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Risk management

 

Risk management: principal risks and uncertainties
The Board determines the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. Across the business, there is an ongoing process in place for identifying, assessing, managing, monitoring and reporting on significant risks faced by the Group. This process has been in place for the year under review and up to and including the date of approval of the 2010 Annual Report. Risk identification processes take into account the four strategic priorities and five 2011 business focus areas outlined here. A summary of the key risks identified, potential impacts and mitigating actions are set out below.

Strategic priorities and related risks
1. Align to key customers and markets
Risk description Potential impact Mitigation
Certain key customers represent a significant portion of Group revenue and operating profits. The loss of all or part of one or more of these customers represents a concentration risk to the business. Reduced profitability and cash flow. The Group believes that it currently enjoys good relationships with major customers and continues to manage and develop these relationships by focusing on superior customer service, product innovation, quality assurance and cost competitiveness. The Group continues to expand its geographic footprint to better serve its key customers and to provide a platform for future growth.
2. First class science-based innovation
Risk description Potential impact Mitigation
Increasing competition, product innovations, technical advances and changing market trends provide a constant challenge to the future success of the Group and its ability to successfully adapt. Such changes may have material adverse effects on the Group's financial performance Glanbia's main innovation centre is located in Ireland with a further innovation and customer collaboration centre in the USA as well as associations with a number of research programmes at third level institutions. Research and development expenditure is focused on value added and customer specific solutions in sectors where Glanbia has significant technical and market knowledge.
3. Effective risk and capital management
Risk description Potential impact Mitigation
A failure by the Board to manage risk or make correct capital allocation decisions may impact the Group's objective of maximising shareholder return. Loss of shareholder value. Inability to achieve strategic objectives. The Group has a comprehensive programme for the identification and management of risk. The Group manages capital by operating within specific debt ratios as outlined in the Group Finance Director's report. All significant investment and divestment decisions are approved by the Board based on a range of financial criteria including return on capital employed. The Board will continue to focus on investments that are in line with Group strategy and capable of generating acceptable returns.
4. Operational excellence and strategic cost management
Risk description Potential impact Mitigation
A breach of existing environmental laws and regulations or the introduction of new more onerous legislation. Reputational damage and regulatory penalties including restrictions on operations, damages or fines. Increased cost of compliance with modified or new legislation. Adverse operational consequences. The Group is committed to compliance with regulations. We continue to invest in energy efficiency advancements, carbon reduction and emission programmes and recycling.
A breach of food safety legislation or the introduction of more stringent regulations. Reputational damage and regulatory penalties including restrictions on operations, damages or fines. Product recall costs. Additional labelling requirements. Damage to customer relationships. The Group conforms to international and local food safety, quality and
environmental regulations and employs best practice across all its production
facilities to maintain the highest standards.
The Group maintains product liability insurance.
Key sites have quality accreditations from external parties.
Contamination of products and/or raw materials. Reputational damage and regulatory. penalties. Product recall costs, lost revenues and reduced growth prospects. The Group conforms to international and local food safety, quality and environmental regulations and employs best practice across all its production facilities to maintain the highest standards. Key sites have quality accreditations from external parties.
A breach of health and safety regulations. Reputational damage and regulatory penalties. An independent risk consulting firm conducts an annual health and safety audit for the Group's main locations the results of which are presented to and considered by the Audit Committee.
Loss of capacity at a major site. Inability to service customer requirements. Adverse impact on reputation. Reduced profitability and cash flow. All business operations have business continuity plans in place including where relevant identification of alternative production locations. The Group monitors overall safety and loss prevention performance through the Glanbia risk management system (GRMS) to assist operational management responsible for the day to day management of business risk. A comprehensive insurance programme is in place for all significant insurable risks and major catastrophes.
One of our major ingredient suppliers being unable to fulfill product demand requirements. Inability to service new and existing customer requirements. Operational efficiencies impacted. A broad supplier base is maintained where possible. Management continuously seeks out and assesses additional sources of supply for key raw materials. The Group has invested heavily in supply chain resources and systems. Regular quality control assessments including supplier site audits are conducted to ensure the areas of greatest social, political and economic exposure are identified.
A significant increase in energy costs impacting the Group's large scale processing operations. Adverse impact on cash flow and earnings. Energy efficiency programmes are operated across all sites. When required the Group will enter into fixed price arrangements to cover certain future energy requirements

2011 Business focus and related risks
1. Successful integration of BSN acquisition
Risk description Potential impact Mitigation
Acquisition failure to deliver in accordance with business case objectives. Intended business benefits not realised impacting profitability and growth. Integration efforts may result in an excessive diversion of management attention. Glanbia has significant knowledge of the performance/sports nutrition sector. There is regular reporting against targets outlined in the acquisition business case. The Group has significant post acquisition integration experience within the Group management team. The acquired entity management team will be strengthened by the transfer of experienced Glanbia managers.
2. Achieve organic growth plans across each business unit
Risk description Potential impact Mitigation
Global economic downturn leading to declining consumer confidence. Negative impact on profitability and cash flow. The Group maintains a balanced spread of businesses and continues to diversify its earnings base in order to reduce volatility in financial performance. The Group continues to streamline its cost base as appropriate to ensure it remains competitive.
Volatile global dairy commodity markets. Inability to deliver higher quality and less volatile earnings. Globally the Group has employed a number of risk management tools to limit volatility but the Group's ability to pass back pricing volatility in dairy commodities to its Irish milk suppliers can be constrained by competitive conditions and the pricing methods employed. As the Group maintains a portfolio of businesses there are some natural hedges to global dairy markets within that portfolio.
Changes in the cost and availability of milk procurement can be impacted by a number of factors including quality, demand, weather conditions and agricultural policies. Negative impact on earnings and cash flow. Group milk procurement teams constantly monitor the milk procurement environment to ensure that the Group remains competitive and that plant utilisation is maximised. Milk supply agreements have been entered into where possible. A number of risk management tools are made available to suppliers in the USA to facilitate them in managing their businesses. Strong links are sustained with the supplier base in Ireland.
3. Deliver Group results in line with market expectations
Risk description Potential impact Mitigation
Deterioration in market conditions or business unit performance, impacting on Group results. Reduced profitability and cash flow. Possible impact on the achievement of Group strategy. Monthly reviews take place with all business units tracking actual performance against planned assumptions and determining corrective actions as required. Regular reviews are undertaken with senior management on the status of business unit strategic objectives. Business unit senior management teams and the Board assess key market trends and implications for Group performance on an ongoing basis.
Foreign currency and interest rate exposure. Unexpected variation in net earnings. Exposures are monitored by the Group Treasurer with oversight by the Group Finance Director and the Group Managing Director. Regular liaison with business units on updated currency exposure reports.
4. Continue to develop people and organisation capability
Risk description Potential impact Mitigation
Recruitment and retention.
The Group is dependent
upon the quality, ability
and commitment of key
personnel in order to
sustain, develop and grow
the business.		 The ongoing success of the Group
being put at risk by failing to attract
and retain high quality management
and staff throughout the business.		 The Group mitigates risk exposure through sustained succession management, strong recruitment processes, long term incentives and retention initiatives. The Group also operates management development programmes to ensure that there is a continuous pipeline of talent within the Group to support the ongoing growth and development of the business. The leadership structure provides a platform for management information to be relayed and discussed on a timely basis.
5. Review of Group financing facilities
Risk description Potential impact Mitigation
Refinancing of Group debt facilities is key to underpinning the liquidity requirements of the Group. Lack of liquidity to sustain and grow the Group. Strong current relationships with debt providers. Tight management of debt on a daily basis with significant headroom maintained against current covenants. New financing arrangements typically negotiated at least twelve months prior to expiration.