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www.wolseley.com

Principal Risks

Crystallisation of these principal risks could have an adverse effect on the Group’s results or financial condition. If more than one of these risks occur, the combined overall effect of such events may be compounded.

The chart shows management’s assessment of material risks before mitigating controls and actions. Various strategies are employed to reduce these inherent risks to an acceptable level. These are summarised below.

The effectiveness of these mitigation strategies can change over time, for example with the acquisition or disposal of businesses. Some of these risks remain beyond the direct control of management. The risk management programme, including risk assessments, can therefore only provide reasonable but not absolute assurance that risks are managed to an acceptable level.

The Group faces many other risks which, although important and subject to regular review, have been assessed as less significant and are not listed here. These include, for example, natural catastrophe and business interruption risks and certain financial risks.

 

Risks to the drivers of profitable growth

The symbols shown below are displayed alongside each risk on the following pages to indicate which of the strategic drivers of growth are most threatened by that risk. These strategic drivers are described here.

A: New competitors and technology

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

Trend
Increased


Organic expansion

Wholesale and distribution businesses in other industry sectors have been disrupted by the arrival of new competitors with lower-cost business models or new technologies to aggregate demand away from incumbents.

 

The Board is attuned to both the risks and opportunities presented by these changes and is actively engaged as the Group takes action to respond.

Increased resources were allocated to the exploration and incubation of new business models and new technologies. The Group made a number of acquisitions of online businesses during the year. 

 

A new Non Executive Director, Nadia Shouraboura, joined the Board, bringing experience of large international e-commerce businesses.

The Group develops and invests in new business models, including e-commerce, to respond to changing customer and consumer needs.

 

The Company remains vigilant to the threats and opportunities in this space. The development of new business models in our market place is closely evaluated – both for investment potential and threats.

B: Market conditions

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

Trend
No change


Organic expansion


Pricing discipline

This risk relates to the Group’s exposure to short-term macroeconomic conditions and market cycles in our sector  (i.e. periodic market downturns).

 

Some of the factors driving market growth are beyond the Group’s control and are difficult to forecast.

 

The downturn seen in industrial markets in 2015/16 has stabilised. 

 

The UK’s vote to leave the European Union continues to create a level of uncertainty affecting the UK economy, although this is not expected to have a material impact on the Group.

 

The Group has maintained a strong balance sheet throughout the year and other measures have been taken to manage the cost base in line with forecast growth.

 

The Group has again tested its financial forecasts, including cash flow projections, against the impact of a severe market downturn.

The Group cannot control market conditions but believes it has effective measures in place to respond to changes. Ferguson continues to reinforce existing measures in place, including:

 

  • – the development of our business model;
  •  – cost control, pricing and gross margin management initiatives, including a focus on customer service and productivity improvement;
  •  – resource allocation processes; and
  •  – capital expenditure controls and procedures.

 

C: Pressure on margins

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

Trend
No change


Organic expansion


Operating model amd e-commerce development


Pricing discipline

Ferguson’s ability to maintain attractive profit margins can be affected by a range of factors. These include levels of demand and competition in our markets, the arrival of new competitors with new business models, the flexibility of the Group’s cost base, changes in the cost of commodities or goods purchased, customer or supplier consolidation or manufacturers shipping directly to customers.

 

There is a risk that the Group may not identify or respond effectively to changes in these factors. If it fails to do so, the amount of profit generated by the Group could be significantly reduced.

Pressure on margins remained high during the period under review, primarily due to levels of competition.

Commodity price deflation eased during the year.

 

In response, the Group has continued to manage its cost base in line with changes in expected growth rates. Business unit performance, including margins achieved, were monitored monthly throughout the year.

 

Gross margins were 40 basis points ahead of last year. This was achieved by driving the benefits of scale in sourcing, growing own label sales and through good pricing discipline.

The Group’s strategy for tackling this issue remains unchanged. This includes continuous improvements in customer service, product availability and inventory management. Revenues from e-commerce and other growth sectors continue to expand and the Group has made acquisitions in these areas during 2016/17.

 

The performance of each business unit is closely monitored and corrective action taken when appropriate.

 

Resource allocation processes invest capital in those businesses capable of generating the best returns.

D: Information security

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High/Medium

Trend
No change


Operating model amd e-commerce development

Technology systems and data are fundamental to the future growth and success of the Group. These digital assets are threatened by sophisticated security threats, including hacking, viruses, “phishing” or inadvertent errors.

 

The Group is reliant on a number of different legacy technology systems, some of which have been in place for many years or have been subject to in-house development.

Data breaches in our industry sector and others indicate that such events are highly likely and difficult to prevent.

 

Sensitive employee, customer or other data may be stolen and distributed or used illegally, leading to increased operating costs, litigation and fines or penalties.

 

These technology systems, on which our branches, distribution centres and e-commerce businesses rely, may be disrupted for several hours or days. As a result, Ferguson could forego revenue or profit margins if we are unable to trade.

This risk has remained material, as a greater proportion of the Group’s revenue is derived from e-commerce. The level and sophistication of IT security threats is constantly developing.

Like all large corporations, the Group continues to experience sustained and frequent attempts to gain unauthorised access to its technology systems, primarily from automated, non-directed malware. 

 

During the year, the Group engaged a specialist security consultancy to benchmark its information security capabilities. The findings, along with improvement actions, have been shared with the Audit Committee. 

 

Further penetration tests have been conducted, using both digital and physical means, e.g. phone calls. Improvements have been made where necessary.

 

Technical IT projects continue to deliver enhancements to the Group’s digital security systems and infrastructure.

 

The Group reviewed the adequacy of its “cyber” insurance arrangements. Using a database of 50,000 historical data breaches, the Group conducted a statistical analysis to estimate its exposure to certain types of cyber risks.

 

Briefings on the status of the Group’s information security programme were provided to the Board, the Audit Committee and the Executive Committee throughout the year.

The Group operates an IT governance framework including a set of dedicated IT policies, procedures and standards aligned to known security and operational risks. These include behavioural procedures for associates and technical controls for IT systems. These are reviewed annually and are subject to continuous improvement.

 

The Group periodically reviews the nature of the sensitive data it holds, its location and the controls in place to protect it. 

 

The Group reviewed its approach to obtaining assurance over the correct operation of IT systems and controls, some of which relate to cyber risks. 

 

Certain of these controls are tested by business units and the Group IT and internal audit functions. External specialists are also employed as appropriate to test the security of our technology systems, e.g. penetration tests.

 

Core IT systems and data centres for the Group’s material businesses, including the Group’s principal e-commerce businesses, have documented disaster recovery plans which are tested annually. Crisis management and communications plans are regularly updated.

 

Insurance coverage is in place, including coverage for “cyber” risks.

E: Litigation

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

Trend
No change


Organic expansion


Own label penetration

The international nature of the Group’s operations exposes it to the potential for litigation from third parties and such exposure is considered to be greater in the USA than in Europe.

Material levels of litigation may arise from many of the Group’s activities. Significant levels of litigation in our industry sector have in the past related to products, associates or major contracts.

 

Acquisitions and disposals and the restructuring of under-performing businesses may also give rise to litigation.

 

During the year, there has been no material change in the level of litigation to which the Group is exposed.

 

An improved management information system was introduced to improve the reporting and analysis of actual and potential litigation.

 

Reviews of policies and procedures relating to product liability were undertaken during the year and the findings were reported to the Board. Particular focus is being placed on quality control and assurance procedures to support the successful growth of own label sales.

 

The level of contractual protection afforded to the Group under product and employee-related contracts has improved during the year.

Contracting procedures continue to be improved in all businesses.

 

The Group’s liability insurance programme was restructured to provide enhanced cover.

 

Levels of litigation are monitored by individual operating companies. A monthly report of potential exposures and current litigation is submitted by all businesses and reviewed by the Group General Counsel.

 

Contracting procedures are continuously reviewed and improved against a “good practice” framework used by all Ferguson businesses.

 

The Group periodically re-assesses the level of product-related risk in all business units. Due diligence is conducted on products and suppliers considered to be high risk. Product testing is carried out in certain businesses supplying product to industrial customers.

 

KPIs are used to measure the level of contractual and other protection.

 

In the case of claims related to exposure to asbestos, Ferguson continues to employ independent professional advisers to actuarially determine its potential gross liability. 

F: Health and safety

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

Trend
Increased


Engaged associates


Excellent service ethic

The Group does not operate in a high risk industry with regard to health and safety. 

 

The nature of Ferguson’s operations can nevertheless expose its employees, contractors, customers, suppliers and other individuals to health and safety risks.

 

Health and safety incidents can lead to loss of life or severe injuries.

The risk has been elevated this year following the deterioration in injury and lost workday rates. The Company is recruiting a senior leader for health and safety in the USA. The Group conducted in-depth driver risk assessments and implemented control improvements. The Group vehicle collision rate has improved.

 

Leadership of health and safety is key. Health and safety performance is reported to and discussed at all Group Executive Committee meetings and Board meetings.

 

The Group maintains a health and safety policy and detailed minimum standard, which sets out requirements which all Ferguson businesses are expected to meet. Branches are audited against this standard.

G: Strategic change

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

Trend
Decreased


Organic expansion


Operating model amd e-commerce development

To respond to changing customer needs the Group is changing traditional ways of working in its established businesses. 

 

These changes are underway in all of our key markets, especially the UK, and will continue for several years.

 

The Group must successfully implement these changes without disrupting existing operations.

 

The Group’s ability to successfully execute these changes will affect its ability to grow profitably in the future.

During the year, we announced our intention to dispose of our operations in the Nordics.

 

In the UK, the transformation plan is underway and we expect that it will take a further two years to complete. To support faster execution, greater focus has been paid to a smaller number of initiatives capable of delivering the greatest value.

 

Each business unit has a clear strategy for continuously developing its business model and a defined programme of work to execute the strategy.

 

The Group Chief Executive and Chief Financial Officer discuss progress with each business unit during regular performance reviews.

 

The Board reviews progress during regular updates from the Group Chief Executive and as part of its six-monthly review of principal risks.

H: Regulations

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

Trend
No change


Organic expansion


Own label penetration

The Group’s operations are affected by various statutes, regulations and standards in the countries and markets in which it operates. The amount of such regulation and the penalties can vary.

 

While the Group is not engaged in a highly regulated industry, it is subject to the laws governing businesses generally, including laws relating to competition, product safety, timber sourcing, data protection, labour and employment practices, accounting and tax standards, international trade, fraud, bribery and corruption, land usage, the environment, health and safety, transportation, payment terms and other matters.

 

Breach of any legal or regulatory requirement could result in significant fines and penalties and damage to the Group’s reputation.

There has been no major change in the level of regulation applying to the Group.

 

Anti-bribery and anti-corruption practices in all businesses were reviewed during the year and the findings reported to the Executive Committee and to the Audit Committee. Improvements are being implemented.

 

The Group reviewed its Code of Conduct.

 

The Group monitors the law across its markets to ensure the effects of changes are minimised and the Group complies with all applicable laws.

 

The Group’s Code of Conduct sets out the behaviours expected of Ferguson associates. This includes clear statements that the Group does not permit bribery or the giving or receiving of improper gifts, that it does not tolerate fraud and that associates must comply with anti-trust laws.

 

The Group aligns Company-wide policies and procedures with its key compliance requirements and monitors their implementation.

 

Briefings and training on legal and regulatory topics and compliance requirements, including anti-trust, anti-fraud and anti-corruption, are undertaken.

 

Where appropriate, tests are conducted to ensure that the Group would respond appropriately to a regulatory investigation.

I: Talent management and retention

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

Trend
New addition


All nine of our drivers of profitable growth

As the Group develops new business models and new ways of working, it needs to develop suitable skill-sets within the organisation.

 

Furthermore, as the Group continues to execute a number of strategic change programmes, it is important that existing skill-sets and talent is retained. 

 

Failure to do so could delay the execution of strategic change programmes, result in a loss of “corporate memory” and reduce the Group’s supply of future leaders.

There has been no material change in the level of employee turnover during the year; however a number of senior management changes have occurred throughout the Group.

 

These have included the retirement of the Group CEO and the CEO in the USA, the appointment of their successors and the appointment of a new Group Chief Financial Officer.

 

Talent management procedures were reviewed during the year.

 

All of the Group’s businesses have established performance management and succession planning procedures. Reward  packages for associates are designed to attract and retain the best talent.

 

Organisational and talent reviews are conducted quarterly by the Group HR Director with each business.

 

The Group continues to invest in associate development.

It should be noted that these risks are difficult to estimate with accuracy. The materialisation of these risks could have an adverse effect on the Group's results or financial condition. Various mitigation strategies are employed to reduce these inherent risks to an acceptable level. The Company also faces many other risks which, although important and subject to regular review, have been assessed as less significant (such as the impact of restructuring activity or product price volatility), which have been reported previously and which through changes in external factors and careful management are no longer material to the Group as a whole.

Many risk factors remain beyond the direct control of the Company and the risk management programme can only provide reasonable but not absolute assurance that key risk are managed to an acceptable level.