Annual Report 2012 - Investor Relations

Notes to the consolidated financial statements67Compensation of the Board of Directors and Executive CommitteeFor information on the compensation of the Board of Directors and the Executive Committee, please refer to the Notes of the financialstatements of the Cham Paper Group Holding AG on page 75.25. Risk managementRisk management is a fundamental element of business practice as well as an integral part of the Group’s business planning. In order tosustainably achieve corporate objectives, the Group uses various risk management and control systems that are set up not only for theearly identification and analysis of risks but also for taking appropriate countermeasures. Strategic and operative risks are considered. Riskmanagement, the internal control system and quality management are closely linked and coordinated.A formal, enterprise-wide risk assessment is performed by the Executive Committee at least once a year. Significant operational risks aredefined in a detailed risk catalogue and risk matrix and analysed according to their probability of occurrence and possible extent of damageor loss. This assessment enables the causes and suitable measures per risk to be derived for the purpose of mitigating or eliminatingthe risk.In the risk assessment of 2012 the following significant risks among others were identified:Exchange rate risk: Since 2009 the exchange rate of the Swiss franc against the euro has developed to the detriment of the Cham PaperGroup. The Swiss mill in particular is confronted with deteriorating margins and the imminent loss of market share because sales pricescannot be downwardly adjusted any further in many cases. In order to minimise the impact of brief exchange rate fluctuations, the Grouphas developed and implemented a hedging concept. In addition, “natural” hedging has been established during the past couple of yearsand purchases made in the currency in which sales are made, where possible. In view of the increasing strength of the Swiss franc ascompared to the euro, the Group Executive Board was forced in the second half of 2011 to initiate restructuring within the Group andgradually shift base paper production to the Italian mills.Market / economy: The earnings situation of the Cham Paper Group is subject to cyclical fluctuations in the world economy that maylead to sales revenues drops, unrecoverable debts and overcapacity in markets. Factors like these make it impossible for the company topass on increases in energy and raw materials costs to customers entirely or in the near term. The Cham Paper Group seeks to minimisethese risks by systematically diversifying its customer portfolio and continuously monitoring markets. In order to respond to changes inthe market in a timely manner, the Group maintains an early warning system featuring an integrated contingency plan to address possiblescenarios. Furthermore, capacities in the Group were adapted in line with sales possibilities during the year under review.Raw materials: The past few years have seen substantial increases in the prices of raw materials such as pulp, chemicals and energy. Thehazard is also increasingly posed of resources intermittently becoming scarce. In order to prevent these bottlenecks, the Group makesevery effort to establish and vet several suppliers for a product, where possible. Annual supply contracts are also concluded to coverrequirements in the medium term. In order to address its energy requirements, the Group pursues a strategy of keeping prices stableand plannable by way of long-term agreements and the Group’s own energy generation capability. Where useful, the Group resorts toderivative financial instruments like pulp swaps to cushion the volatility of prices. In doing so, it pays contractually fixed prices for contractuallyfixed quantities of pulp and in return receives variable payments according to the market price of the contractually fixed quantitiesof pulp. The amount and the timeline of future planned pulp purchases hedged in this manner are based on delivery quantities and datescontractually agreed with individual customers for whose production operations the pulp is required.The Board of Directors of Cham Paper Group Holding AG has approved the risk assessment and monitors the implementation of the actionsdefined in the catalogue of measures by the Executive Committee.In the event of the emergence of unexpected individual risks, the Board of Directors is also immediately informed of the risks identifiedand the actions taken and processes implemented by the Executive Committee to mitigate or eliminate them.