23 Financial instruments and risks

Policies on financial risks

As an international company, dsm-firmenich is exposed to financial risks in the normal course of business. A major objective for the company is to minimize the impact of market, liquidity and credit risk on the value of the company and its profitability. In order to achieve this, a systematic financial and risk management system has been established. Furthermore, an internal control framework is in place, and the controls are monitored and tested periodically.

The derivative contracts used by dsm-firmenich are entered into exclusively in connection with the corresponding underlying transaction (hedged item) relating to normal operating business. The instruments used are customary products, such as currency swaps, cross-currency interest rate swaps, collars, forward exchange contracts, and interest rate swaps.

An important element of dsm-firmenich’s capital management is the allocation of cash flow. dsm-firmenich primarily allocates cash flow to investments aimed at strengthening its business positions and securing the payment of dividends to its shareholders. The remaining cash flow is further used for acquisitions and partnerships that strengthen dsm-firmenich’s competences and market positions.

The net debt to equity ratio (gearing) is 10.1% (2023: 8.8%), see also Note 25 Net debt.

Liquidity risk

Liquidity risk is the financial risk that an entity does not have and/or cannot access enough liquid cash and/or assets to meet its obligations. This can happen if the entity’s credit rating falls, or when it experiences sudden unexpected cash outflows or an unexpected drop in cash inflows, or some other event that causes counterparties to avoid trading with or lending to the entity. Additionally, an entity can be indirectly exposed to market liquidity risk if the financial markets on which it depends are subject to loss of liquidity.

The primary objective of liquidity management is to optimize the corporate cash position, among other means by securing availability of sufficient liquidity for the execution of payments by dsm-firmenich entities, at the right time and in the right place.

At 31 December 2024, dsm-firmenich had cash and cash equivalents of €2,667 million (2023: €2,456 million).

During 2024 dsm-firmenich concluded a new €1.8 billion revolving credit facility (RCF) to replace existing RCF arrangements which would have expired in 2025: DSM’s €1 billion RCF and Firmenich’s CHF 750 million RCF. The syndicated facility, which dsm-firmenich entered into with a group of 15 banks, has a tenor of five years and two one-year extension options. On 15 November 2024, dsm-firmenich entered into a €100 million bilateral revolving credit facility with the same commercial terms and maturity to provide additional financial flexibility. The agreements for the newly arranged committed credit facilities neither contain financial covenants nor material adverse change clauses. At year-end 2024, no loans had been taken up under the committed credit facilities.

In 2023, a bridge financing facility amounting to €1.0 billion was contracted by DSM B.V. The issuance by dsm-firmenich of an €800 million bond on 2 July 2024 reduced the undrawn amount of the bridge financing facility to €200 million. The remaining undrawn amount was canceled on 18 October 2024.

On 13 December 2024, dsm-firmenich concluded a €1.0 billion bridge facility to provide additional financial flexibility in light of upcoming bond maturities. The agreement neither contains financial covenants nor material adverse change clauses. At year-end 2024, no loans had been taken up under the bridge facilities.

Furthermore, DSM B.V. has a commercial paper program amounting to €2.0 billion (2023: €2.0 billion). At 31 December 2024, there were no ECP outstanding (same as 2023).

dsm-firmenich has no derivative contracts to manage currency risk or interest rate risk outstanding under which margin calls by the counterparty would be permitted.

Floating-rate and fixed-rate borrowings and monetary liabilities analyzed by maturity are summarized in the following table. Borrowings excluding credit institutions are shown after taking into account related interest rate derivatives in designated hedging relationships. dsm-firmenich manages financial liabilities and related derivative contracts on the basis of the remaining contractual maturities of these instruments. The remaining maturities presented in the following table provide an overview of the timing of the cash flows related to these instruments.

The following table reflects the exposure of the derivatives to liquidity risk. It contains the cash flows from derivatives with positive fair values and from derivatives with negative fair values to provide a complete overview of the derivative-related cash flows. The amounts are gross and undiscounted.

Market risk

Market risk can be subdivided into interest rate risk, currency risk, and price risk.

Interest rate risk

Interest rate risk is the risk that adverse movements of interest rates lead to high costs on interest-bearing debt or assets, which negatively impact our ability to honor our commitments. The aim is to minimize the interest rate risks associated with the financing of the company and thus at the same time optimize the net interest costs. This translates into a certain desired profile of fixed-interest and floating-interest positions, including cash and cash equivalents, with the floating-interest position not exceeding 60% of net debt.

There were no outstanding fixed-floating interest rate swaps (end of 2023: none). The following analysis of the sensitivity of borrowings, assets, and related derivatives to interest rate movements assumes an instantaneous 1% change in interest rates for all maturities from their level on 31 December 2024, with all other variables held constant. A 1% reduction in interest rates would result in a €27 million pre-tax loss in the income statement and equity on the basis of the composition of financial instruments on 31 December 2024, as floating-rate borrowings are more than compensated for by floating-rate assets (mainly cash). The opposite applies in the case of a 1% increase in interest rates.

For more information regarding fixed or floating interest, see Note 19 Borrowings.

Currency risk

Adverse movements of foreign currencies can negatively impact the results of operations and our financial condition, e.g., due to losses on assets or liabilities in foreign currencies. The aim is to hedge risks resulting from sales and purchases at the moment of recognition of the receivables and payables. This is done by transferring at spot rates the respective exposures to the Group, which are, then (on a netted basis), hedged externally.

Companies may opt to hedge currency risks from firm commitments and forecast transactions. The currencies involved are primarily USD and CHF. CNY has significant exposure for the Group. However, it does not meet the threshold for cash flow hedging. We use currency forward contracts, spot contracts, and average-rate currency forwards and options to hedge exposure to fluctuations in foreign exchange rates. At year-end, these instruments had remaining maturities of less than one year. For the hedging of currency risks from firm commitments and forecast transaction cash flows, hedge accounting is applied. Hedge accounting is not applied for hedges of recognized trade receivables and payables hedged with short-term derivatives. To hedge intercompany loans, receivables, and payables denominated in currencies other than the functional currency of the subsidiaries, we use currency swaps or forward contracts.

The following table assumes a 10% change in all foreign currency rates against the euro from their level on 31 December 2024, with all other variables constant. A +10% change indicates a strengthening of the foreign currencies against the euro, and vice-versa.

Sensitivity changes on these positions will generally be recognized in profit or loss or in the Translation reserve in equity, with the exception of the instruments for which cash flow hedge accounting or net-investment hedge accounting is applied. In case of a strengthening or weakening of the euro against USD, CHF and CNY (being the key currencies), this would affect the translation of financial instruments denominated in these currencies taking into account the effect of hedge accounting and assuming all other variables being constant.

Price risk

Financial instruments that are subject to changes in stock exchange prices or indexes are subject to a price risk. At year-end 2024, mainly other participating interests are subject to price risks.

Credit risk

Credit risk is the risk that a (commercial or financial) counterparty may not be able to honor a financial commitment according to the contractual agreement with dsm-firmenich. The company manages the credit risk to which it is exposed by applying credit limits per institution and by dealing exclusively with institutions that have a high credit rating.

At the balance sheet date, there were no significant concentrations of credit risks.

For all financial assets measured at amortized cost, the estimation of the loss allowance for doubtful accounts receivable is based on an expected credit loss (ECL) model. For trade receivables, dsm-firmenich uses an allowance matrix to measure the lifetime ECL for trade receivables. The loss rates depend among other things on the specified aging categories and are based on historical write-off percentages, taking market developments into account.

For other financial assets, dsm-firmenich applies an ECL model that reflects the size and significance of dsm-firmenich’s exposure to credit loss. The ECL is based on the allocation of a credit risk grade which is based on data that is determined to be predictive of the risk of loss (including but not limited to external ratings, audited financial statements, management accounts, cash flow projections, and available press information about customers) and applying experienced credit judgement. Credit risk grades are defined using qualitative and quantitative factors that are indicative of the risk of default and are aligned to external credit rating definitions from Moody’s.

Risk of default is herewith considered as the risk of bankruptcy, or any legal impediment to the timely payment of either interest and/or principal, as well as missed or delayed disbursement of either interest and/or principal.

The loss allowance on non-current financial assets taken into consideration at the end of 2024 was €2 million (2023: €0 million).

With regard to treasury activities (for example cash, cash equivalents, and derivatives held with banks or financial institutions) it is ensured that financial transactions are only concluded with counterparties that have at least a Moody’s credit rating of A3 for long-term instruments. At Business Unit level, outstanding receivables are continuously monitored by management. Appropriate allowances are made for any credit risks that have been identified in line with the expected credit loss policy.

The development of the outstanding trade accounts receivable per aging category is as follows.

The table below provides information about the credit risk exposure per aging category and the ECL for trade accounts receivable of €20 million at 31 December 2024 (31 December 2023: €15 million), see Note 13 Current receivables.

The changes in the expected credit loss for trade accounts receivable can be found in the table below.

The maximum exposure to credit risk is represented by the carrying amounts of financial assets that are recognized in the balance sheet, including derivative financial instruments. dsm-firmenich has International Swaps and Derivatives Association (ISDA) agreements in place with its financial counterparties that allow for the netting of exposures in case of a default of either party, but do not meet the criteria for offsetting in the balance sheet. The table ‘Notional value of derivative financial instruments’ further below presents the carrying amounts of the derivative financial instruments subject to these agreements. No significant agreements or financial instruments were available at the reporting date that would reduce the maximum exposure to credit risk.

Information about financial assets is presented in Note 10 Associates and joint arrangements, Note 11 Other financial assets, Note 13 Current receivables, Note 14 Current investments and Note 15 Cash and cash equivalents.

dsm-firmenich may grant corporate guarantees for credit support of subsidiaries and associates, to get access to credit facilities which are necessary for their operating working capital needs and which cannot be funded by the corporate cash pools and/or for bank guarantees needed for local governmental requirements.

Information on guarantees is presented in Note 22 Contingent liabilities and other financial obligations.

Hedge accounting

dsm-firmenich uses derivative financial instruments to manage financial risks relating to business operations and does not enter into speculative derivative positions.

The purpose of cash flow hedges is to minimize the risk of volatility of future cash flows. These may result from a recognized asset or liability or a forecast transaction that is considered highly probable (firm commitment). dsm-firmenich determines the existence of an economic relationship between the hedging instrument and hedging item based on currency, amount, and timing of their respective cash-flows.

The purpose of a hedge of a net investment is to reduce the foreign currency translation risk of an investment in a company whose functional currency is not the euro. Changes in fair value are recognized in Other comprehensive income (Translation reserve), and ineffectiveness will be recognized in the income statement. The amount recognized in Other comprehensive income will be reclassified to the income statement, upon divestment of the respective foreign subsidiary.

The purpose of a fair value hedge is to hedge the fair value of assets or liabilities reflected on the balance sheet. Changes of fair value in hedging instruments, as well as hedged items, will be recognized in the income statement.

Cash flow hedges

In 2024, dsm-firmenich hedged USD 1,129 million (2023: USD 498 million) of its 2025 projected net cash flow in USD against the euro by means of average-rate currency forward contracts at an average exchange rate of USD 1.091 per EUR for the four quarters of 2025. Each quarter, the relevant hedges for that quarter will be settled and recognized in the income statement.

In 2024, dsm-firmenich also hedged JPY 1,850 million (2023: JPY 7,535 million) of its 2025 projected net cash flow in JPY against the EUR by means of average-rate currency forward contracts at an average exchange rate of JPY 154.4 per EUR for the four quarters of 2025. dsm-firmenich also hedged the projected CHF obligations against the EUR, namely CHF 380 million (2023: CHF 393 million) at an average exchange rate of CHF 0.937 per EUR. These hedges have fixed the exchange rate for part of the USD and JPY receipts and CHF payments in 2025. Cash flow hedge accounting is applied for these hedges. In 2024, €4 million loss was recognized in the operating profit of the segments involved in accordance with the realization of the expected cash flows. There was no ineffectiveness in relation to these hedges. As of the second quarter of 2024, the Group no longer hedges forecast JPY cash flows as the exposure is no longer deemed material.

Fair value of financial instruments

The fair values of derivatives and long-term instruments are based on calculations, quoted market prices or quotes obtained from intermediaries. The portfolio of derivatives consists of average-rate forward contracts that are valued against average foreign exchange forward rates obtained from Bloomberg and other derivatives that are valued using a discounted cash flow model, applicable market yield curves and foreign exchange spot rates.

Inputs for the fair value calculations represent observable market data that are obtained from external sources that are deemed to be independent and reliable.

We use the following hierarchy for determining the fair value of financial instruments:

• Level 1: quoted prices in active markets for identical assets or liabilities
• Level 2: other techniques for which all inputs with a significant effect on the fair value are observable, either directly or indirectly
• Level 3: techniques that use inputs with a significant effect on the fair value that are not based on observable market data

The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for the financial assets and financial liabilities measured at amortized cost if the carrying amount is a reasonable approximation of the fair value.