29. Financial risk

The Group is exposed to several financial risks, namely: i. price risk, which includes interest, exchange rate and energy price risks; ii. transactional risk, which includes credit and liquidity risk; and iii. the risk arising from the Group’s investments portfolio, which covers various economic and financial risks such as interest rate, credit, foreign exchange or inflation, as well as political and fiscal.

The management of these risks is focused on the unpredictable nature of the financial markets and aims to minimize its adverse effects on the Group’s financial performance.

Certain types of exposure are managed using financial derivative instruments.

The activity in this area is carried out by the Financial Operations Department. It is responsible, with the cooperation of the financial areas of the Group’s companies, for identifying and assessing risks and for executing the hedging of financial risks, following guidelines set out in the Financial Risk Management Policy.

Every quarter, reports on compliance with the Financial Risk Management Policy are presented to and discussed with the Audit Committee.

29.1. Pricing risk

29.1.1. Foreign exchange risk

The main source of exposure to foreign exchange risk comes from the Group operations in Poland and in Colombia.

In addition to this exposure, within the scope of the commercial activities of its subsidiaries, the Group acquires merchandise denominated in foreign currency, mainly euros and US dollars for the Polish and Colombian operations and in US dollars for the Portuguese operations. In general, these transactions are very short dated. Exchange rate risks associated with imports are covered by forward purchases of the currency of payment.

The Management of the operational Companies’ exchange rate risk is centralised in the Group’s Financial Operations Department. Whenever possible, exposure is managed through natural hedges, namely through loans denominated in local currency. When this is not possible, hedging structures are contracted using instruments such as swaps, forwards or options.

The Group’s exposure to foreign exchange risk in financial instruments recognised as at 31 December 2023, was as follows:

Considering the net position of the financial assets and liabilities on the balance sheet at 31 December 2023, a depreciation of the zloty against the euro of around 10% would have a positive impact of €457 million on the equity’s currency translation reserves (in 31 December 2022: a positive impact of €383 million). Regarding the colombian peso, a depreciation against the euro of 10% would have a positive impact on the equity’s currency translation reserves of €139 million (in 31 December 2022: a positive impact of €84 million).

Considering the net financial assets related with operating activities that some Group subsidiaries hold in currencies other than their functional currency, a 10% depreciation of the exchange rate would have a negative impact on the results of €44 million.

Considering the total net assets (financial and non-financial) to which the Group is exposed to in zloty and colombian peso, the effect of a 10% depreciation of these currencies would have a negative impact of €164 million in total equity (on 31 December 2022: a negative impact of €136 million).

29.1.2. Interest rate risk (cash flow and fair value)

All financial liabilities are directly or indirectly indexed to a reference interest rate, which exposes the Group to cash flow risk. A given portion of this risk is hedged through interest rate swaps, thus the Group is also exposed to fair value risk.

Exposure to interest rate risk is monitored continuously. In addition, to evaluate future interest costs based on forward rates, sensitivity tests to variations in the interest rate level are performed. The Group is essentially exposed to interest rate curves of the euro, the zloty, and to the colombian peso.

The sensitivity analysis is based on the following assumptions:

• Changes in market interest rates affect interest gains and losses on financial instruments, traded at variable interest rates;
• Changes in market interest rates only affect gains and losses in interest on financial instruments with fixed interest rates if these are recognised at fair value;
• Changes in market interest rates affect the fair value of derivative financial instruments and other financial assets and liabilities;
• Changes in the fair value of derivative financial instruments and other financial assets and liabilities are estimated by discounting future cash flows from current net values, using the market rates at the valuation date.

For each analysis, whatever the currency, the same changes to the yield curves are used. The analyses are carried out for the net debt, meaning deposits and short-term investments with financial institutions and derivative financial instruments are deducted. Simulations are performed based on net debt values and the fair value of derivative financial instruments as of the reference dates, and the respective change in the interest rate curves.

Based on the simulations performed at 31 December 2023, and excluding the effect of interest rate derivatives, a rise of 50 b.p. in interest rates, with everything else remaining constant, would have a positive impact of €6 million (2022: positive in €6 million). These simulations are carried out once a quarter, but are reviewed whenever there are relevant changes, such as debt issuance, debt repayment or restructuring, significant variations in reference rates and in the slope of the interest rate curve.

29.1.3. Energy price risk

Within the scope of its activity, the Group is exposed to energy prices fluctuation, since its electricity supply contracts are indexed to spot market prices, exposing the Group to the risk of variability in cash flows. Regularly the Group analyses the evolution of the energy price, in all the geographies where it operates, and when market conditions allow it, tries to fix, for more or less long periods, the energy price with its suppliers, as a way to mitigate the respective risk. This is the case of companies in Portugal, for which it was possible to fix the price per MWh with the electricity operator, until 2027.

Additionally, as described in note 13, it was signed a financial settlement agreement on the energy price covering part of the Group needs. As at 31 December 2023, the negative fair value of the contract was €5.8 million (negative €5.4 million at 31 December 2022).

Based on the simulations carried out on 31 December 2023, a 5% increase/decrease (parallel shift of the price curve) in the electricity price would have a positive/negative impact, keeping everything else constant, of about €3.3 million.

29.2. Transactional risk

29.2.1. Credit risk

The Group manages centrally its exposure to credit risk on bank deposits, short-term investments and derivatives contracted with financial institutions. The Financial Departments of the business units are responsible for the management of credit risk on its customers and other debtors.

The financial institutions that the Group chooses to do business with are selected based on the ratings they receive from one of the independent benchmark rating agencies. Apart from the existence of a minimum accepted rating, there is also a maximum exposure to each of these financial institutions.

In each Company the bank that collects the deposits from stores may have a lower rating than the one defined in the general policy, although the maximum exposure does not exceed two days of sales of the operating company.

The following table shows a summary of the credit quality on bank deposits and short-term investments and derivative financial instruments with positive fair value, as at 31 December 2023 and 2022:

The ratings shown correspond to the notations given by Standard & Poor’s. When these are not available Moody’s or Fitch notations are used instead.

With regard to customers, the risk is mainly limited to Cash & Carry business, since the other businesses operate based on sales paid with cash or bank cards (debit and credit). This risk is managed based on experience and individual customer knowledge, as well as through credit insurance and by imposing credit limits which are monitored on a monthly basis and reviewed annually by Internal Audit. In addition, the Company uses credit insurance to mitigate the associated risk.

The following table shows an analysis of the credit quality of the amounts receivable from customers and other debtors without non-payment or impairment:

The following table shows an analysis of the concentration of credit risk from amounts receivable from customers and other debtors, taking into account its exposure for the Group:

The maximum exposure to credit risk as at 31 December 2023 and 2022 is the financial assets carrying value.

29.2.2. Liquidity risk

Liquidity risk is managed by maintaining an adequate level of cash or cash equivalents, as well as by negotiating credit limits that not only ensure the regular development of the Group’ activities, but that also ensure some flexibility to be able to absorb shocks unrelated to Group activities.

Treasury needs are managed based on short-term planning, executed on a daily basis, which derives from the annual plans that are reviewed regularly during the year.

Some subsidiaries of the Group have entered into confirmation protocols with financial institutions, of voluntary adherence by suppliers, which allow them to anticipate the payment of their invoices by approximately 7 days. According to the characteristics of these protocols, the amounts remain classified as debts payable to suppliers, considering that, in substance, the characteristics of commercial debt remain. Suppliers that do not adhere to these protocols are normally paid according to the term contractually agreed with each supplier.

The following table shows the Group’ liabilities by intervals of contractual residual maturity. The amounts shown in the table are the non-discounted contractual cash flow. In addition, it should be noted that all the derivative financial instruments that the Group contracts are settled at net value.

The Group has entered into some covenants in its loan agreements for the medium and long-term debt in place.

These covenants include:

• Limitation on the disposal and pledge of assets above a certain amount;
• Limitation on mergers and/or demergers when these imply the reduction of assets in the consolidation perimeter;
• Change of control clause;
• A limit on the ratios of Net Debt/EBITDA, calculated in accordance with the pre-IFRS 16 accounting standards;
• Fulfilment of social and environmental standards.

In some cases, the breach of these covenants may trigger the early redemption of the associated debt. At the end of December 2023, the Group was in full compliance with the covenants assumed on the debt loans in place.

Throughout the year the Group maintains liquidity reserves in the form of credit lines contracted with the financial institutions with which it relates, in order to ensure the ability to meet its commitments, without having to finance itself under unfavourable conditions. Thus, on 31 December 2023, the Group has contracted credit lines that were not being used in the total amount of €965 million.

In addition, the Group had, at 31 December 2023, a liquidity reserve consisting of cash and cash equivalents in the amount of €1,938 million.

This way, the Group expects to satisfy all its treasury needs with the use of operating activity flows and liquidity reserves, and if eventually necessary, using the existing available credit lines.

29.2.3. Capital risk management

The Group seeks to keep its capital structure at appropriate levels so that it not only ensures the continuity and development of its activity, but also to provide adequate returns to its shareholders and to optimise the cost of capital.

Balance of the capital structure is monitored based on the financial leverage ratio (Gearing), calculated according to the following formula: Net debt/Shareholder Funds and by the ratio Net debt/EBITDA. The Board of Directors established a target for the Gearing ratio below 100%, consistent with an investment grade rating, and a ratio Net debt/EBITDA below 3.

The Gearing ratios as at 31 December 2023 and 2022, calculated without the effect of adopting the IFRS 16 standard, as analysed by the Group’s Management, were as follows: