Barloworld Limited: Leading Brands

The risk of future net cash flows from acquisitions and/or joint ventures failing to realise the projections upon which the initial purchase consideration or arrangement was based may lead to value destruction for shareholders and a need to impair the related goodwill or assets.

Acquisition risk

• A business acquisition policy and procedure is in place that sets out a structured approach and framework to be used when acquisitions and/or joint ventures are being made or entered into. This includes a pre-acquisition phase that includes the requirement to conduct a comprehensive strategic analysis of intended targets, development of acquisition criteria for both strategic and financial aspects, and the quantification of risk-adjusted value creation potential for the respective business unit and the group.
• The acquisition phase includes strategic, legal, financial, tax, human capital, transformation, information systems and technology, technical, risk, governance and responsible corporate citizenship and environmental due diligence processes to verify and validate assumptions and future projections.
• Following acquisitions and/or the formation of joint ventures, planning and task teams are established to focus on the realisation and management of identified value creation opportunities, including synergies.

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Barloworld considers a number of environment-related risks to its operations and value chain. These include climate change and related physical risks due to changing weather patterns; regulatory risks associated with greenhouse gas emissions; financial risks resulting from carbon taxes; operational risks due to constraints in energy supply and the availability of natural resources, such as water. The group identifies the predominant use of fossil fuel-based energy in its supply chain, operations, products and solutions as a risk to itself and its value chain.

Environmental/operational/strategic/financial/regulatory risk

Minimise exposure through in-depth risk assessments and strategic responses. Ensure organisational resilience through aligned and integrated management activities and policies.

These include:

• Implementation of aspirational efficiency improvement targets in non-renewable energy consumption, greenhouse gas emissions (scope 1 and 2) and water withdrawals, as well as an aspirational target for renewable energy consumption.
• Association with leading principals, provision of products and solutions with reduced environmental footprint and which assist customers to achieve their sustainable development objectives.
• Geographic, industry and product diversification.

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Responsible corporate citizenship.

Competitors' actions will erode the group's competitive position and have a significant impact on the value created for shareholders.

Competitor risk

• Continually reduce controllable costs by focusing on improving operational efficiencies to achieve sustainable and optimised operating models across our businesses.
• Continually improve service levels and the provision of innovative solutions to customers that differentiate us from our competition.
• Develop key customer plans which contain information and strategies to ensure value creation for customers.
• Ongoing and robust strategic planning process assists in identifying industry trends and uncertainties and developing appropriate strategic responses to change, risks and opportunities.

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The movement of other currencies against the Rand which creates risks relative to the translation of non-Rand profits, the marking-to-market of financial instruments taken out to hedge currency exposures and the cost of imports into South Africa. There are also constraints on the repatriation of funds due to shortages of hard currencies in some of the countries in which the group operates and possible losses as a result of local currency devaluations.

Financial risk

• The responsibility for monitoring and managing these risks is that of divisional finance and treasury teams under the guidance and support of group treasury.
• A group treasury policy is in place which clearly sets out the philosophy of hedging and guideline parameters within which to operate, and permissible financial instruments to be utilised.
• Preventive measures are implemented in respect of the determination of pricing mechanisms and the structuring of commercial contracts to reduce the impact of any adverse currency fluctuations.
• Geographic, industry and product diversification.
• Strict capital allocations and management including group dividend policies, diverse funding sources and the availability of committed facilities within an overall balanced debt maturity profile.

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One of the key risks for the United Kingdom's defined benefit scheme over the past few years has been the reduced real yield on AA rated corporate bonds which is used to value the liabilities. In addition, increased life expectancy of members will have an adverse impact on the scheme's funding position, although this trend has slowed recently. Market volatility remains a risk, with 50% of the scheme's assets invested in growth assets (largely equities), which includes diversification into absolute return funds. The year-end accounting valuation resulted in the deficit decreasing to £95 million, largely due to a marginal increase in interest rates, good asset returns and changes in the demographic assumptions. The scheme is maturing with the average age of deferred members of 54 years and pensioners of 75 years. This is resulting in the trustee board adopting more prudent assumptions as it will become increasingly necessary to match the investment strategy with the cash outflows necessary to fund the pension payments. The triennial valuation has been completed, which has produced a higher actuarial deficit of £154 million as compared to the valuation in 2014 of £112 million. The increased deficit has largely been due to the reduced gilt interest rates of 2.15% compared to 3.9% in 2014.

Market risk

• A suitably qualified representative board of trustees, which includes a professional independent trustee, manages the scheme and is responsible for regularly evaluating the effectiveness of investment decisions, the setting of actuarial factors for the liabilities and managing the administration. Professional investment advisers are used to assist in the management of the investment portfolios with a view to conservatively preserving and enhancing fund valuations. Complex investment risk models are run by the investment advisers and actuaries to assess optimum risk balance. The actuary also conducts a formal triennial valuation and provides updated figures on a real-time basis.
• Funding shortfalls are planned to be made up within sensible time frames via market-anticipated increased interest rates, positive returns on investments and additional contributions from the company agreed at the 2017 triennial valuation. The recovery plan agreed is expected to fund the deficit over nine years.
• The company and trustees have agreed a long-term strategy for reducing funding risk as and when appropriate. This includes a liability-driven investment (LDI) policy which aims to reduce volatility of the funding level of the pension plan by investing in bonds which operate as interest rate hedges, and matching annuities (buy-ins) for pensioners which fund the liabilities agreed in the buy-in. In 2013 and 2016, the fund purchased buy-in insurance policies representing approximately 25% of the assets, and in 2017 invested in interest rate hedges via a pooled fund managed by Legal and General. The combination of the existing hedging, the buy-ins and the bond holdings means the scheme is now 31% hedged against interest rate volatility and 17% hedged against mortality. Following the recent valuation, the interest hedges will be increased to 50%.
• The accounting deficit has been reflected on the company's balance sheet as a liability in line with International Financial Reporting Standards.

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Responsible corporate citizenship.

Barloworld makes extensive use of IT systems and digital technology in its operations and to deliver services to its customers. The growing threat landscape posed by cyber-attacks from both cyber-crime and cyber-warfare poses an increasing risk to the business. This threat landscape includes operational disruption, information theft and damage to the group's reputation.

There is a risk of technological obsolescence and being 'left behind' should the group not embrace digital technologies.

Employee/operational/strategic risk

Barloworld continues to mature its information security approach in line with the evolving threat landscape.

The approach is based on the ability to:

• Prevent, detect and respond to attempts to access the group's information.
• Restore confidentiality, integrity and availability of systems, information and data in the event of a breach.
• Proactively train, promote and raise information security awareness.

The approach includes all appropriate security mechanisms, physical, technical, organisational, human orientated and legal to keep all information protected against threats.

Insurance cover has been effected to offset any losses that may arise from cyber-risk.

Barloworld is investing in digital transformation initiatives to improve efficiencies within our businesses and, together with our principals, we are exploring digital technologies to remain relevant and competitive in the markets in which we operate.

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Instil a high-performance culture.

Barloworld's key asset is its employees. The occupational health and safety risk is the likelihood of a person being harmed or suffering adverse health effects if exposed to a hazard in the workplace.

Employee/operational/strategic risk

• Minimise exposure through in-depth risk assessments, coupled with the application of preventive and corrective risk management activities and policies.
• Extensive communication and safety awareness programmes, training in accident prevention, accident response, emergency preparedness and the use of protective clothing and equipment, and extensive monitoring, reporting and review of safety data, all with the aim of ensuring a healthy and safe workplace.

Instil a high-performance culture.

The group's people and assets are spread through numerous countries around the world, while its activities are conducted in many more.

The possibility exists that the group's people and assets, and the viability of the businesses, may be exposed to sanctions, acts of terrorism, political turmoil or crime in some of the regions in which the group operates, as well as in those that may be identified for expansion. Business growth initiatives require that new markets and territories are the focus of business expansion. These opportunities come with their own distinct risk exposures.

Operational risk

• Minimise exposure in high-risk countries through in-depth risk assessments, coupled with the application of preventive and corrective risk management activities.
• Monitor and ensure compliance with international sanctions.
• Maintain flexible business models.
• Maintain business continuity plans that incorporate emergency response actions, crisis management and business recovery plans specific to the businesses and the respective territories in which the businesses operate.
• Optimise the geographic spread of operations.

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Drive profitable growth.

Responsible corporate citizenship.

Significant businesses in the group are dependent on a small number of principals and/or suppliers.

Barloworld's success is therefore linked to their ongoing reputation and good standing, financial stability, the competitiveness and quality of their products and services and the availability of equipment to meet customers' evolving needs.

In order to ensure sustainable value creation, the group depends on suppliers of infrastructure in the countries in which it operates. Most of the group's businesses are dependent, inter alia, on reliable power and water supply and appropriate transport networks.

Strategic risk

• Add value by giving constant feedback to the principals on customer requirements and expectations, market movements and product competitiveness.
• Continually improve/build relationships with principals and major suppliers and strive to be a preferred dealer/customer.
• Provide excellent customer service and lead in our markets.
• Build long-term partnerships with customers.
• Perform supplier due diligence assessments.
• Build relationships with local authorities.
• Align strategies and targets with those of the major principals as far as possible.
• Implement initiatives to reduce dependency on infrastructural deficiencies and increase organisational resilience.

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Drive profitable growth.

The group is subject to an ever-changing statutory universe across all its divisions and geographies. These are monitored and assessed using both internal and external resources. However, the scope of these changes is such that it is difficult to ensure full compliance.

Regulatory risk

• Management is responsible for the ongoing monitoring of all pending and actual changes to the group's regulatory environment. Due to both the large number of and new jurisdictions in which the group operates, this monitoring is an ongoing process.
• A risk-based approach is followed to ensure compliance.

Instil a high-performance culture.

Barloworld is exposed to certain large customers and/or industries and well-established distribution and support channels that may change or consolidate.

Market risk

• Build long-term partnerships with customers.
• Develop customer solutions which differentiate and expand the group's offering from product-based businesses to service and solutions focused.
• Diversify customer base.
• Develop new channels.
• Monitor and anticipate competitor activity.

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Drive profitable growth.

The group is exposed to the ever-increasing war for top talent and might therefore face challenges in attracting, developing and retaining the diverse talent required to sustainably deliver its strategy. If we do not become a company that reflects the demographics of the countries where we operate, our competitiveness and legitimacy will be negatively impacted, and we may lose our licence to trade in the respective regions.

Strategic/employee risk

• Focus on creating group-wide, integrated and robust talent growth opportunities and experiences as well as long-term retention plans through a redesign of our talent management strategy.
• Key focus on our diversity and inclusion targets including the percentage of women in the group and having the targets set at group executive and social, ethics and transformation committee levels.

Deliver top quartile shareholder returns.

Drive profitable growth.

Instil a high performance culture.

The effect of volatile commodity prices has contributed to the slower than anticipated recovery of the group's businesses, customers, suppliers and funders and to the continued risk that funding constraints within the supply chains could result in a recurring recession and/or impede growth. This, in turn, has negatively impacted many company investments.

Financial risk

• Inflationary pressures to be carefully monitored and managed, as appropriate, in each business.
• Focus on costs and cost reduction opportunities, and improve operating efficiencies.
• Monitor customers' ability to spend, access credit, and settle debt.
• Reduce working capital, limit capital expenditure and improve cash flow.
• Secure adequate committed borrowing facilities.
• Maintain credit rating.

Deliver top quartile shareholder returns.

Drive profitable growth.