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Risk Management in 2020

The Board’s oversight of principal risks involves a specific review of the processes by which the Group manages those risks. This establishes a clear understanding at Board level of the individuals and groups within the business formally responsible for the management of specific risks and the mitigation in place to address them. The Board also establishes the Group’s risk appetite, considering the nature and extent of the principal risks that the Group should take and the associated adequacy of the steps being taken to mitigate them.

The Board has overall responsibility for establishing and maintaining a system of risk management and internal control, and for reviewing its effectiveness. The Group undertakes a continuous process of risk identification and review, which includes a formal process, conducted annually for mapping risks from the bottom up, with each major business unit and key operational, senior functional and senior management staff identifying their principal risks. This assessment undergoes a formal review at half-year. The results are compiled centrally to deliver a coordinated picture of the key operational risks identified by the business. These are further reviewed by the Group Executive Committee. In conjunction with this process, each Director contributes their individual view of top-down strategic risks facing the Group – drawing on the broad commercial and financial experience gained both inside and outside the Group. The results of this assessment are then overlaid on the internal assessment of risks to build a comprehensive analysis of existing and emerging risk. This review process extends to cover both financial and non-financial risks, and considers the risks associated with the impact of the Group’s activities on employees, customers, suppliers, the environment, local communities and society more generally. As in previous years, in 2020 the Group’s assessment of principal risks was also reviewed and considered against any emerging risks and uncertainties that were identified through our Board review process.

The Board continues to monitor the implications of certain other emerging ‘macro’ trends such as automation in manufacturing and increasing digitalisation and electrification, which could act as disruptors to industry.  The Board also continued to monitor the developing issues posed by cyber threats, receiving regular reports on relevant issues in this area, including general developments and concerns specific to the Vesuvius business. Work on maintaining and where appropriate, improving the integrity of our system security remains an area of focus. In 2020, work was undertaken to engage with the workforce, and to ensure that Vesuvius fosters an appropriate culture that embeds Vesuvius’ values throughout the Group. This reflects the Board’s recognition of the challenges that could arise from a failure by the Group to support the retention of appropriate talent and to foster the correct culture for success. Whilst the travel restrictions imposed in 2020 curtailed the Board’s face to face engagement with staff around the world, they continued where possible to solicit feedback to ensure that the Group was taking the necessary steps to mitigate risk in this area.

The Directors’ views on each of the above issues, and on emerging risks in general, were independently gathered and integrated into the management discussions and actions taken on risk. Risk remains an integrated part of all business unit presentations to the Board, informing the Board of the operational approach taken to risk management on a day-to-day basis.

Risk Mitigation

The principal risks identified are actively managed in order to mitigate exposure. Senior management ‘owners’ have been identified for each principal risk, and they manage the mitigations of that specific risk and contribute to the analysis of its likelihood and materiality. This analysis is reported to the Board. The risks are analysed in the context of our business structure which gives protection against a number of principal risks we face with diversified currencies, a widespread customer base, local production matching the diversity of our markets and intensive training of our employees. Additionally, we seek to mitigate risk through contractual measures. Where cost-effective, the risk is transferred to insurers.

Principal Risks

The risks identified are those the Board considers to be the most relevant to the Group in relation to their potential impact on the achievement of its strategic objectives. All of the risks set out on these pages could materially affect the Group, its businesses, future operations and financial condition, and could cause actual results to differ materially from expected or historical results. As a result of Covid there is heightened focus on risks and their mitigation, but the Principal risks remain the same. These risks are not the only ones that the Group will face. Some risks are not yet known and some currently not deemed to be material could become so.

Changes to Risk in 2020

As with most companies, the Covid pandemic impacted the Group’s staff, customers, shareholders and suppliers as well as the Group’s financial performance. With the economic and social pressures brought about by Covid-19 during 2020, the Board continued to focus on the Group’s existing and emerging risks, and the processes to mitigate and manage them. A key mitigant in 2020 was our devolved decision-making structure and empowered regional managers, who responded swiftly to issues as they arose, relying both on Group processes and resources, and acting to respond to specific local circumstances.

Issues identified by certain of the Group’s Principal Risks materialised during the year. The Group’s existing measures in mitigation were initiated and additional actions taken specific to the challenges posed by the Covid-19 pandemic. These were most notably:

 - End Market Risk: Vesuvius experienced a drop in demand for its products, with an associated impact on revenue, driven by the impact of Covid-19 on the Group’s end markets. Our geographic diversification shielded us from an acute impact on revenue, and we flexed our cost base to respond to the drop in demand. Other mitigating factors came into play, with our focus on working capital management and credit control, and close monitoring of manufacturing performance. The Group also accessed  government initiatives around the world to ease the financial impact, taking advantage of Tax Deferral schemes, and temporarily seeking additional Government Financing, and furlough financial support.

 - People, Culture and Performance: The Values of Vesuvius have never been more at the fore. At the start of the crisis, across the world our staff worked tirelessly to provide support for travel/repatriation, changes to office and site working conditions, the provision of increased PPE, IT connectivity, and staying connected with a significantly increased body of remote workers. The Group strengthened its internal communication with weekly interactive calls from the CEO and GEC, a Bi-weekly Newsletter, regular CEO messages and the sharing of best practices, successes and news from around the Group. The focus on values was maintained, involving employee family initiatives, and continuing our Living the Values Awards competition. Where physical meetings had been expected, these were moved online, including the Group’s annual Senior Leaders conference.

 - Business interruption: Whilst the Group suffered some disruption in its manufacturing processes, driven predominantly by government shutdowns, management responded swiftly and effectively to reduce this impact, minimising plant closures and downtime, and maintaining our ability to supply customers safely. Our management’s responsiveness has also resulted in other risks not being manifest, with product quality remaining at its high level, our safety culture driving key responses to protect employees and our continued investment in R&D and market-leading research. Finally, the Group’s IT function supported the transition of around 2,000 employees to work from home, increasing server capacity, rolling out technology and expanding, as appropriate, the Group’s programme of cyber security and controls.

 - Health & Safety: Our very strong focus on health and safety and the consistency of its application across the Group placed us extremely well to respond to the pandemic’s challenges. We adapted production layouts to allow for social distancing, implemented site by site safety plans, ensured the availability of appropriate PPE and were able to respond to the government requirements on a country by country basis while keeping our sites operating. We established weekly group-wide reporting on instances of Covid-19, supporting our staff who were affected, or who needed to self-isolate.

The Board also monitored the effect of the pandemic on other risks, where it considered it could have a specific or longer-term effect. Whilst the Group saw the beginnings of a recovery towards the end of 2020, there still remains uncertainty about the longer-term economic effects of the pandemic. Similarly, further protectionism remains possible, though this has not specifically been manifested in the Group’s business as a result of the pandemic. Finally, the social impact of the pandemic remains at the forefront of the Board’s concerns, both in terms of the impact on our communities and workforce and in the individual health – both mental and physical – of our staff as we continue to adapt to different ways of working.

Overall, the Board has not identified any material change to the Group’s principal risks and uncertainties during the year and the Covid-19 pandemic did not give rise to any change in the Principal Risks previously identified by the Group. As such, the Group’s statement of Principal Risk and Uncertainties was unchanged in 2020 from 2019.

Climate Change

The Group’s risk management processes also incorporate consideration of the potential impact of climate-related risks on the Group. The Group does not regard climate change itself to represent a material standalone risk for the Group’s operations. However, a significant proportion of the Group’s revenue is generated from Steel manufacture and automotive castings, and as such the opportunities in the Group’s business strategy, which is founded on helping our customers to improve their manufacturing efficiency and the quality of their products – and therefore reduce their climate impact – is a critical element of mitigation in this regard. The Group recognises that climate change could presents further uncertainty for the Group in terms of increasing climate change-related taxes and regulations and the costs of meeting more onerous disclosure requirements. ESG is identified as a separate element of the Group risk register – recognising the work Vesuvius can do to mitigate the environmental impact of our customers’ processes. Other elements of this risk are incorporated into the appropriate Principal Risk and Uncertainties that the Group has identified. The Group continues to focus internally on the action we can take to drive our business’ sustainability. In 2020, the Group adopted a new Sustainability initiative, which sets out the Group’s approach to environmental issues, sets targets in specific areas and as such seeks to mitigate issues such as the increasing costs of energy, and the potential reduction in capital accessibility as investor sentiment focuses on environmentally-conscious companies.

Brexit

As we have previously noted, for our customers located in the EU27 countries, most of our products are manufactured by Vesuvius outside the UK, so we did not envisage a material impact from Brexit after the expiry of the Transition Period. To date this has been borne out in our experience. For those customers located in the UK or located in the EU27 and supplied from our UK plants, we have contingency plans and we continue to work with these customers to meet their needs in a cost-efficient way.


Principal risks and uncertainties 

Risk Potential Impact Mitigation/Management

End market risks

Vesuvius suffers an unplanned drop in demand, revenue and/ or margin because of market volatility beyond its control

  • Unplanned drop in demand and/or revenue due to reduced production by our customers
  • Margin reduction
  • Customer failure leading to increased bad debts
  • Loss of market share to competition
  • Cost pressures at customers leading to use of cheaper solution
  • Geographic diversification of revenues
  • Product innovation and service offerings securing long-term revenue streams and maintaining performance differential
  • Increase in service and product lines by the development of the Technical Services offering
  • R&D includes assessment of emerging technologies
  • Manufacturing capacity rationalisation and flexible cost base
  • Diversified customer base: no customer is greater than 10% of revenue
  • Robust credit and working capital control to mitigate the risk of default by counterparties

Protectionism and globalisation

The Vesuvius business model cannot adapt or respond quickly enough to threats from protectionism and globalisation

  • Restricted access to market due to enforced preference of local suppliers
  • Increased barriers to entry for new businesses or expansion
  • Increased costs from import duties, taxation or tariffs
  • Loss of market share
  • Trade restrictions
  • Highly diversified manufacturing footprint with manufacturing sites located in 26 countries
  • Strong local management with delegated authority to run their businesses and manage customer relationships
  • Cost flexibility
  • Tax risk management and control framework together with a strong control of inter-company trading

Product quality failure

Vesuvius staff/contractors are injured at work or customers, staff or third parties suffer physical injury or financial loss because of failures in Vesuvius products

  • Injury to staff and contractors
  • Product or application failures lead to adverse financial impact or loss of reputation as technology leader
  • Incident at customer plant caused manufacturing downtime or damage to infrastructure
  • Customer claims from product quality issues
  • Quality management programmes including stringent quality control standards, monitoring and reporting
  • Experienced technical staff knowledgeable in the application of our products and technology
  • Targeted global insurance programme
  • Experienced internal legal function controlling third-party contracting

Complex and changing regulatory environment

Vesuvius experiences a contracting customer base or increased transaction and administrative costs due to compliance with changing regulatory requirements

  • Revenue reduction from reduced end-market access
  • Disruption of supply chain and route to market
  • Increased internal control processes
  • Increased frequency of regulatory investigations
  • Reputational damage
  • Compliance programmes and training across the Group
  • Internal Audit function
  • Experienced internal legal function including dedicated compliance specialists
  • Global procurement category management of strategic raw materials

Failure to secure innovation

Vesuvius fails to achieve continuous improvement in its products, systems and services

  • Product substitution by customers
  • Increased competitive pressure through lack of differentiation of Vesuvius offering
  • Commoditisation of product portfolio through lack of development
  • Lack of response to changing customer needs
  • Loss of intellectual property protection
  •  
  • Enduring and significant investment in R&D, with market-leading research
  • A shared strategy for innovation throughout the Group, deployed via our R&D centres
  • Stage gate process from innovation to commercialisation to foster innovation and increase alignment with strategy
  • Programme of manufacturing and process excellence
  • Quality programme, focused on quality and consistency
  • Stringent intellectual property registration and defence

Business interruption

Vesuvius loses production capacity or experiences supply chain disruption due to physical site damage (accident, fire, natural disaster, terrorism), industrial action, cyber attack or global health crisis

  • Loss of a major plant temporarily or permanently impairing our ability to serve our customers
  • Damage to or restriction in ability to use assets
  • Denial of access to critical systems or control processes
  • Disruption of manufacturing processes
  • Inability to source critical raw materials
  • Diversified manufacturing footprint
  • Disaster recovery planning
  • Business continuity planning with strategic maintenance of excess capacity
  • Physical and IT control systems security, access and training
  • Cyber risks integrated into wider risk-management structure
  • Well-established global insurance programme
  • Group-wide safety management programmes
  • Dual sourcing strategy and development of substitutes

People, culture and performance

Vesuvius is unable to attract and retain the right calibre of staff, fails to instil an appropriate culture or fails to embed the right systems to drive personal performance in pursuit of the Group’s long-term growth

  • Organisational culture of high performance is not achieved
  • Staff turnover in growing economies and regions
  • Stagnation of ideas and development opportunities
  • Loss of expertise and critical business knowledge
  • Reduced management pipeline for succession to senior positions
  • Internal focus on talent development and training, with tailored career-stage programmes and clear performance management strategies
  • Contacts with universities to identify and develop talent
  • Career path planning and global opportunities for high-potential staff
  • Internal programmes for the structured transfer of technical and other knowledge
  • Clearly elucidated Values underpin business culture

Health and safety

Vesuvius staff or contractors are injured at work because of failures in Vesuvius’ operations, equipment or processes

  • Injury to staff and contractors
  • Health and safety breaches
  • Manufacturing downtime or damage to infrastructure from incident at plant
  • Inability to attract the necessary workforce
  • Reputational damage
  • Active safety programmes, with ongoing wide-ranging monitoring and safety training
  • Independent safety audit team
  • Quality management programmes including stringent manufacturing process control standards, monitoring and reporting

Environmental, social and governance (ESG) criteria

Vesuvius fails to capitalise on the opportunity to help its customers significantly reduce their carbon emissions as environmental pressure grows on the Steel Industry or Vesuvius fails to meet the expectations of its various stakeholders including employees and investors

  • Loss of opportunity to grow sales
  • Loss of opportunity to increase margin
  • Loss of stakeholder confidence including Investors
  • Reputational damage
  • Development and implementation of a new Sustainability initiative, which includes stretching targets focused on reducing the Group’s Energy usage, CO2 emissions, waste and recycled materials
  • Investment in R&D to develop products to assist our customers in reducing their carbon emissions and improve their own ESG measures
  • Skilled technical sales force to develop efficient solutions for our customers
  • Globally disseminated Code of Conduct sets out standards of conduct expected and ABC Policy adopted with a zero tolerance regarding bribery and corruption
  • Internal Speak up mechanisms to allow reporting of concerns
  • Extensive use of Due Diligence involving existing and potential investments, business partners and customers