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Risk management

Board accountability

The Board has ultimate responsibility for the effective risk management of the Group’s strategic objectives. The Group has a well-established process which has operated throughout the year that identifies and monitors the key strategic and operational risks, ensures appropriate mitigating activities and reports on their effectiveness.

The Board has considered and approved the risk management policy, the risk appetite of the Group (discussed below) and has delegated the review of the risk management process to the Audit Committee. The Audit Committee receives regular reports from management and internal audit detailing the risks that are relevant to our business activity, the effectiveness of our internal controls in dealing with these risks and any required remedial actions along with an update on their implementation.

The Audit Committee reports to the Board on the effectiveness of the risk management process. Day-to-day risk management is the responsibility of senior management as part of their everyday business processes and is underpinned by the Group’s policies and procedures to ensure this is fully embedded.

There is a structured business review process that operates across all business areas which management report to the Board and this, along with the corporate governance framework, further underpins the ongoing management of risk.

Management controls

The internal control system provides senior management with an ongoing process for the management of the risks that could impact on the fulfilment of the Group’s business objectives. The system is designed to manage rather than eliminate the risk of failure to achieve our business objectives and can only provide reasonable, not absolute, assurance against material misstatement. Our internal controls cover all areas of operations. The system also supports senior management’s decision making processes improving the reliability of business performance.

Corporate oversight

Risk management — The Group operates a formal risk management process designed to provide information to the Board, drive internal audit activities and support the executive and senior management in identifying and mitigating the key risks facing the business on an ongoing basis. Collective top down executive reviews are conducted, as a minimum twice per annum, and detailed functional risk registers are maintained for each businessarea.

Financial control — The Group maintains a strong system of accounting and financial management controls. Our accounting controls ensure data in the Group’s financial statements are reconciled to the underlying financial systems. A review of the data is undertaken to provide assurance that the position of the Group is fairly reflected, through compliance with approved accounting practices.

The Group has a dedicated team of finance managers aligned to business areas, supported by systems to provide the best available decision making information to management on an ongoing basis. This is reflected in an annual budgeting process, monthly management reporting and ongoing investment appraisal.

Treasury risk management committee — This committee focuses on the commodities purchased by the Group, reviewing our policies and operational delivery with respect to forward trading and foreign exchange exposures.

Health & Safety — The Group maintains an ongoing programme of Health & Safety audits and has established internal Health & Safety compliance tours at all factory sites.

Food safety – The Group has developed and implemented corporate technical standards and established an ongoing food quality and safety compliance programme which audits all factory sites and major suppliers. This supplements internal testing facilities established as part of our internal control system which confirm food quality, safety and authenticity.

Internal audit

The Audit Committee annually reviews and approves the internal audit programme for the year. The Committee reviews progress against the plan on a quarterly basis considering the adequacy of audit resource, the results of audit findings and any changes in business circumstances which may require additional audits.

The results of internal audits are reported to the Executive Leadership Team and senior management and where required corrective actions are agreed. The results of all audits are summarised for the Audit Committee along with progress against agreed actions.

Risk appetite
The organisation’s approach is to minimise exposure to reputational, financial and operational risk, whilst accepting and recognising a risk/ reward trade-off in the pursuit of its strategic and commercial objectives.

As a food manufacturing company, with many well known brands, the integrity of the business is crucial and cannot be put at risk. Consequently, it has a zero tolerance for risks relating to Health & Safety and food safety. The business, however, operates in a challenging and highly competitive market place and as a result it recognises that strategic, commercial and investment risks will be required to seize opportunities and deliver results at pace.

It is therefore prepared to make certain financial and operational investments in pursuit of growth objectives, accepting the risk that the anticipated benefits from these investments may not always be fully realised. Its acceptance of risk is subject to ensuring that potential benefits and risks are fully understood and sensible measures to mitigate risk are established.

Changes since last year
The business has continued to invest in its commercial capability since the business unit restructure announced in 2014, particularly in International where we have a new team and Managing Director in place. Our consumer focused growth strategy has demonstrated results in the areas where we have focused investment, such as Bisto, OXO, Loyd Grossman, Sharwood's, Mr Kipling and Cadbury cake. Growth has been driven by increased investment in marketing and innovation which is set to increase even further in the coming financial period. We have increased our 2016/17 and medium-term growth forecasts and supported this with the announcement of a
number of new strategic initiatives including 'Cake on the go', expansion of our Grocery business into the chilled category, and further roll-out of cake into the USA following successful trials. We have recently entered into a Relationship agreement and co-operation agreement with Nissin, who are now also our biggest shareholder. The co-operation agreement identifies a number of opportunities to drive mutual growth including potential co-branding, distribution, manufacturing and technical innovation initiatives.

However, we continue to operate in a highly challenging environment and have raised our growth targets against a market undergoing price deflation. As a result, growth from new strategic initiatives may not be in line with expectations, or take longer than expected to deliver results. Long-term growth is dependent on innovation delivery, the success of which cannot be guaranteed. The success of our international growth strategy depends on identifying the correct business partners in our key territories (e.g. direct sales customers, strategic distributors and other partners). Increasing our international presence brings with it certain inherent risks and it is important that we have appropriate processes in place to mitigate these risks. A key focus for the business currently is the renewal of our Cadbury cake license, which will run for a period to expire not earlier than 30 June 2017, subject to 12 months rolling notice. The economic environment is a risk and our supply costs could be impacted by an increase in commodity prices. The upcoming EU referendum creates uncertainty over the exchange rate and could adversely impact input costs in the event of Britain leaving the EU. However, because the business is predominantly UK focused, Brexit is not expected to give rise to any other material commercial or operational risks. New Government regulations, particularly around obesity and sugar, could have an adverse impact, particularly in our Sweet Treats business. Our Hovis Joint Venture is included as a risk given the challenging trading conditions they are operating in, however, we have fully written off our investment in this company. We have also assumed control of the Knighton Foods business.

Last year’s report included a risk around organisational structure and capability which has now been mitigated by successfully embedding the new business structure, the recruitment of key vacancies with high calibre staff and ongoing investment in technology and infrastructure. Last year’s risk on reputation and stakeholder perception has been reduced through a review of corporate policies and their enforcement, as well as numerous high profile brand initiatives including charity and community partnerships. Effective resources and processes are in place to manage external communications and media responses where required.

For 2014/15 we have focused on five key strategic risks which pose the greatest threat to the delivery of our strategy. We have also highlighted a number of operational risks which we believe are common to all food manufacturers under the headings; Operational continuity and Legal and regulatory compliance. These risks are identified in the following heat map and described in more detail below.

Summary of major strategic & operational risks
We have focused on six key strategic risks which pose the greatest threat to the delivery of our strategy. We have also highlighted a number of operational risks which we believe are common to all food manufacturers under the headings; Operational continuity and Legal compliance. These risks are identified on the heat map below and are described in more detail in the below table, together with a discussion of the mitigating activities we are taking to reduce the likelihood or potential impact of these risks. This webpage also contains a more detailed discussion of operational risks seven and eight below than was discussed in the annual report 2015/16.


Strategic risks

Mitigating activities

1 Commercial arrangements

Delivery of the Company’s commercial objectives is dependent on a number of key arrangements with customers, suppliers and distributors. A large proportion of our revenue derives from sales to the major UK retailers who are themselves under significant pressure due to continuing structural changes in grocery retailing. New strategic initiatives around ‘Cake on the go’, our planned expansion into the chilled Grocery segment and increased focus on International markets expose us to risks and uncertainties associated with operating in new categories, markets and/or customers. Growth may not be as strong as expected and/or may take longer than expected to be delivered. However ‘Cake on the go’ is considered to be the lowest risk of these new initiatives. We have a key licensing agreement for use of the Cadbury brand (which runs at least until 30 June 2017 with an extension currently being negotiated). Failure to renew this license could have implications for our Cadbury manufacturing site at Moreton. Other licensing agreements include Loyd Grossman (which continues until 2026 but is dependent on achieving performance targets) and a new agreement with Paul Hollywood to support a range of home baking products introduced to the market in the last quarter of 2015/16, also subject to performance targets.

We have worked closely with our major customers to agree business plans that are strategically aligned and reflect mutual growth opportunities and have strengthened customer relationships through our category management activities. Strategic initiatives to grow our business with discounters, convenience, online and international markets will broaden our customer base and reduce the dependence on major retailers. We have significantly increased our investment in our commercial teams to support our growth plans. The non-branded business has seen substantial growth. The ‘Cake on the go’ offering aims to grow our share in the convenience market. New strategic initiatives are being implemented in a measured way through phased entry and are supported by trials where appropriate. In addition we expect that the new co-operation agreement with Nissin, announced in March 2016, will support our growth initiatives and create mutual opportunities to leverage brands, technology, presence in international markets and customer relationships. We enjoy good relationships with our licensed brand owners and are engaged in appropriate commercial discussions with them. This is supported by successful recent innovation activity, particularly with Cadbury.

2 Commodity prices / Brexit

There is a risk that commodity prices may increase over the time frame of our strategic plan which could impact margins and/or our ability to invest in marketing and capital expenditure activities. Additionally, if the upcoming referendum results in the UK leaving the EU, the subsequent forecasted devaluation of sterling would have an adverse impact on imported raw material costs, only partially offset by positive currency benefits in our international business.

Hedging activity and ongoing supplier risk management and price negotiation processes are in place to mitigate the impacts of commodity price inflation. Appropriate assumptions for movements in commodities and foreign exchange have already been reflected in the current budget and business plan. If commodity price increases are significant, we could seek to recover these through price increases to our customers.

3 Regulatory and Government policy

The business may be subject to significant new regulatory compliance requirements as a result of Government policies, including potential measures to address the obesity issue which could adversely impact our business, particularly in Sweet Treats. New legislation on the National Living Wage and the Apprenticeship Levy could also adversely affect margins. Corporate tax legislation changes, although currently unconfirmed, could impact our ability to utilise tax losses in future.

We are taking pro-active steps to reduce the sugar and calorie content in our products and have published a nutrition strategy with ten commitments to healthier choices (for further information see page 22 of annual report 2015/16). Innovation activities are also focused on improving health aspects of our product portfolio. We actively engage in regulatory discussions with trade bodies such as the Food and Drink Federation (FDF). The business is currently reviewing its short and long-term strategy with regard to the National Living Wage and Apprenticeship Levy. We will monitor changes to tax legislation and review our tax strategy accordingly.

4 Investments

The Group could be exposed to reputational and/or financial risks through the activities and performance of its Hovis Joint Venture and the Knighton Foods business, previously a joint venture and now fully controlled by the Group.

Under certain circumstances, as a result of English statute law, the Group could also have some residual liability for certain operational properties held by Hovis under long-term leases, although this element of risk is currently considered to be remote.

The Group has senior executive representation on the Board of Hovis and has fully written off its investment in this company. Hovis has independent sources of finance which are non-recourse to the Group. In the event that the Group becomes liable for Hovis property obligations we would seek to sub-let these properties or surrender the leases. The Group has assumed control of the Knighton Foods business in order to address operational issues.

5 Pension fund deficit

The Group supports a number of significant pension schemes which are in deficit on an aggregate level. The resulting balance sheet liability may fluctuate due to factors outside the Group’s control

The Group has agreed deficit funding payments which (unless the Group resumes payment of dividends) are fixed until the end of 2019. The RHM Pension Scheme, which is the largest scheme, has a sophisticated investment strategy which is designed to minimise risk while earning long-term returns in line with the scheme’s funding requirements. The scheme makes use of swaps and other financial derivatives in order to hedge interest rate and inflation exposures. The smaller Premier Foods schemes have a much lower funding position and therefore less ability to hedge. These schemes are more reliant on cash contributions from the Group as well as positive investment returns to reach a satisfactory long-term funding position. The Group enjoys close relationships with the various Trustees, through regular meetings with the Trustee Chairs through the Pension Liaison Forum and attendance, by invitation, of the CFO and members of his team at investment committee meetings. A triennial valuation will be concluded later in 2016 but this will not affect deficit contributions until 2020.

6. Innovation and consumer trends
The Group's portfolio of products needs to align with changing consumer requirements, particularly trends towards healthy eating, convenience, ‘real food’ and indulgence. This needs to be delivered through effective innovation and marketing activity supported by appropriate manufacturing capability. The business continues to invest strongly in commercial insights resources to understand consumer trends, as well as its marketing and innovation capability. Product innovation activities are targeted at addressing healthy eating and other trends and product lifecycle management processes are in place to manage the decline of products in our portfolio. Exciting new developments in our product portfolio are underway or planned for this year, particularly for Batchelors and Ambrosia.
7 Operational continuity  

Delivery of our strategy is dependent on the organisation’s ability to minimise operational disruption from issues with facilities, IT and factory infrastructure, as well as procurement and logistics functions.

We have crisis management processes in place and business continuity plans are reviewed and refreshed on an ongoing basis. The financial impact of material site issues is mitigated by insurance cover. Systems resilience is built in through the deployment of dual data centres and will be enhanced following the completion of a re-hosting project in early 2016/17. Procurement category strategy plans are in place to monitor and mitigate risk around key suppliers.

7.1 Facilities Incident

A major disruption at one of our operating sites could impact service levels.

Crisis management processes are in place and business continuity plans are refreshed across  all operational and administrative sites. Insurance cover is also in place to mitigate the short-term financial impact of site disruption.

7.2 Food Safety and regulation

The business is exposed to risks around food contamination with hazardous products as well as food authenticity. A major food safety incident could result in financial, regulatory as well as reputational impacts. 

We have an ongoing program of food safety audits at sites and suppliers and strong process controls in this area, including a best-in-class laboratory for food testing. The surveillance program also includes licensed products and audits of licensed manufacturers. We have signed up with SEDEX to promote ethical trading.  

7.3 IT Systems

The business is dependent on a number of core IT systems, the breakdown of which could result in operational disruption. The business could also be impacted by security breaches, including the evolving threat of cyber security which could lead to damage to assets, loss of commercially sensitive information or reputational damage. Increasing reliance on Cloud technology for storage of information also carries evolving security risks.

Systems resilience is built on through the deployment of dual data centres and the recent completion of the Connect Program, an initiative to update legacy systems. A re-hosting project was completed in 2016 which will further improve our resilience and Disaster Recovery capability. There is a regular penetration testing program in place to assess network vulnerabilities and DR plans are in place and tested on an agreed cycle.

7.4 Supply continuity

Security of supply could be disrupted by commodity price fluctuations, key supplier performance, relationship and solvency issues,  as well as global political and economic unrest.

There are extensive Procurement category strategies in place to review risks for key categories, market trends and potential supplier issues. Supplier relationships are monitored and managed on a day to day basis by the Buying teams. Commodity price fluctuations are monitored and appropriate hedging strategies implemented by the Procurement and Treasury teams. The business has recently completed the supplier reduction program and is further enhancing supplier partnering strategies, for example through a supplier innovation initiative.  

8 Legal and regulatory compliance

The business is subject to a number of legal and regulatory compliance requirements and must continually monitor new and emerging legislation, in areas such as Health & Safety, the listing regime, competition law, food safety, labelling regulations and environmental standards.

Leading food industry processes are in place to manage Health & Safety and food safety issues, including an ongoing programme of internal and external audits. There are dedicated legal and regulatory teams in place to monitor changes in legislation, ensure compliance across the organisation and defend against litigation where necessary.

8.1 Legal and Regulatory Compliance

Health & Safety is a key priority for the business. As well as the human cost, a serious workplace injury of fatality could carry financial and reputational risks as well as legal consequences under applicable regulation.

We have a zero tolerance policy towards workplace incidents and a best in class process for managing health and safety, including TOPS tours and a regular cycle of inspections and specialist health and safety audits across all sites. 

8.2 Compliance with food regulations

The business must comply with government and EU codes around advertising and food labelling, as well as changing legislation on healthy eating, for example restrictions on salt and sugar content. We also need to maintain compliance with ethical trading standards.   

We have a dedicated Regulatory team in place to monitor changes in legislation and ensure compliance across the business. We are also a member of SEDEX as part of our ethical assurance program.

8.3 Legal risks

The business could be exposed to financial and/or operational risks as a result of failure to observe laws and regulations or commercial claims e.g. for breach of copyright.

We have a dedicated Legal team in place to provide guidance to the business and ensure legal compliance. They are supported by external expertise when necessary.

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