Risks are an inherent part of enterprise. TenCate aims to identify and control these risks at the earliest stage possible. Risk control models have been developed for that purpose, which are regularly updated by and discussed with the Group management. The risk appetite of TenCate, the main risks and the applicable risk control models are described briefly below for each category. A full description of the risk management can be found on the TenCate website (www.tencate.com).
Insights into the risk appetite of TenCate and the associated limits are discussed with the management. Limits are determined by the strategy, code of conduct, business values, authorisation schedules, procedures and management regulations. The risk appetite differs in each risk category. Risk management is covered in the consultations with the Supervisory Board’s Finance Committee.
STRATEGIC AND MARKET RISKS
In order to determine the strategic and market risks, TenCate uses its own value chain management business model based on four cornerstones. This enables TenCate to clearly understand the strategic position of a business unit and adjust its course accordingly.
TenCate is prepared to incur substantial but carefully considered risks in order to achieve the qualitative strategy objectives it has set. Identified strategic risks relate to:
- Limits on government expenditure
- Deteriorating economic and political conditions
- Technological developments
- Availability and price fluctuations of raw materials.
The major risk factor in demand for TenCate products is the level of government expenditure. The number of customers may be limited, even in the industrial market. In some market groups products are developed for adjacent markets, reducing the dependence on government budgets and dominant customers. By building flexibility into cost structures, it is possible to offset the consequences of a drop in demand to a certain extent. TenCate continued to face relatively low spending levels in the defence sector in 2015.
There is never any guarantee that development expenditure will yield results. Nevertheless, substantial sums are devoted to research and development because the future of TenCate as a materials technology group depends on technological progress. Measures are agreed with the management, on the basis of the TenCate business model and the SWOT analyses, with a view to early identification of opportunities and limitation of the risks associated with research and development. TenCate participates in various innovation and knowledge networks. Research and development costs amounting to €21.3 million were charged to the profit and loss account in 2015 (2014: €26.9 million).
A limited number of raw materials account for a large proportion of the materials consumed by the market groups within TenCate. Prices in commodity markets are liable to fluctuate widely. In 2015 this was the case particularly in the Geosynthetics & Grass sector. Price rises cannot always be passed on, or can only be passed on after a time lag. In the case of some materials, shortages may occur or a dependence may develop on a single supplier. Such cases give rise to availability risks or disproportionate price rises. TenCate endeavours to reduce this dependence by using alternatives.
In respect of operational risks, TenCate has a very low risk appetite. The objective of TenCate is to minimise the impact of unexpected operational problems. Identified operational risks relate to:
- Continuity of production
- Product liability
- Retention of knowledge and skills
- Licence to operate
- IT reliability and continuity.
It is vital that TenCate has safe production sites. This guarantees business continuity and can prevent any loss of production capacity. At the same time TenCate can safeguard its position as a dependable supplier and customer.
Safety aspects concern in particular the risk of fire, explosion and natural disaster, such as floods, earthquakes or storms. In co-operation with the insurer FM Global, corporate risk management conducts regular annual inspections of production sites of all market groups worldwide.
Corporate risk management also deals with numerous matters relating to the company’s liabilities, including product liabilities and insurance cover.
TenCate has various small- to medium-scale production processes. Incidents in production can never be ruled out. These may lead to a loss of quality in the end-products, claims from customers or even a temporary halt in the production process. TenCate carries out preventive inspections of its products and almost all plants are ISO-certified. Control of production processes and quality management are important priorities in order to prevent product claims. The provision for claims and guarantees amounted to €4.0 million at the end of 2015.
The development of technical and management competences plays an important role in the personnel policy of TenCate. This enables the company to monitor the quality of products and the continuity of the production processes.
The TenCate businesses’ licence to operate depends on close adherence to local regulations and operation within locally specified standards of good entrepreneurship. Both the holding company and the managements of operating companies carry out regular audits and take measures to avoid environmental risks. The use of fossil fuels, energy, water and waste is quantified and reduced where possible as part of corporate social responsibility.
Any disruptions to IT systems can impede the operating processes. The risks are limited as far as possible by means of information security and fallback procedures. The operation of these facilities is tested regularly both internally and externally. The policy is to further reduce the multiplicity of ERP systems. The existing system in the Grass unit in the Netherlands was replaced by a new ERP system in 2015. For reasons of cost and risk control, IT systems are mostly managed centrally in shared service centres.
TenCate has a zero-tolerance policy with regard to compliance risks. Identified compliance risks relate to:
- Business ethics
- Laws and regulations
- Intellectual property
The standards and values of TenCate are set out in the code of conduct and corporate values (10Cate). A whistleblower scheme and a complaint scheme enable employees to inform the company management of any undesirable situations. A central compliance officer and a confidential adviser have also been appointed and insider trading rules are in force, with which the management must comply every year.
All managers and controllers sign an annual letter of representation declaring their compliance with financial reporting and internal control requirements.
TenCate is involved in a number of legal proceedings resulting from normal business operations. The results of these proceedings are by their nature uncertain. The progress of these proceedings is monitored continuously. A summary is discussed twice a year in the Supervisory Board’s finance committee. Apart from standard legal fees, the legal proceedings did not lead to any material financial impact for TenCate in 2015.
Developments of new products entail a risk of IP rights violations. Important patents and innovations are recorded as far as possible to mitigate risks of violations. Possible violations are investigated.
With regard to financial risks, TenCate has a low risk appetite. The risks relating to liquidity, credit, interest rates and currencies and the associated risk preparedness are described in more detail in note 53 of the financial statements. Identified financial risks relate to:
- Availability of finance
- Interest and exchange rate fluctuations
- Counterparty credit risk, including customers.
The financing of the company is centralised through corporate treasury. The main financing source is the syndicated loan. As at 31 December 2015 the facility amounted to €339.3 million. €198.5 million of this facility was drawn as at 31 December 2015.
The main condition of the credit facility as at the end of 2015 concerns the net debt / EBITDA ratio. In view of the specific seasonal pattern in TenCate’s financing requirement, different quarterly net debt / EBITDA ratios have been agreed.
As a result of the offer for the outstanding TenCate shares by Tennessee Acquisition BV, the existing facility was repaid on 29 January 2016 and replaced by a facility granted by Tennessee Acquisition BV. Notes concerning the facility granted by Tennessee Acquisition BV can be found in ‘Subsequent events’ on page 109.
An impairment test is carried out on these assets at least once a year. This is discussed with the Supervisory Board and the external auditor. Full details of the impairment test can be found in note 39.2.
The risk of an interest rate rise is hedged in stages over the subsequent years. With regard to currencies, TenCate has a policy to hedge the main risks for at least the current calendar year. Currency positions are hedged internally within the company as far as possible. Any residual risk is hedged in accordance with the established policy.
The credit risk relating to individual customers is monitored centrally and partly insured.
The Executive Board is of the opinion that:
- The risk management and control systems provide reasonable assurance that the financial reporting is free of material misstatements
- The risk management and control systems have operated correctly in the reporting year
- There are no indications that the risk management and control systems will not operate correctly during the current year.
However well designed the internal risk management and control systems are, they can never provide absolute certainty that objectives relating to strategy, operation, reporting and compliance with laws and regulations will always be achieved. When taking decisions, TenCate is mindful that:
- Human errors of judgement may arise
- Cost-benefit assessments are constantly made when assuming risks and taking control measures
- Human failings and even simple errors or mistakes can have major consequences
- Conspiracies by officials can lead to circumvention of internal control measures
- The management of parts of the company can permanently or temporarily negate agreements made with the Executive Board.