Our focus on customer service and operational excellence, together with the regulated and commercially competitive environment of the construction supplies industry, leave us exposed to a number of risks. The Group risk management systems identify, monitor and report on key opportunities and risks and ARE a fundamental and integrated part of all management processes.

Risk management involves the identification and evaluation of risks and is the responsibility of the Group Board. The Group's ability to manage risk is continually growing through the focus on risk management capability to ensure that it remains robust and that emerging risks are identified, assessed and managed effectively.

The risk management process incorporates both top down and bottom up elements to the identification, evaluation and management of risks, and all risks evaluated are referenced to the achievement of the Group's Strategic Initiatives. Risks are continually evaluated using consistent measurement criteria. Mitigating controls are identified and opportunities for the enhancement of the Group's control environment are implemented.

Further information on the Group's risk management procedures is included in the Corporate Governance section.

There are a number of potential risks and uncertainties which could have a material impact on SIG's long-term performance. The risk identification, monitoring and reporting framework together with the key risks and uncertainties identified as part of the Group's risk management process are as follows:

Risk identification, monitoring and reporting framework

Risk identification board

2014 Developments

Throughout 2014 SIG has continued to develop the integrated approach to its risk and assurance activities. Specifically, the following improvements were implemented:

  • external review of the internal control and risk framework in conjunction with the new internal audit partner (KPMG from 1 January 2014);
  • refresh of the risk management processes;
  • review of self-certification processes;
  • development of dashboards to support risk and control practices;
  • improved interaction with specialist risk committees and forums which improve visibility and enable a more consistent approach to risk identification; and
  • introduction of Group-wide control framework forums to identify and drive best practice.

Planned improvements for 2015

SIG will continue to improve its risk management processes with a number of initiatives:

  • review of risk management software to help improve risk identification and drive consistency;
  • deliver risk management training to help confirm a consistent approach in embedding risk practices throughout the business as well as educating employees on the importance of this discipline; and
  • refresh the Group's cyber security structure in order to ensure that it remains resilient and able to evolve to counter the increasing complexity and volume of information security threats to the wider business community.

Link to our Strategic Pillars

1 Outstanding Customer Service

2 Sales Outperformance

3 Gross Margin Enhancement

4 Operational Efficiency

5 Focus on Financial Returns

6 Exceptional People

Understanding movements in business risk:

Increase

No Change

Decrease

Throughout the year the risks that SIG faces have been critically reviewed and evaluated. The assessment of the most significant risks and uncertainties that could impact SIG's long-term performance are outlined in this section of the report. These risks are not set out in any order or priority and they do not comprise all the risks and the uncertainties that SIG faces. This list is not exhaustive and has the potential to change as some risks assume greater importance than others during the course of the year.

RISK AND LINK TO STRATEGIC PILLARSTRENDKEY MITIGATION ACTIVITIES INCLUDE:OUR FOCUS IN 2014
Market conditions23
The Group is exposed to changes in the level of activity and therefore demand from the building, construction and civil engineering industries. Government policy and expenditure plans, private investor decisions, the general economic climate and both business and (to a lesser extent) consumer confidence are all factors which can influence the level of building activity and therefore the demand for many of the Group's products.
  • Maintain a broad spread of markets, products and customers to limit risks within any given territory
  • The Group Board's portfolio review ensures that the Group's capital is appropriately allocated to the geographies and markets which remain core
  • Continual review of all available indicators of market activity and regular communication with key suppliers and customers to ensure that any change in market demand is anticipated as early as possible
  • Ensure the Group remains structured in a way that enables it to take prompt action in the event of a material change in the trading environment
  • Ensure the Group maintains a strong balance sheet and financial position
  • Rebranding
  • One-off restructuring actions
  • Strategic Initiatives
  • Selected ROCE enhancing acquisitions
  • Divestment of three underperforming businesses
  • Further diversification through investment in specialist niche markets
Competitors and margin management235
Challenging market trading conditions mean that competition pressures from direct specialist competition and the overlap with general suppliers remain high, which in turn results in continued margin pressures being faced by the Group.
  • Strong trading presence in the majority of the markets in which the Group trades
  • Initiatives designed to improve the Group's core competencies surrounding customer service, sales support and training
  • Ongoing pricing and purchasing initiatives, including supplier rebates, designed to improve gross margin
  • Tight control of operating costs
  • Significant investment in the branch network, people, IT infrastructure and product offering
  • Diversified portfolio of products, customers and markets limit the risk from any single competitor
  • Recruitment of 27 procurement specialists
  • Specialist training
  • Investment in IT
  • Professionalising procurement and pricing management
  • Audit Committee review of supplier rebate procedures and controls
Commercial relationships 13
Failure to negotiate competitive terms of business with suppliers or failure to satisfy the needs of customers could harm the Group's business.
Customer or supplier consolidation and/or manufacturers dealing directly with customers.
  • Ongoing pricing and purchasing initiatives designed to improve gross margin
  • The Group has extensive and regular dialogue with all commercial partners to maintain strong relationships
  • Key supplier/customer harmonisation and national account strategy planning
  • The Group is not overly reliant on any one supplier and all businesses undergo alternative key supplier scenario planning
  • Strategically important suppliers are reviewed globally to assess their financial health
  • Monitoring of customer behaviour and performance
  • Procurement Initiative
  • Commercial partner relationship rationalisation
Government legislation 56
SIG operates in a number of countries, each with its own laws and regulations, encompassing environmental, legal, health and safety, employment and tax matters. Changes in these laws and regulations could impact on SIG's ability to conduct its business, or make the conduct of such business more expensive. There is also the reputational and financial cost of being penalised for non-compliance.
  • Dedicated resource to monitor compliance with legal and regulatory matters
  • Active monitoring of relevant laws and regulations to ensure that any changes to the legal framework are identified and effects minimised
  • Review of policies and procedures with reference to changing legislative requirements and the provision of associated training
  • Affiliation with regulatory bodies and trade associations
  • Strong internal control framework, policies and culture supported by strong leadership, accountability and commitment throughout the organisation
  • 'Zero Harm' initiative
  • Training and development programmes
  • Anti-Bribery and Corruption Policy
  • Data protection e-learning initiative
Debt 5
Group net debt at 31 December 2014 amounted to £126.9m. The Group has to manage the following risks relating to its net debt:
  • future availability of funding;
  • interest rate risk;
  • foreign currency risk;
  • compliance with debt covenants; and
  • counterparty credit risk.
  • Comprehensive Treasury Policy (please see Treasury Risk Management)
  • Regular monitoring, including sensitivity analysis, to understand the impact of interest rate and exchange rate movements
  • Active hedging programme in place
  • Monitor performance against covenants on the Group's Revolving Credit Facility and private placement notes
  • Refinanced £250m committed bank facility, maturing October 2019
  • Regular meetings of the Tax and Treasury Committee
Working capital and credit management145
Failure to manage working capital effectively may lead to a significant increase in the Group's net debt, thereby reducing the Group's funding headroom and liquidity.
  • Post-tax Return on Capital Employed is a Key Performance Indicator of the Group
  • Cash flow targets are agreed with each business unit as part of the annual budget process and reviewed on a monthly basis
  • Stringent authorisation procedures to control capital expenditure
  • Proactive credit management systems
  • Branch reviews
  • Strategic Initiatives
  • Internal credit control forums to share best practice
  • Recruitment of 27 procurement specialists
  • Investment in IT
  • CICQM accreditation renewal
IT infrastructure and cyber security 45
SIG uses a range of computer systems across the Group. Outages and interruptions could affect the ability to conduct day-to-day operations which could result in loss of sales and delays to cash flow.
Key systems are breached causing financial loss, data loss, disruption or damage.
A new ERP system is currently being implemented within the UK distribution businesses.
  • Continual review of IT strategies to ensure they remain appropriate
  • Business continuity framework
  • Dedicated internal IT support team together with external support providers
  • Regular updates to technology, infrastructure, communications and application systems
  • The Group has advanced hardware and software security in place to ensure protection of commercial and sensitive data
  • For new IT projects, external consultants are utilised in conjunction with internal project management teams
  • Collaborative cross functional risk group in place
  • The new ERP system for the UK distribution businesses has been successfully rolled out to selective branches during the course of 2014 and this will continue during 2015
  • Newly appointed Chief Information Officer ("CIO")
  • Awareness of increased exposure to cyber crime
Availability and quality of key resources 46
Unavailability of key resources (e.g. assets such as property, stock and personnel) will impact on the ability of SIG to operate effectively and efficiently.
Failure to attract and retain key individuals, strong management and technical staff in the future could have an adverse effect upon the Group's business.
  • Strategic and budget reviews ensure all key resource requirements are identified and managed
  • Senior management succession planning
  • Continue to evolve a defined people strategy based on culture and engagement, talent management, training and reward recognition
  • Provision of channels for employees to raise concerns to promote an environment of honesty and trust
  • Appointment of a Group Talent and Development Director and a Group Reward Director
  • Employee engagement survey
  • Increased employee communication and engagement