5. Financial risk management

Financial risk factors

Due to its business activities, NORMA Group is exposed to a variety of financial risks, including market, credit and liquidity risks. NORMA Group’s financial risk management focuses on the unpredictability of the financial markets and is designed to mitigate potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain exposures.

Financial risk management is performed by the Group Treasury & Insurance department (Group Treasury). The responsibility and necessary controls related to risk management are defined by NORMA Group’s management. Group Treasury is responsible for identifying and assessing financial risks in close consultation with the Group’s operating units. Furthermore, Group Treasury acts as the first point of contact for the subsidiaries. In a close dialogue, Group Treasury informs and trains the companies and technically handles the internal and external hedging processes. The principles established by NORMA Group’s management apply to the use of derivative and non-derivative financial instruments and to the investment of liquidity surpluses.

(a) Market risk

Foreign exchange risk

As a company that operates internationally, NORMA Group is active in 100 different countries and is exposed to the currency risk resulting from various foreign currency positions with regard to the most important currencies, the US dollar, British pound, Chinese renminbi, Indian rupee, Polish złoty, Swedish krona, Czech koruna, Serbian dinar, Singapore dollar and Mexican peso. .

Taking into account the respective risk-bearing capacity of the subsidiaries, Treasury Risk Management seeks to achieve a reasonable hedging level of net foreign currency risks (as a result of taking foreign currency inflows and outflows into account). Highly volatile net foreign currency risks are thus hedged with increased hedging ratios.

The Group uses forward exchange contracts to hedge the foreign currency risk arising from its operating activities. The risk arises from a possible change in future cash flows from an expected and highly probable transaction in a non-functional currency, where the change is due to a change or fluctuation in the exchange rate. The hedging relationship is designated as a cash flow hedge. NORMA Group designates only the spot component as a hedging element. Gains or losses on the effective portion of the change in the spot component of the forward contract are recognized in the hedging reserve as a component of equity. Changes in the forward component of the hedging instrument that relate to the hedged item (“aligned forward element”) are recognized in other comprehensive income in the hedging reserve as a component of equity.

Furthermore, forward exchange contracts are used to hedge intracompany financing transactions that involve foreign exchange risks arising from loans between Group companies in non-functional currencies. The Group designates such loans and hedging instruments as fair value hedges in order to achieve the offsetting effects of hedged items and hedges in the same income statement line item. The Group designates only the spot component as the hedging element. Gains or losses on the effective portion of the change in the spot component of the

forward transaction are recognized in financial income (expense), analogous to those on the hedged item. The changes in the forward component of the hedging instrument that relate to the hedged item (“aligned forward element”) are also recognized in this item.

For further information on the instruments used by the Group to hedge foreign currency risk, please refer to NOTE 21 (F) DERIVATIVE FINANCIAL INSTRUMENTS.

In accordance with the Group guideline, the main contractual conditions of the forward transactions for all hedging relationships must correspond to the hedged underlying transactions.

The effects of changes in the exchange rates of financial assets and financial liabilities denominated in foreign currencies are presented below.

Interest rate risk

NORMA Group’s interest rate risk arises from borrowings with variable interest rates. These expose the Group to a cash-flow-related interest rate risk, which is partly offset by hedging transactions (interest rate swaps). As there is currently a correspondingly more restrictive monetary policy in the Eurozone, NORMA Group rates the risk of interest rate increases for the euro as very likely in the short term. In the medium and longer term, the risk of interest rate increases is assessed as likely. In view of the current interest rate level in the Eurozone, the opportunities that could arise from a falling interest rate level are assessed as unlikely on the other hand.

Interest rate cuts are considered very likely in the USD area, which would lead to corresponding opportunities for NORMA Group. Against the backdrop of the measures already implemented to optimize financing, the financial impact associated with these opportunities is assessed as low. In fiscal year 2023, NORMA Group converted financial instruments that referenced USD LIBOR as interest rate to a successor reference interest rate (Term SOFR). This did not result in any significant balance sheet effects. Interest rate cuts are considered very likely in the USD area, which would lead to corresponding opportunities for NORMA Group. Against the backdrop of the measures already implemented to optimize financing, the financial impact associated with these risks is assessed as low.

Currently existing swaps cover around 19% (2022: 24%) of the outstanding variable-interest loans. In the variable-rate USD loans, the comparable hedge ratio is 57% (2022: 55%). For further information on the instruments used by the Group to hedge interest rate risk, please refer to NOTE 21. (F) DERIVATIVE FINANCIAL INSTRUMENTS.

The effects of changes in interest rates on liabilities to banks with variable interest rates and on interest rate swaps used in hedge accounting are explained in more detail below. Borrowings with fixed interest rates are not included in this analysis.

If the interest rates of euro- and US-dollar-denominated borrowings in fiscal year 2023 had been 100 basis points higher (ceteris paribus), NORMA Group’s profit before taxes for fiscal year 2023 would have been EUR 2,322 thousand lower (2022: EUR 1,799 thousand lower) and the other result would have been EUR 1,427 thousand higher (2022: EUR 1,947 thousand higher).

If the interest rates of euro- and US dollar-denominated borrowings in fiscal year 2023 had been 100 basis points lower (2022: 50 basis points) lower (ceteris paribus), NORMA Group’s profit before taxes for fiscal year 2023 would have been EUR 2,322 thousand higher (2022: EUR 627 thousand higher). Other comprehensive income would have been EUR 1,488 thousand lower (2022: EUR 1,011 thousand lower).

Other price risks

NORMA Group is exposed to other economic price risks. For further information, please refer to the RISK AND OPPORTUNITY REPORT.

(b) Credit risk

The Group’s exposure to credit risk arises from the possibility that counterparties will fail to meet their obligations arising from their operating and financing activities. Credit risk arises from cash and cash equivalents, from deposits with banks and financial institutions and from customer default risk, including outstanding receivables and committed transactions.

Credit risk is monitored at the Group level. To minimize credit risk from business activities and financial transactions, each contractual partner is assigned a credit line, the use of which is monitored on a regular basis.

In order to reduce the credit risk arising from the Company’s investment activities and derivative financial assets, it is its internal policy to enter into all transactions only with recognized, large financial institutions and issuers, each with high external credit ratings.

In the operating business, default risks are monitored continuously.

The aggregate carrying amounts of financial assets represent the maximum default risk. Due to the Group’s heterogeneous customer structure, there is no concentration of risk.

As of December 31, 2023 the credit risk position for the gross carrying amounts of cash and cash equivalents and other financial assets was as follows:

Further details on the credit risk positions for trade receivables can be found at NOTE 21. (A) TRADE AND OTHER RECEIVABLES.

(c) Liquidity risk

Prudent liquidity risk management requires the holding of sufficient cash and marketable securities, the availability of funding through committed credit lines at appropriate levels, and the ability to close out market positions. Due to the dynamic nature of the underlying business, Group Treasury seeks to maintain flexibility in funding by maintaining the availability of committed credit lines.

The remaining promissory note loans from 2013, 2014, 2016 as well as 2023 (outstanding volume on Dec 31, 2023: EUR 206.5 million) were each issued in 3-, 5-, 7- and 10- year EUR tranches. Scheduled repayments of the promissory note loans from 2013 and 2016 in the amount of EUR 56.35 million were made in the fiscal year 2023. In August 2023, NORMA Group successfully issued a new promissory note loan of EUR 120.0 million for general corporate financing and to refinance maturing financial liabilities.

In 2021, an additional revolving committed credit line of a further EUR 50.0 million was established via the accordion facility. This has a maturity similar to the existing syndicated bank loan, which was extended by one additional year, through the end of 2026, as part of the expansion of the credit line. Both committed revolving credit lines in the total amount of now EUR 100.0 million were not drawn as of December 31, 2023.

In addition, the syndicated bank loan and the promissory note from 2023 contain a sustainability component. This links the financing conditions to NORMA Group’s commitment in the area of corporate responsibility. This commitment is measured by a rating from an external service provider. In 2023, NORMA Group – as in the previous year – achieved a corresponding sustainability rating, which enabled savings to be made in the external credit margin of the syndicated bank loan. The agreed interest margin for the syndicated bank loan could therefore also be kept at a lower level in the current year. Failure to meet the sustainability targets would increase the future interest burden.

The Commercial Paper program launched in fiscal year 2019 with a total volume of up to EUR 300 million consists of short-term (1 – 52 weeks) bearer bonds. The revolving issuance of such short-term debt securities enables the Group to manage and optimize its short-term financing requirements even more flexibly via the money and capital markets in addition to its current credit lines with various banks. As of the reporting date December 31, 2023, the Commercial Paper program was utilized in the amount of EUR 0 million (Dec 31, 2022: EUR 25 million)

The liquidity situation is constantly monitored with regard to business development, investments planned and the repayment of loans.

The following table contains the contractually agreed, undiscounted future payments. Financial liabilities denominated in foreign currencies are translated in the Consolidated Statement of Financial Position at the closing rate. Interest payments on financial instruments with variable interest rates are determined on the basis of the interest rates on the reporting date.

The maturity structure of the derivative financial instruments based on cash flows is as follows:

Capital risk management

NORMA Group’s objectives in managing its capital are to continue to be able to service its debt and to remain financially stable.

The Group is obliged to comply with the financial covenant total net debt cover (“debt” in relation to adjusted Group EBITDA) for a small portion of a promissory note tranche from 2014 , which is monitored on an ongoing basis. This financial covenant is based on the Group’s Consolidated Financial Statements as well as on special definitions of the bank facility agreements. In the event of noncompliance with the financial covenant, there are several options for remedying the situation in the form of exemption regulations or shareholder measures. If there is a breach of a covenant that is not remedied, loan agreements may possibly be called due. The underlying financial ratio may not exceed a value of 3.75. In the fiscal year 2023, the value of the key figure was 2.2.