Risk management

Risks are an inherent part of enterprise. The company 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 preparedness of TenCate, the main risks and the applicable risk control models of are described briefly below for each category. A full description of the risk management can be found on the TenCate website (www.tencate.com/corporate-governance).

Insights into the risk preparedness 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 financial committee.

STRATEGIC AND MARKET RISKS
In order to assess 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. A second model used is the SWOT analysis (see page 56).

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 fluctuation of prices 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.

There is never any guarantee that substantial 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 market opportunities and limitation of the risks associated with research and development. TenCate participates in various innovation and knowledge networks.

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. 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. Efforts are made to reduce this dependence by using alternatives.

OPERATIONAL RISKS
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. TenCate can then also safeguard its position as a dependable supplier to its customers.

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. The insurer FM Global once again granted the Highly Protected Risk or the Recognition status to three businesses in 2014. These were the production sites of TenCate Advanced Composites in Camarillo and Fairfield (California), United States, and in Burlington, Canada. TenCate now has 12 sites with this status.

Other initiatives are also deployed to maintain the level of safety culture within TenCate. Various employees attended refresher courses for the company emergency service and general or specific courses in occupational safety with FM Global in 2014. 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 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 operating company managements conduct regular audits and take measures to avoid environmental risks. Work started in 2012 on quantifying the use of fossil raw materials, energy and waste 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. For reasons of cost and risk control, IT systems are increasingly managed centrally.

COMPLIANCE RISKS
TenCate has a zero-tolerance policy with regard to compliance risks. Identified compliance risks relate to:
  • Business ethics and legal compliance
  • Infringements of 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, knowledge of which has to be confirmed by the management 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 procedures 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.

Developments of new products entail a risk of IP rights violations. An IP manager has been appointed to co-ordinate activities. Important patents and innovations are recorded as far as possible to mitigate risks of patent infringements. Possible infringements are actively investigated.

FINANCIAL RISKS
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
  • Impairment
  • Interest and exchange rate fluctuations
  • Counterparty credit risk, including customers.
The treasury policy was updated and a treasury committee was appointed in 2014. This committee develops and monitors the Group’s treasury policy and reports on it to the Executive Board.

The financing of the company is centralised through corporate treasury. The main financing source is the syndicated loan. TenCate entered into a new € 350 million credit facility with an international syndicate of six banks on 31 October 2014. The facility has a five-year term. € 212.1 million of this facility was drawn as at 31 December 2014. The main condition concerns the net debt/EBITDA ratio. In view of the specific seasonal pattern in the financing requirement of TenCate, quarterly variations in net debt/EBITDA ratios have been agreed, thereby substantially reducing the risk of a breach of covenant.

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 hedging policy whereby the main risks are hedged for at least the current calendar year.

The credit risk relating to individual customers is monitored centrally and partly insured.
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