Foreign exchange risk management & Cash Flow at Risk David - PowerPoint PPT Presentation

Foreign exchange risk management & Cash Flow at Risk David Thilthorpe – Geneva 30 th October, 2017 Highly Confidential

Content  The Tetra Laval Group  The role of Group Treasury  Foreign exchange risk management methodology  Cash Flow at Risk development & future plans Highly Confidential Tetra Laval International

The Tetra Laval Group Tetra Laval International Highly Confidential Tetra Laval International

Three independent industry groups Focus on technologies for efficient production, packaging and distribution Swedish origin – of food headquartered in Swedish origin since 1951 – Switzerland headquartered in Switzerland Privately owned Privately owned Tetra Laval Group Board Tetra Laval Tetra Laval Group International Support Functions Tetra Pak DeLaval Sidel Highly Confidential Tetra Laval International

Tetra Laval in summary Net sales € 13.8 bn to more than 190 countries, 34,180 employees worldwide (Dec 2016) Sales Employees Others : Sidel : Sidel : Others : 10 270 1'435 5'320 DeLaval : 935 DeLaval : 4'450 Tetra Pak : Tetra Pak 24'140 : 11'435 187 bn packages sold 2016 (Tetra Pak) 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Highly Confidential Tetra Laval International

Tetra Laval International - responsibilities Operations Board & Sub-Committees Strategy Holdings Audit Finance GFP&R M&A Taxes Control & Compliance Industry Groups Risk Corporate Group Legal Management Reporting M & A Taxes Financing Structures Governance & Risk Transfer Accounting & Reporting IT / IS Operations TLG Suppliers: 3 rd Party External Suppliers TP GIM, TLG HR Highly Confidential Internal Tetra Laval International

The Role of Group Treasury Tetra Laval International Highly Confidential Tetra Laval International

Tetra Laval Group Treasury Responsible for managing FX, interest rate, commodity risk, daily liquidity management & financial counterparty risk ➢ All foreign exchange & interest rate risk are managed under risk management policies and natural hedging opportunities ➢ Commodity risk managed together with Procurement, main exposures are paper board, aluminium & polymers ➢ Most of FX exposure is based on annual pricing to customers, inter- company netting scheme used to centralise risk at Treasury Highly Confidential Tetra Laval International

Foreign exchange risk management methodology Tetra Laval International Highly Confidential Tetra Laval International

Strategy preparation methodology Factors taken into consideration to determine annual strategy Curre Currency outlook, 2018 FX Flows Hedge Economic Result of Cash Hedge Allocation ncy event risk forecast & Cost Exposure Flow at Risk Technical analysis historical Analysis including & speculative volatility forecast variation positioning positive high high low Hedge less Hedge less Hedge less Hedge less • Lower fwd ratio + options + options + open + options • Open position Using CFaR Tool to define optimal strategy • Options (PV and zero cost) Neutral Neutral Neutral Neutral • 95-100% fwd ratio Forward Forward Forward Forward Scale • Open position • Zero cost options Hedge 100% Hedge close Hedge close Hedge close Forward to 100% to 100% to 100% + • Close to 100% fwd forward forward forward Over hedge Over hedge with with option options negative low High low Highly Confidential Highly Confidential Tetra Laval International

Bank forecasts for 2018 Outlook very close to current one year forward with the exception of SEK and BRL Positive/ Negative Outlook Comments Consensus Current spot 1Y fwd Q317 Q417 Q118 Q218 Q418 EUR/USD 1.12 1.14 1.10 1.12 1.12 1.13 1.15 Positive Growth momentum in EUR, Trump impact less than expected EUR/SEK 9.73 9.72 9.50 9.41 9.33 9.25 9.00 Negative Higher inflation, undervalued currency EUR/CNY 7.62 7.98 7.65 7.84 7.86 7.91 8.13 Neutral All measures taken by BoC to stabilize the currency EUR/JPY 123.48 123.72 124.50 126.00 127.00 126.00 126.00 Negative BOJ continues QE to weaken JPY EUR/CHF 1.08 1.08 1.09 1.10 1.10 1.10 1.12 Positive Risk on mode will see the CHF weaken EUR/MXN 20.34 21.94 21.26 21.84 21.56 21.84 22.25 Neutral High carry, Trump impact and election in 2018 Better growth and inflation outlook & benefiting from carry trade - Political uncertainty EUR/BRL 3.72 4.04 3.63 3.72 3.79 3.74 3.91 Positive Bloomberg consensus as per June 13th Highly Confidential Tetra Laval International

EURUSD: Consensus forecast vs actual Consensus forecasts do not usually match actual outcomes Highly Confidential Tetra Laval International

EURUSD event risk map: 100% forward benchmark Subjective view of financial impact event risks may have if 100 % hedged with forwards -15% -12% -9% -6% -3% 0% 3% 6% 9% 12% 15% -42 -33 -25 -17 -8 0 8 17 25 33 42 0.94 0.94 EU -37 -29 -22 -15 -7 0 7 15 22 29 37 0.96 0.96 breaks up -32 -26 -19 -13 -6 0 6 13 19 26 32 0.98 0.98 Grexit -27 -22 -16 -11 -5 0 5 11 16 22 27 1.00 1.00 -23 -18 -14 -9 -5 0 5 9 14 18 23 1.02 1.02 EU -19 -15 -11 -8 -4 0 4 8 11 15 19 1.04 1.04 mishandle Italy, Fed -15 -12 Chinese/EM -9 -6 -3 Brexit 0 3 6 9 12 15 1.06 1.06 Spain Tightening more Hard landing Trump and faster -11 -9 -7 -4 -2 0 2 4 7 9 11 1.08 Geo-politics 1.08 fiscal BS reduction Iraq, Yemen stimulus -7 -6 -4 -3 -1 0 1 3 4 6 7 1.10 Ukraine 1.10 1.12 -3 -3 -2 -1 -1 0 1 1 2 3 3 1.12 1.14 0 0 0 0 0 0 0 0 0 0 0 1.14 3 3 2 1 1 0 -1 -1 -2 -3 -3 1.16 1.16 Less Fed tightening EU 7 5 4 3 1 0 -1 -3 -4 -5 -7 1.18 1.18 Relative Growth continues 10 8 6 4 2 O il price 0 -2 -4 -6 -8 -10 1.20 EU 1.20 to pick up rebounds Inflation pick 13 10 8 5 3 0 -3 -5 -8 -10 -13 1.22 up 1.22 16 13 9 6 3 0 -3 -6 -9 -13 -16 1.24 1.24 19 15 11 7 4 0 -4 -7 -11 -15 -19 1.26 1.26 21 17 13 9 4 0 -4 -9 -13 -17 -21 1.28 1.28 24 19 14 10 5 0 -5 -10 -14 -19 -24 1.30 1.30 27 21 16 11 5 0 -5 -11 -16 -21 -27 1.32 1.32 29 23 18 12 6 0 -6 -12 -18 -23 -29 1.34 1.34 Highly Confidential Tetra Laval International

Group economic exposure analysis: example data only Utilise FX rates & commodity prices to compare historic economic exposure levels & support hedging strategy Highly Confidential Tetra Laval International

Cash Flow at Risk development & future plans

CFaR Project Background How to quantify and manage our financial market risk ➢ What is the best way to quantify our financial risk exposure – do we need to hedge at all ? ➢ How are financial markets inter-related – does this provide an opportunity to hedge less & save cost without increasing risk ? ➢ Can we create a dynamic model to propose & adjust optimal hedging strategies ? ➢ What do other corporates do, what do banks & consultants recommend ? 120 1.5 1.45 110 1.4 100 1.35 90 1.3 80 1.25 1.2 70 1.15 60 1.1 50 1.05 40 1 Brent Crude Nov-15 (rhs) EUR/USD Spot (lhs) Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Highly Confidential Tetra Laval International

Cash Flow at Risk model development We are working together with ING to build our own CFaR model Tetra Laval in summary Financial risk management model Macroeconomic scenarios – impacts for business & financials CFaR for Commodity exposures Dynamic hedging CFaR for exposure forecast variation Optimal hedge portfolio CFaR for FX exposures Economic exposure identification Corporate benchmarking Highly Confidential Tetra Laval International

Cash Flow at Risk model – hedge optimisation CFaR model computes thousands of hedging strategies’ risk, cost and forecast valuations to help selecting a hedging strategy ➢ Compute optimal hedging strategies based on risk tolerence and hedge frame % cover ➢ Evaluate risk under forecasted FX curves and forward curves (hedge cost minimization) € m 40 10 20 30 50 60 20 Value at Risk 40 60 Hedging Costs 80 Optimal 1 Optimal 3 Optimal 4 Optimal 2 100 Optimal 5 Our strategy 100% FWD 120 Highly Confidential Tetra Laval International

CFaR model proposes optimal strategies & includes impact of volume variation (sample data) Our strategy includes options for risk of volume variation Gross VaR 780 Highly Confidential Tetra Laval International

Comparing the strategies Treasury strategy has lowest worst case outcome whilst allowing for volume variation management and potential gain from positive event risks Highly Confidential Tetra Laval International