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BAKKAVOR ANNUAL REPORT AND ACCOUNTS 2012 our risks WE HAVE IDENTIFIED EIGHT RISKS, THE SUCCESSFUL MITIGATION OF WHICH IS PARAMOUNT TO THE DAY-TO-DAY RUNNING OF OUR BUSINESS AND THE ACHIEVEMENT OF OUR LONG-TERM VISION. WE SHARE THESE WITH YOU BELOW. OUR EIGHT KEY RISKS TO THE BUSINESS 1 2 FOOD SAFETY & INTEGRITY HEALTH AND SAFETY (H&S) WHY THIS RISK AFFECTS US Millions of people eat our products every day. We have a duty to make food that is safe for people to eat and is clearly and correctly labelled. We have a duty of care to take every reasonable step to secure and protect the H&S of our employees across the Group. A relatively high proportion of our employees (over 80%) work in fast-moving manufacturing environments. WHAT MIGHT HAPPEN IF WE GET IT WRONG Failing to make safe products or label them accurately would damage our reputation in the industry and could also, ultimately, jeopardise the industry’s long-term prospects. Compromising on the H&S of our 19,000 employees would damage our reputation within the industry and would further impact the business through loss of employee trust. FINANCIAL RISKS MARKET RISKS OPERATIONAL RISKS 3 4 5 6 7 8 LOSS OF KEY EMPLOYEES CUSTOMER RELATIONSHIPS CONSUMER UNDERSTANDING COMMODITY PRICE INFLATION COVENANT COMPLIANCE INTEREST RATES, LIQUIDITY AND CREDIT We have a highly experienced senior management team which is passionate about the business and whom we consider to be a key competitive strength. We work with a concentrated number of some of the largest food retailers and foodservice providers in the world and we aim to be their supplier of choice. Our diverse and innovative product range is critical to developing customer relations and future growth. Bakkavor spends over £800 million on ingredients and packaging every year and may be exposed to fluctuating prices in significant areas of expenditure. We are subject to various financial covenants and undertakings as a consequence of our borrowing agreements. We are a relatively highly leveraged company and therefore exposed to the external risk of interest rate fluctuations and the market’s view of our credit rating. We would be unable to fulfil our strategic growth objectives without the recruitment, development and retention of talented and committed people who understand and respect our values. Given the size and relatively small number of customers, any major customer loss would have a significantly negative impact on our turnover, manufacturing efficiency and profit. Investing in product areas which fail or underperform is costly in terms of resource, profitability and our reputation with our customers. In the short term, increases in cost prices adversely affect individual product margins. In the longer term, the inability to pass on significant commodity cost increases within a reasonable timeframe would impact the Group’s profit negatively. In order to achieve our growth objectives, we require a strong financial platform. Breaching any covenant would destabilise our platform for growth and may impair our ability to secure future financing. In order to achieve our growth objectives, we require a strong financial platform. An inability to repay interest or a downgrading of the Group’s credit rating may impair our ability to secure future financing. PAGE 49 VIEW THE FULL REPORT AT ANNUALREPORT12.BAKKAVOR.COM
BAKKAVOR ANNUAL REPORT AND ACCOUNTS 2012 our risks WHO MANAGES OUR RISKS Management of all risks are assigned to Management Board members and discussed at each Management Board meeting. Risks 1 & 2: Ann Savage, Group Technical Director Risks 3, 4, 5 & 6: Agust Gudmundsson, Chief Executive Officer Risks 7 & 8: Peter Gates, Chief Financial Officer 1 HOW WE MITIGATE OUR RISKS We use Hazard Analysis Critical Control Point (HACCP) principles to identify the food safety controls required in our businesses. All operational staff are trained in food safety using documented procedures derived from the HACCP plan. We ensure compliance through audit of our sites and our suppliers of key raw materials, using a combination of internal and external food safety experts. PROGRESS We have continued to invest in food safety processes in order to remain leading class in this area. Risk management in action: In July 2012 one of our sites was the subject of a malicious and isolated act of contamination. Our risk management processes prevented any contaminated products from leaving the factory. We took additional steps by installing CCTV and encouraging employees to use our new ‘Speak out’ service. For more information see page 39. FINANCIAL RISKS MARKET RISKS OPERATIONAL RISKS 2 3 4 5 6 7 8 Our Group Technical Director is responsible for the Group’s H&S policies and performance and is supported by the Central Technical team which provides specialist expertise in key areas including H&S. H&S KPIs are reported monthly to the Management Board. The team’s role is to embed and monitor sound H&S practices and standards across the business and to develop a proactive accident prevention culture across the Group. We communicate our values internally in order to provide our employees with a cohesive framework. We recruit, appraise, reward and develop our employees against these values. We are committed to ‘growing our own’ people and provide relevant training to help our employees reach their potential. We have developed a ‘talent pipeline’ of employees based on performance and potential and we identify opportunities for them to grow within the business. Customer care is one of our five values. We invest in significant resource to manage and develop deep and long-lasting relationships with our customers, ensuring they have access to dedicated Bakkavor employees at all levels of the decision-making process. At a senior management level we appoint Customer Champions in the UK to manage customer relations and long-term strategic account planning. We regularly commission consumer research and communicate its results to our marketing and product development teams. Market trends and Bakkavor’s market share performance are discussed at each Bakkavor Management Board meeting. Through its central procurement team the Group aims to benefit from its scale and strong supplier relationships to achieve the requisite balance between price, quality, availability and service levels. Where possible it is the Group’s policy to pass on commodity price increases. Equally, it seeks to reduce costs and make products as efficiently as possible in order to offset any delays in achieving price increases. Bakkavor reviews its projections and covenant position monthly. The Group believes it is adequately placed to manage this risk successfully despite the current uncertain economic outlook and challenging macroeconomic conditions. Mitigating actions in 2012 included successful price negotiations, cost reduction programmes and enhanced working capital policies, all of which will continue into 2013. These risks are actively managed by the Group’s Treasury Department. The Treasury function operates within the framework of strict Board-approved policies and procedures which are explained further in Note 29 of the Group Financial Statements. Our key H&S measure is Major Accidents per 100,000 employees. In 2012 our performance improved by 26% and we continue to perform significantly better than the average for the food and drink industry. Our total number of accidents also fell by 10% in 2012. In 2012 we relaunched our values across the Group. See page 21. For the fourth year in a row we have hit or exceeded our employee retention targets, achieving retention rates of 90% for managers and 92% for site-graded employees in 2012. We filled 45% of our vacancies internally in 2012. We continue to work collaboratively with customers to secure joint business plans and deliver growth across the categories in which we operate. In 2012, we received three supplier awards from our customers in recognition of our service and partnership approach. We launched over 2,000 products in 2012 and won 11 food product awards, testament to our product quality and innovation. The Group has increased its level of hedging and as at 29 December 2012 32% of raw material spend for 2013 was hedged. We will continue to mitigate raw material price volatility through forward purchasing. However, in certain instances there is not always a seller willing to enter into such forward contracts. Further hedging arrangements will be secured where it is both practical and possible to do so. We renegotiated our leverage covenant in early 2012, providing increased headroom and allowing management to focus on the long-term strategy of the Group. The Directors consider that the Group has the flexibility to react to further deteriorating market conditions through implementing previously agreed early settlement arrangements with our core customers and reducing our capital expenditure programme. Further actions available to management include supply chain improvements and additional cuts to discretionary spend. Fixed interest rate swaps totalling £300 million matured in the year, leading to a reduction in interest payments. The Group continues to enter into forward contracts to reduce the Group’s exposure to foreign exchange rate movements. PAGE 50 VIEW THE FULL REPORT AT ANNUALREPORT12.BAKKAVOR.COM
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