Monitoring risk throughout the Group
The Board is ultimately accountable for the system of risk management at Wolseley. The Board, Audit Committee and Executive Committee review risks and controls in the context of the Group’s strategic plan and objectives. Throughout the year, information is provided directly from front line operations, via corporate functions and independent audits.
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Risk analysis during the year
2015/16 risk and control assessments
Wolseley formally reviews its principal Group and business unit risks every six months – at the half-year and at the year-end.
In January and July 2016, the Board provided its perspective on risks relating to the Group’s strategy for 2016/17 and beyond. The Board’s assessment was combined with bottom-up risk reports received from business units in February and August 2016 to produce an overall risk profile for the Group.
This risk report, listing principal and “emerging” Group risks and key business unit risks, was reviewed, amended and finalised with the Executive Committee in March and September 2016. The control frameworks in place for each principal risk were then reported to and reviewed by the Audit Committee.
Throughout the year, members of the Board, Audit Committee and Executive Committee have received updates on the Group’s principal risks, as follows:
|a||Strategic change, new business models||Monthly performance reviews with CEO and CFO. CEO update to the Board at each Board meeting.|
|b||Pressure on margins|
|c||Market conditions and growth|
|d||Commodity price volatility||Included in monthly performance reviews with CEO and CFO.|
|e||New competitors and technology||Updates provided to the Executive Committee in November 2015 and to the Board in January 2016.|
|f||Information security||Updates were provided to the Executive Committee, the Board and the Audit Committee throughout the year.|
|g||Litigation||The Group General Counsel regularly provides updates to the Executive Committee and the Board on changes in legislation and any material litigation or exposures. Updates on the Group’s “Product Integrity” programme were provided to the Executive Committee in September 2015 and to the Board in March and July 2016.|
|h||Regulation||The status of the Group’s anti-bribery programme was reported to the Audit Committee in March 2016.|
Longer-term viability of the Group
Building on this risk analysis, the Directors have assessed the Group’s prospects and viability in light of its current financial position, strategic plan and principal risks. The Board believes that a three-year viability assessment period to July 2019 is appropriate as this timeframe aligns with the Group’s planning horizon.
Strategic plans have been prepared by all business clusters and financial forecasts and budgets have been reviewed by the Board. The principal risks to the Company’s strategy were formally reviewed by the Board in January and July 2016. Consideration has also been given to the strength of the Company’s balance sheet and its credit facilities.
The Board considered the potential consequences of the UK referendum result to leave the European Union. The Board considered the impact on the UK and Group-wide operations and funding, taking into account the risks as currently understood and the fact that many aspects of the terms of the eventual exit of the UK from the European Union remain unknown.
Financial forecasts have been tested against an unlikely, but realistic, worst-case scenario. This incorporates a material downturn occurring simultaneously in all the Group’s major markets, combined with the materialisation of one of the Group’s principal operational risks. The material assumptions used in this analysis were based on a hypothetical market downturn resulting in a 20 per cent shortfall in forecast Group revenue in 2017, lasting for one year, followed by annual growth rate of 5 per cent thereafter. In addition, the materialisation of a severe operational incident was considered (such as a major product quality issue or an information security breach) leading to unexpected expenditure of £50million. The testing took account of mitigating actions available to the business to respond to the market downturn – for example, a reduction in working capital, acquisitions and discretionary expenditure.
Based on these assumptions, and considering the Group’s financial position, strategic plans and principal risks, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
UK referendum result – June 2016
The UK referendum result of a vote to leave the European Union has resulted in some market uncertainties including a material weakening of sterling against the Group’s principal trading currencies, of which the most significant is the US dollar.
The weakening of sterling has had a translation impact on the Group’s financial statements with a beneficial impact on results. Since the large majority of the Group’s profit is derived from activities outside of the UK and Europe, the Group does not, at this point in time, envisage a material adverse impact in the future. The Company will continue to monitor developments.