernan Kredit AB. Shareholding: 8 000 shares. Christer Johansson Iggesund. Born in 1959. Deputy member since 2017. Employee representative, LO. Chairman of the Swedish Paper Workers Union branch 15. Steewe Björklundh Hudiksvall. Born in 1958. Member since 1998. Employee representative, LO. Information at 31 December 2018. Auditors: KPMG AB Principle Auditor: Joakim Thilstedt. Authorised Public Accountant HOLMEN ANNUAL REPORT 2018 / BOARD OF DIRECTORS 71 Group management Anders Jernhall Executive Vice President, Chief Financial Officer Lars Lundin Senior Vice President Paper Born in 1970. Joined Holmen in 1997. Shareholding: 9 800 shares. Born in 1966. Joined Holmen in 2018. Shareholding: 0 shares. Sören Petersson Senior Vice President Forest Born in 1969. Joined Holmen in 1994. Shareholding: 8 800 shares. Ola Schultz-Eklund Senior Vice President Technology Born in 1961. Joined Holmen in 1994. Shareholding: 1 600 shares. Henrik Sjölund President and CEO Born in 1966. Joined Holmen in 1993. Shareholding: 9 834 shares. Henrik Sjölund has no significant shareholdings and no ownership in companies with which the Group has important business relations. Further information about the President and CEO can be found on page 70. Gunilla Rolander Senior Vice President Human Resources Born in 1966. Joined Holmen in 2013. Shareholding: 724 shares. Nils Ringborg Senior Vice President International Affairs Born in 1958. Joined Holmen in 1988. Shareholding: 5 028 shares. Lars Ericson Senior Vice President Legal Affairs Company secretary. Born in 1959. Joined Holmen in 1988. Shareholding: 1 300 shares. Daniel Peltonen Senior Vice President Paperboard Born in 1971. Joined Holmen in 1997. Shareholding: 1 076 shares. Johan Padel Senior Vice President Wood Products Born in 1966. Joined Holmen in 2014. Shareholding: 1 660 shares. Stina Sandell Senior Vice President Sustainability and Communications Born in 1966. Joined Holmen in 2017. Shareholding: 0 shares. 72 HOLMEN ANNUAL REPORT 2018 / 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’ are used. 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 excluding items affecting comparability 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 74 for what items affecting comparability refers to. 2018 2017 2016 2015 2014 3 063 -1 012 425 2 476 -94 2 382 2 476 16 055 15.4 760 425 1 185 23 453 2 807 26 261 2 476 25 469 9.7 1 033 2 494 61 -468 -35 -278 2 807 2 807 23 453 0.12 23 453 36 912 63.5 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 2 673 -1 240 267 1 700 -931 769 769 16 014 10.6 638 267 905 20 853 4 799 25 653 1 700 26 769 6.4 2 295 2 698 130 -43 -61 -221 4 799 4 799 20 853 0.23 20 853 35 456 58.8 2 717 -1 265 282 1 734 -450 1 284 1 284 15 994 10.8 535 282 817 20 969 5 907 26 876 1 734 27 010 6.4 2 488 3 269 400 -40 -22 -187 5 907 5 907 20 969 0.28 20 969 36 434 57.6 HOLMEN ANNUAL REPORT 2018 / KEY FIGURES 73 Ten-year review, finance SEKm 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 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 excluding items affecting comparability Items affecting comparability* Operating profit 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 Group-wide costs and eliminations*** Group Operating profit 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 16 055 -12 984 -9 -1 012 425 16 133 -13 379 -12 -991 415 15 513 -12 626 -22 -1 018 315 16 014 -13 348 7 -1 240 267 15 994 -13 270 -7 -1 265 282 16 231 -13 919 3 -1 370 264 17 852 -15 224 47 -1 313 350 18 656 -15 501 84 -1 260 - 17 581 -15 077 28 -1 251 52 18 071 -15 191 45 -1 320 16 2 476 -94 2 382 -25 2 356 -89 2 268 13.5 5 944 5 785 5 571 1 747 319 -3 311 16 055 1 185 689 329 246 181 -154 2 476 -94 2 382 2 356 540 -396 -214 2 286 -1 005 1 281 2 166 - 2 166 -53 2 113 -445 1 668 9.9 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 2 162 -232 1 930 -71 1 859 -436 1 424 8.5 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 1 700 -931 769 -90 679 -120 559 3.4 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 -824 1 702 1 734 -450 1 284 -147 1 137 -230 907 5.4 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 -815 1 361 1 209 -140 1 069 -198 871 -160 711 4.3 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 -872 1 139 1 713 -193 1 520 -227 1 294 559 1 853 11.1 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 -1 957 297 1 980 3 593 5 573 -244 5 328 -1 374 3 955 23.6 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 -1 791 310 1 332 264 1 596 -208 1 388 -684 704 4.2 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 -1 585 -62 1 620 - 1 620 -255 1 366 -360 1 006 6.0 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 -714 2 158 Dividend paid -1 092 -1 008 -882 -840 -756 -756 -672 -588 -588 -756 *Items affecting comparability: 2018: Restructuring costs of SEK -94 million. 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. **Historical figures have been adjusted because of the share split (2:1) in 2018. ***Income and costs from the sale of newsprint from the Spanish mill sold in Q2 2016 are recognised in the Group-wide segment. ****Net after disposals and before changes in non-current financial receivables. 74 HOLMEN ANNUAL REPORT 2018 / 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 *Excluding non-current financial receivables. 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 For a ten-year review of data per share, see page 37. 29 287 6 845 503 278 36 912 23 453 5 839 3 588 4 032 36 912 14 830 5 316 2 072 927 3 082 34 26 261 12 6 14 15 8 12 15 27 6 10 10 0.12 2 831 525 1 036 828 1 145 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 **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. 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 75 HOLMEN ANNUAL REPORT 2018 / TEN-YEAR REVIEW, FINANCE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 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 environmental protection is reported in accordance with guidelines from Statistics Sweden. As some of the details provided in this report had already been collected by the end of the year they refer to, they might differ slightly from the information finally reported to the authorities. Production Paperboard, ’000 tonnes Market pulp, ’000 tonnes 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) Environmental protection expenditure, SEKm Investments (remedial and preventive) Electricity and heat-saving investments12) Environmental taxes and charges13) Internal and external environmental expenses14) Environmental cost of forestry15) 2018 2017 2016 2015 2014 538 66 1 069 873 1 145 679 5.62 78 6 2382) 3 9963) 73 2.9 165 164 56 986 45 75 1 660 48 216 16 21.5 3.5 977 166 13 1.6 7.6 137 370 84 10 12 165 91 530 54 1 088 827 1 169 621 5.63 79 6 099 3 987 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 44 20 12 137 62 503 56 1 176 776 1 080 784 5.36 70 6 375 3 949 70 2.6 151 148 41 960 39 124 1 540 52 208 14 20.4 3.2 872 270 13 2.2 16.0 155 380 55 8 14 182 71 502 56 1 287 734 1 441 781 5.10 79 6 288 3 994 68 2.5 138 146 52 891 48 180 1 440 57 226 19 21.0 3.3 823 303 12 1.9 13.0 230 348 12 18 12 208 101 500 67 1 325 742 1 113 740 5.16 75 6 230 4 067 74 2.1 146 147 57 1 181 29 126 1 550 54 203 19 20.4 3.6 824 296 13 1.6 5.6 275 305 26 320 10 169 70 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 4 675 GWh from production at mills from recovered liquors, bark and wood residues, 1 222 GWh from the TMP process at Braviken Paper Mill, Hallsta Paper Mill and the mill in Workington. The process generates thermal energy that is recovered and used in production. 341 GWh comes from natural gas, oil and pur- chased thermal energy. 3) Of which 1 420 GWh from renewables and 2 576 GWh from nuclear. Emissions of fossil carbon dioxide from production of purchased electricity totalled 21 tonnes. 4) Almost 100 per cent use of surface water from lakes and watercourses. 5) Stated as 100 per cent active substance. Total quantity of commodities was 238 000 tonnes for chemicals and 232 000 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 2018, 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 2018 totalled 634 tonnes. 10) Branches, treetops and peat delivered from Holmen’s land to external energy producers. 11) For 2018: 130 GWh of electrical energy supplied from the mill at Workington to the local community. 229 GWh of thermal energy from Iggesund Mill and Braviken Paper Mill to Iggesund Sawmill and Braviken Sawmill. A total of 11 GWh thermal energy from Hallsta Paper Mill and Iggesund Mill was supplied to the district heating network of the local communities. 12) The high costs stated for 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. 13) 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. 14) Includes costs of environmental personnel, operation of treatment equipment, waste mana- gement, management systems, environmental training, applications for permits, environmental consultants and the costs of inquiries and mea- sures in connection with discontinued operations. 15) The environmental cost of forestry is calculated as the value of the wood that is not harvested for environmental reasons. Holmen sets aside just under 16 per cent of its productive forest acreage and thus refrains from harvesting just under 16 per cent of the potential volume. The annual loss of income in 2018 is estimated at SEK 91 million. 76 HOLMEN ANNUAL REPORT 2018 / FIVE-YEAR REVIEW, SUSTAINABILITY Personnel Employees Average number of whom women, % of whom temporary employees, % Average age1) Sickness absence, %2) Total of which longer than 60 days Gender equality, %1) Women managers out of total number of managers Women joining the company out of total new employees Personnel turnover, %1) Personnel turnover of which given notice of which retiring of which leaving at own request New employees Number of industrial accidents2) Industrial accidents, more than 8 hours of absence, per million hours worked Union cooperation, %3) Percentage of employees that work at a unit with a collective agreement4) Income statement per stakeholder category, SEKm Customers Suppliers Employees Lenders Society Sales of products, wood and electricity Purchases of products, services, along with depreciation, etc. Wages and social security costs Interest Property tax Excise tax Social security costs Payroll tax Corporation tax Shareholders Net profit Board’s dividend proposal 1) Relates to permanent employees. 2) No industrial accidents with a fatal outcome occurred during the year. 3) Relates to permanent and temporary employees. 4) All Swedish units have collective agreements. At foreign units, Holmen supports other forms of collective employee engagement in line with local standards. 2018 2017 2016 2015 2014 2 955 20.3 10.7 44.9 4.1 1.6 19.8 40.1 7.9 0.4 2.6 3.9 2.7 4.9 94 2 976 19.3 7.4 46.0 4.2 2.0 20.7 25.0 8.0 0.9 2.6 4.4 5.9 2 989 19.3 8.8 46.3 4.2 2.0 19.0 27.0 6.9 1.6 2.4 2.9 5.4 3 315 19.4 9.0 46.8 4.2 1.8 20.5 24.0 7.6 2.8 2.4 2.5 5.3 3 359 19.2 7.9 46.8 3.9 1.7 20.9 31.0 7.2 2.0 2.2 3.0 5.1 5.1 8.8 8.8 6.5 94 94 97 97 17 339 17 269 17 072 17 216 17 015 -12 539 -1 792 -25 -82 -30 -479 -35 -89 2 268 1 134 -12 719 -1 767 -53 -101 -31 -449 -36 -445 1 668 1 092 -12 721 -1 786 -71 -126 -26 -448 -34 -436 1 424 1 008 -13 955 -1 825 -90 -129 -27 -481 -29 -120 559 882 -13 307 -1 792 -147 -138 -18 -453 -23 -230 907 840 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 RENEWABLE 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 1) Holmen’s forest operations are certified in accordance with environ- mental management system ISO 14001. Forest operations are also certified under criteria issued by PEFC™ and FSC® respectively and have chain-of-custody certification (Controlled 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 opera- tions 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 has begun to incorporate its operations under the certification of the other sawmills. 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. HOLMEN ANNUAL REPORT 2018 / FIVE-YEAR REVIEW, SUSTAINABILITY 77 Definitions, glossary and references DEFINITIONS Capital employed Net financial debt plus equity, which corresponds to fixed capital (excluding non-current financial receivables) plus working capital less the net sum of deferred tax liabilities 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. 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 buyback of shares, if any, during the year. Diluted EPS means that any diluting effect from outstanding call options has been taken into account. Equity/assets ratio Equity expressed as a percentage of total assets. Financial assets Non-current and current financial receivables and cash and cash equivalents. Items affecting comparability Used to illustrate how income measures were affected by events outside normal business operations, such as impairment losses, disposals and major restructuring. The effects of maintenance and rebuilding shutdowns are not treated as an item affecting comparability. Page 74 states which items have been treated as items affecting comparability over the past 10 years. Net financial debt Non-current and current financial liabilities and pension provisions, less financial assets. Operating margin Operating profit/loss (excluding items affecting comparability) expressed as a percentage of net sales. Operating profit Profit before net financial items and tax. Profit before depreciation/amortisation Earnings before interest, taxes, depreciation, amortisation and change in value of forests, excl. items affecting comparability. Result before change in value Result before change in value, excl. items affecting comparability. Used for the Forest business area. Return on capital employed Operating profit/loss (excluding 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. Yield Profit/loss before change in value in relation to the book value of biological assets. Used for the Forest business area. 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 grammage can have different thicknesses depending on the paper’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 14001 An international standard for environmental management. Important principles in ISO 14001 include regular environmental audits and a gradual increase in the requirements. 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. 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 cooking 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. Wood-containing paper Paper that is manufactured from mechanical pulp. Woodfree paper Paper that is manufactured from chemical pulp. REFERENCES References page 17 • Brege, S, Nord, T and Stehn, L. Industriellt byggande i trä – nuläge och prognos mot 2025 (Industrial construction in wood – status and forecast to 2025). 2017, Linköping University. With annex from consultancy firm Tyréns, Framtidsstudie: Indata för bedömning av klimateffekt av ökat träbyggande (Future study: Input data for assessing climate impact of increased wood construction), 2017. • Hurmekoski, E. How can wood construction reduce environmental degradation, 2017. European Forest Institute. ISBN 978-952,5980-43-9. • Tettey, U, Y, A; Dodoo, A. and Gustafsson, L., Carbon balances for a low energy apartment building with different structural frame materials. 10th International Conference on Applied Energy (ICAE2018), 22-25 August 2018, Hong Kong, China. To be published in Energy Procedia. References page 24 • 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. • Sathre, R. and O’Connor, J. Meta-analysis of greenhouse gas displacement factors of wood product substitution. Environmental Science Policy 2010, 13, 104–114. • Gustavsson, L. et al. Climate change effects of forestry and substitution of carbon-intensive materials and fossil fuels. Renewable and Sustainable Energy Reviews 2017,Volume 67, 612–624. • Cintas, O. et al. The potential role of forest management in Swedish scenarios towards climate neutrality by mid century. Forest Ecology and Management 2017, 383, 73–84. The use by Holmen of any MSCI ESG Research LLC data, and the use of MSCI logos, trademarks, service marks or index names herein, do not constitute a sponsorship, endorsement or promotion of Holmen AB. MSCI services and data are the property of MSCI or its information providers. MSCI and MSCI ESG Research names and logos are trademarks or service marks of MSCI or its affiliates. 78 HOLMEN ANNUAL REPORT 2018 / DEFINITIONS, GLOSSARY AND REFERENCES Information The interim and year-end reports are presented at a tele conference for the press and analysts. The conference is in English and can 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 automatically to the share holders 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 2019 Holmen will publish the following financial reports: Interim report January–March: 8 May 2019 Interim report January–June: 15 August 2019 Interim report January–September: 18 October 2019 Year-end report: 30 January 2020 Date for trading and dividend The final date for trading in Holmen shares including right to dividend: 11 April 2019 Record date for dividend: 15 April 2019 Payment date for dividend: 18 April 2019 100% Holmen-produced This entire annual report is made using Holmen’s own pro- ducts. 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 prin- ted on Holmen TRND, which is manufactured at Hallsta Paper Mill. This is an uncoated, matt magazine paper that offers a wide range of options in terms of bulk, grammage and shade. Both Holmen TRND and Invercote G are made from fresh fibre 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, Lasse Hejdenberg, Måns Berg, Magnus Glans and others. Print: Åtta.45 Cover photos: Holmen’s forest outside Norrköping and refiner plate from Braviken Paper Mill. 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 

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