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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 below shows management’s assessment of material risks before mitigation. Various strategies are employed to reduce these inherent risks to an acceptable level.

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, certain financial risks. People-related risks and opportunities, including employee development and retention and health and safety risks detailed in the Sustainability section.

Key
 

a: Strategic change, new business models

b: Pressure on margins

c: Market conditions and growth

d: Commodity price volatility

e: New competitors and technology

f: Information security

g: Litigation

h: Regulation



^   Risk is rising

<> Risk is unchanged

˅   Risk is falling

+  Issue has been added to the list of top Group risks this year

a: Strategic change, new business models <>

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

Trend
No change

To respond to changing customer needs the Group is introducing new business models and changing traditional ways of working. These changes are underway in all of our key markets 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.

Execution of key strategic initiatives in each market continues. Close attention is paid to the execution of these programmes at all levels of the organisation. 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.

b: Pressure on margins <>

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

Trend
No change

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

Pressure on margins remained high during the period under review, primarily due to levels of competition. Commodity price deflation was significant and adversely impacted margins (see risk ‘d’ below). In response, the Company continues 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.

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 Company has made acquisitions in these areas during 2015/16.

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.

c: Market conditions and growth <>

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

Trend
No change

This risk relates to the Company’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.

End markets have been more turbulent during the year. The Group has seen a notable downturn in industrial markets in North America and European markets have remained weak. The UK’s vote to leave the European Union has created additional uncertainty. 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:

 

i) The development of our business model;

 

ii) Cost control, pricing and gross margin management initiatives, including a focus on customer service and productivity improvement;

 

iii) Resource allocation processes;

 

iv) Capital expenditure controls and procedures.

d: Commodity price volatility +

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

Trend
New - increased during the year

Prices of commodities such as copper, plastic (oil) and steel have fallen as global demand weakened. There is a risk that further sharp falls (or rises) in these commodities may occur too quickly for the Company toadjust its inventory levels, impacting revenue and profit margins.

This year has seen material deflation in the prices of certain commodities, including copper and steel. The Company’s ability to fully mitigate the impact of this volatility is limited and there has been a resulting impact on the margins achieved by the Group.

The Company’s ability to mitigate this risk is limited. Inventory levels are managed by each business and low to normal levels are maintained at times of price deflation. Large forward purchases are subject to management approval.

The Company does not actively hedge commodity prices using financial instruments.

e: New competitors and technology +

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High/medium

Trend
New

Wholesale and distribution businesses in other industry sectors have been disrupted by the arrival of new competitors with lowercost business models or new technologies to aggregate demand away from incumbents. There has to date been limited competitor activity in this area; however the nature of Ferguson’s industry is such that its markets could be disrupted by new entrants.

An updated analysis of this risk was conducted and presented to the Executive Committee and the Board during the year. The Group made a number of acquisitions of online businesses during the year.

The Company continues to develop and invest in new business models, including e-commerce, to respond to changing customer and consumer buying patterns and needs. The development of such competitors continues to be monitored.

f: Information security <>

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High/medium

Trend
No change

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

 

The Company 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.

 

During the year under review, the Group has reassessed high risk data types, their location and has reconfirmed ownership for that data. Mitigation plans have been updated for all businesses to address this risk. These include improving security awareness amongst employees and continuing to enhance data ownership and classification. Technical IT projects are in progress to deliver enhancements to the Group’s digital security systems and infrastructure.

 

Briefings on this topic were provided to the Board, the Audit Committee and the Executive Committee throughout the year.

 

The Group reviewed the adequacy of its “cyber” insurance arrangements.

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 employees and technical controls for IT systems. These are reviewed annually and are subject to continuous improvement.

 

Certain of these controls are tested by business units, by the Group IT function and by Internal Audit. 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.

g: Litigation <>

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

Trend
No change

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, employees 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.

 

A review of policies and procedures relating to product liability wasundertaken in 2016 and the findings were reported to the Board. Internal audits have been undertaken in all major businesses to test procedures. Improvements are being implemented.

 

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

 

Contracting procedures continue to be improved in all businesses.

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. Ferguson has insurance which exceeds the current estimated liability relating to asbestos claims.

 

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.