Risk management

A structured and consistent approach to identifying, assessing and responding to risk in relation to the Group's strategic and business objectives is fundamental to continued growth and is a key element of creating and preserving shareholder value. The Board is ultimately responsible for risk management which includes the Group's risk governance structure and maintaining an appropriate internal control framework. The Audit Committee Terms of Reference includes responsibility for reviewing the effectiveness of the Group internal control and risk management systems. This incorporates reporting to the Board on the effectiveness, efficiency and sustainability of the internal control system environment. Management's responsibility is to manage risk on behalf of the Board.

Under Irish Company law (Regulation 37 of the European Communities (Companies Group Accounts) Regulations 1992, as amended), the Group is required to give a description of the principal risks and uncertainties which it faces. Across the business, there is an ongoing process in place for identifying, assessing, managing, monitoring and reporting on the significant risks faced by individual business units and by the Group as a whole. This process has been in place for the year under review and up to and including the date of approval of the 2009 Annual Report. The principal strategic, financial, operational and regulatory risks identified are set out below:

Strategic risks

The performance of the Group is influenced by economic growth, global dairy and US cheese markets, consumer confidence and changes in commodity prices. Declining general economic conditions and dairy market volatility negatively impacted 2009 results and the pace and sustainability of an improvement in markets, which commenced in late 2009, may continue to impact Glanbia's business. A deterioration or delay in economic recovery or acute volatility in dairy pricing represents a material risk to the operating performance and financial position of the Group. To help mitigate this, the Group has employed, particularly in the USA, a number of risk management tools to limit volatility. In addition, the Group has a portfolio of businesses and this approach, with a growing emphasis on international operations, mitigated some of the worst effects of the unprecedented trading environment experienced in 2009.
Competitor product innovations technical advances and the intensification or consolidation of competition could adversely affect the Group. To combat competitive threats the Group has re-positioned the business with a focus on high growth, profitable market segments where the Group has market leadership positions, strong brands, excellent customer relationships and a solid platform for international growth. Glanbia also invests in research and development through its Irish and USA innovation centres as well as associations with a number of third level institution research programmes.
Glanbia has a significant number of key customers across its portfolio of businesses and consequently there is a risk that business performance could be negatively impacted by the loss of one or more of these customers. The Group believes that it currently enjoys good relationships with major customers and continues to manage and develop these relationships by focusing on superior customer service, product innovation, quality assurance and cost competitiveness.
Although demand for food products is expected to remain broadly stable, consumer purchasing patterns tend to change over time and especially when the economy is weak. The success of the Group depends on its ability to react to changing trends with appropriate innovation.
Failure to attract and retain qualified personnel could negatively impact the execution of Glanbia's strategy. Glanbia strives to attract and retain the right quality of management and staff required to support its growth and customer relationship management requirements. Detailed management succession plans, strong recruitment processes, management development programmes, long-term incentives and retention initiatives have all been implemented and are routinely monitored to manage the risk.
Risks inherent in the acquisition or disposal of businesses and brands may have an adverse impact on the Group's business or financial results. The risks are partially mitigated by careful planning, significant pre acquisition due diligence and post acquisition integration experience built up by the Group's senior management team.

Financial risks

Lack of financial capacity could affect the Group's ability to conduct its business, maintain capital investment programmes, pursue acquisitions, and make dividend payments and service debt commitments. The Group manages its bank debt position within a number of financial covenants that are closely monitored by Group Treasury. Strong banking relationships are maintained through regular meetings and updates. Close monitoring and management of cash flows and regular forecasting mitigates the risk exposure.
The conduct of ordinary business operations necessitates the holding and issuing of financial instruments and derivative financial instruments by the Group. The main risks arising from issuing, holding and managing these financial instruments typically includes liquidity risk, interest rate risk and currency risk. The Group does not trade in financial instruments. The Group's approach is to centrally manage financial and taxation risks against comprehensive policy guidelines, details of which are outlined in note 3.1 'Financial Risk Factors' on page 77 of the Annual Report. The Board agrees and regularly reviews these policies.

Operational risks

The loss or significant destruction of a key site could present operational and financial difficulties for Glanbia. All operations within the Group have business continuity and communication plans in place to manage the impact of the loss of a major site. The Group also monitors overall safety and loss prevention performance in line with safety, health and welfare legislation through its risk management system to assist operational management responsible for the day-to-day management of business risk. In addition, an insurance cover programme is in place for all significant insurable risks and major catastrophes to mitigate the potential financial consequences.
In order to fulfil the demand for its products Glanbia needs to ensure an efficient supply chain is in place which complies with the highest health and safety standards. The Group mitigates supply chain risk by maintaining a broad supplier base and all of the Group's key sites operate quality control assessments on products supplied to ensure world-class quality and food safety targets are maintained throughout the supply chain.
There are a number of factors affecting the price of milk and it can be subject to potentially significant price fluctuations. The Group has a varying degree of control over these prices and may be unable to pass on increases to its customers in whole or part or without a period of delay. This can adversely affect the Group's operating profits and cash flow. If the supply of milk from suppliers were constrained for any reason, the Group may not be able to obtain sufficient supplies, or supplies of a suitable quality, from other sources, which could have an adverse impact on its financial performance.

Regulatory risks

Robust processes are in place to ensure the Group maintains the highest standards of food safety across all processing, packaging, labelling and distribution operations in the interest of the health and well being of its consumers and sustaining its strong reputation as a leading international nutritional ingredients and cheese group. Glanbia conforms to international and local food safety, quality and environmental regulations and employs best practice to maintain the highest standards and to develop a competitive advantage from the consistent supply of high quality products.
While the Group could be at risk from product contamination and consequent liability, either through its products and/or raw materials, Glanbia employs best practice food safety and quality standards in its operations and supply chain management to mitigate this risk.
The Group is subject to strict and developing environmental laws and regulations which could result in an increase in the cost of achieving compliance and that may impact the Group's operational or financial performance. Glanbia currently believes that the Group is abreast of evolving environmental standards and operates energy efficiency, carbon reduction, recycling and emission programmes as a means of reducing costs in a sustainable fashion and gaining a long term competitive advantage in the market place.