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Risk management

Board accountability

TThe 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.

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.

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
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

Strategic risks

Mitigating activities

1. Delivery of Strategy

Our revenue growth strategy is taking longer than anticipated to deliver and the business has reviewed its strategy with a more balanced focus on revenue, cost efficiency and cash generation. Marketing spend is  targeted at certain key brands and consequently there will be parts of our portfolio that receive only modest marketing investment and support. We expect that some of the categories in which we operate will continue their current trend of decline and so the delivery of our growth strategy is dependent on us growing share in our markets and aligning our product portfolio with consumer trends. This needs to be delivered through effective innovation and marketing activity.

We are continuing to invest in our core brands. There are no changes to our investment strategy for International and the collaboration initiatives with Nissin, which are both delivering strong results. We have excellent relationships in place with the major retailers through our strategy of supporting customer growth, providing new shopper insights and exclusive customer ranges. As a result we have been able to outperform the market in many of our categories. The results of retailer range reviews have been positive and a number of de-listed products are now back in store. We also have strong non-branded offerings in place and are growing our convenience, online and international businesses which reduces our dependence
on the major retailers. 

2. Corporate risks

During 2017 the Group has renegotiated elements of its debt capital structure.  Capital availability may be impacted by market trends which are outside the Group's control e.g. US interest rate volatility and global political uncertainty. The Group's pension fund deficit also remains a significant risk due to the materiality of the liability on the balance sheet.

Deficit payments post 2019 are subject to the outcome of the 2019 actuarial revaluation and if the pension schemes underperform over this period there is a risk that requested contributions become unaffordable. In certain circumstances (such as significant corporate events or the disposal of certain businesses) the RHM Trustees have the capability to exercise enhanced powers (including in respect of funding). 

We have strong relationships in place with our banking group and have now extended the maturity of our revolving credit facility and announced the proposed issue of a new 5 year floating rate note due 2022.

Our executive directors are actively engaged with the pension trustees on scheme funding and investment matters and we have engaged Mercer to assist in formal dialogue with the trustees over the risk profile of the RHM scheme. An integrated risk management review has been initiated with the major UK schemes following the 2016 valuation and the Premier Foods pension scheme has an agreed de-risking programme in place. We have negotiated reduced pension payment contributions until March 2020 and as a result total cash payments will be approximately £32m lower than outlined in our Interim Results on 15 November 2016 (see page 15 for a breakdown of scheduled payments).

3. Commodity prices / Foreign exchange (FX)

Commodity prices have undergone significant increases driven by Brexit, indirect FX impacts and cyclical cost inflation. There is a risk of further unbudgeted commodity inflation or sterling devaluation against the Euro. This could impact margins and/or our ability to invest in other areas of the business such as marketing or capital expenditure.

Hedging activity and ongoing supplier risk management is in place to mitigate the impact of commodity price and FX driven inflation. Initiatives to mitigate inflation through price increases, cost efficiencies and supply chain optimisation are well advanced. We have also undertaken a restructuring of the business to significantly reduce our SG&A expenditure, effective from 2017/18.

4. Weather 

The business is subject to seasonal fluctuations and lacks a warm weather product portfolio. This, along with changes to customer promotional strategy, was a contributory factor to recent trading performance issues. Initiatives to de-seasonalise our portfolio will only have a material effect over the longer-term. Longer-term climate change patterns could also undermine our business model if the product portfolio does not evolve over this period.

We are continuing to preferentially invest in programmes to de-seasonalise our Grocery product portfolio. The Sweet Treats side of the business is also less sensitive to weather fluctuations. In the long-term, the growth of our International business will also help to reduce our dependence on cold weather focused categories in Grocery

5. Commercial arrangements

The delivery of our strategic objectives is dependent on strong relationships with key customers, suppliers and distributors. A number of our brands are licensed; in respect of our use of the Cadbury brand our agreement is now operating on a rolling 12 month notice period and consequently we are in advanced discussions to secure a longer-term arrangement. In addition our licensing agreement with Loyd Grossman includes performance targets.

The business is undergoing a major transformation of its logistics operations which will combine the existing Grocery and Sweet Treats warehousing and distribution activities under a single supplier. This is expected to deliver significant long-term cost savings but gives riseto some operational risks during the transition period and will result in dependence on a single supplier and site for operations

The Group has recently signed non-binding Heads of Terms to be a Strategic Global Partner with Mondel─ôz for Cadbury cake. Once finalised, this agreement will extend the Group’s long standing partnership for another five years with the option to the Group of extending this for an additional three years. Additionally, the licence will cover a total of 46 countries with the potential to use other brands in the Cadbury family. The Loyd Grossman brand is well set for growth with a strong pipeline of NPD, including a new range of premium pouch sauces, Indian sauces and desserts.

The logistics consolidation programme is being managed through a strong project governance framework including transition planning and risk management activities. The supplier contract has been agreed following appropriate due diligence checks and effective contractual protections are in place. 

6. Business restructuring

The business has recently restructured its commercial and central functions in order to deliver cost savings. This may result in loss of experience and capability in certain parts of the business, particularly at a senior level. There are also some short-term risks around our ability to maintain staff engagement and retain key talent. There may also be continuity and succession planning issues for certain roles, as individual responsibilities are combined and expanded.
The restructuring of roles has been completed swiftly to provide clarity to colleagues. Certain areas of the business such as International and the graduate teams, as well as operational sites, have not been impacted. The business will continue to invest in staff development and engagement initiatives on a focused basis. The new structure will also reduce 'silos' in the business and enable more cross-divisional activities and staff development opportunities

Operational Risks

Operational risks

Mitigating activities

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.  Operational control over sites has been consolidated with one senior manager providing a consistent level of discipline.  Knighton Foods has been reintegrated into the business, providing stronger commercial and operational control. This has been further enhanced through the implementation of SAP in 2016/17.  Systems resilience is built in through the deployment of dual data centres and has been enhanced following the completion of a re-hosting initiative in 2016. Greater operational efficiency will be introduced to our Logistics function through the warehousing and distribution consolidation programme over the next two years. Procurement category strategy plans are in place to monitor and mitigate risk around key suppliers.

8. Legal 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.

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Our brands

100 years of history

When were Mr. Kipling cakes invented? Where does the name Bisto come from?

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Caring for the environment, and building trust in our supply chain.

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