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G18 Risk descriptions

18.1 Strategic and operational risks

18.1.1 Market risk

Umicore has a diverse portfolio of activities serving a number of different market segments and in most of its business has a truly global presence. No one end-user market segment or industry accounts for more than 50% of Umicore’s sales. In terms of overall exposure the main end markets served by Umicore are automotive, consumer electronics and construction. Umicore’s business model also focuses on sourcing secondary or end-of-life materials for recycling. In many instances the availability of these materials is dependent on the levels of activity in specific industries or at specific customers where Umicore provides closed-loop recycling services. A diverse portfolio and wide geographical presence help to mitigate the risk of over-exposure to any one particular market.

Comments on 2015: Overall conditions for most of the product businesses improved in 2015. Strong growth in Catalysis and Energy & Surface Technologies more than offset the impact of lower metal prices on the recycling activities. The revenue growth, which was in part driven by the ramp-up of recent growth investments, was the main factor behind the REBIT growth of 21%.

18.1.2  Technology risk

Umicore is a materials technology Group with a strong focus on the development of innovative materials and processes. The choice and development of these technologies represent the single biggest opportunity and risk for Umicore. In order to manage this risk and to enhance the effectiveness of technology screening and implementation processes Umicore has implemented a Group-wide Technology Innovation Management process and carries out technology reviews at Executive Committee level every year. All business units are also expected to carry out an annual technology review. The purpose of these technology reviews is to verify the suitability, potential and risks of those technologies that are screened and pursued and to ensure that they are in line with Umicore’s strategic vision. In 2015, Umicore established an Innovation Excellence Board (IEB) composed of senior R&D managers and whose objective is to improve innovation management in the Group. The IEB identified specific self-assessment tools aimed at improving R&D efficiency and clarifying technology roadmaps.. This system is primarily based on a self-assessment tool for the business units and Group R&D.

In terms of organization Umicore’s R&D efforts comprise initiatives at both Group and business unit level. The position of Chief Technology Officer (CTO) was created in 2005 with the aim of stimulating the various R&D efforts through the Group, ensuring the alignment of the R&D roadmap with strategic priorities and achieving a balance between current technology needs and longer-term opportunities. Five R&D platforms provide a framework for those elements that have a high degree of relevance across the Group namely Functional Materials, Recycling & Extraction Technology, Expert Services, Analytical Competence Centre and Support Functions. Efforts are also made to promote best practice in knowledge management, information sharing, training and networking throughout the R&D community at Umicore.

To the greatest extent possible, the financial support for the Group’s R&D efforts is maintained irrespective of short-term fluctuations in the financial performance of the Group. With regard to intellectual property (IP) risk, a Group IP committee co-ordinates the protection of IP at Group level and promotes best practice in this regard at the level of the business units, which have their own IP committees.

Comments on 2015: In 2015 the Executive Committee undertook four dedicated technology reviews compared to five reviews in 2015. These reviews focus on the technology developments that will be key to achieving Horizon 2020 growth ambitions and cover product and process developments but also some support functions and the management of innovation at Group level.

18.1.3 Supply risk

Umicore is reliant on supplies of certain metals or metals-containing raw materials in order to manufacture its products. Some of these raw materials are comparatively rare. In order to mitigate the risk of supplies becoming difficult to source Umicore enters into longer-term contracts with its suppliers wherever possible. In some cases the Company holds strategic reserve stocks of certain key raw materials. The Company also attempts to source its materials from a geographically diverse range of locations. Umicore’s focus on recycling also means that its supply needs are only partially dependent on supplies of virgin material from mines – a significant proportion of the Company’s feed coming from secondary industrial sources or end-of-life materials. Where possible Umicore seeks to partner with customers in a “closed-loop” business model thereby integrating sales and the recycling of the customer’s residues in one package. Umicore has developed a Sustainable Procurement Charter that has been designed to drive further improvements in the Company’s approach to sustainable procurement and is being rolled out towards Umicore’s suppliers.

Comments on 2015: Umicore demonstrated continued compliance with the Dodd Frank Act in the US. While Umicore does not source conflict minerals and is not itself subject to the Dodd Frank Act, the Company is proactively addressing the issue with a number of its customers and suppliers. In Precious Metals Refining the Hoboken and Guarulhos facilities were awarded the conflict-free smelter certification by the London Bullion Market Association (LBMA) following an audit of processes and supply streams. The Jewellery & Industrial Metals operations in Pforzheim, Vienna and Bangkok are certified as part of the Responsible Jewellery Council’s (RJC) Chain of Custody programme. For more information see here. To access Umicore’s conflict minerals policy see here. For general comments on the progress in implementing Umicore’s Sustainable Procurement Charter please see page here and note S8.

18.1.4 Substitution risk

Achieving the best cost-performance balance for materials is a priority for Umicore and its customers. There is always a risk that customers will seek alternative materials to integrate in their products should those of Umicore not provide this optimum balance. The risk is especially present in those businesses producing materials containing expensive metals (especially those with historically volatile pricing characteristics). Umicore actively seeks to pre-empt this search for substitute materials by developing such substitutes itself using less costly materials with lower pricing volatility and where possible without impacting the performance provided for the customer’s product.

Comments on 2015: No specific developments took place with regards to substitution risk during 2015.

18.1.5 Regulatory risk

Like all companies, Umicore is exposed to the evolution of the regulatory environment in the countries or regions within which it does business. It should be noted that Umicore’s businesses stand to benefit from certain regulatory trends, notably those regarding more stringent emission controls for vehicles and enforced recycling of end-of-life products such as electronic goods.

However, some environmental legislation does present operational challenges. The REACH Directive came into force in the European Union in June 2007 and it introduced the need for new operational procedures regarding the registration, evaluation and authorization of chemical substances. Umicore has created an operational network of REACH managers from all of its business units, coordinated by a corporate REACH implementation manager.

Umicore monitors closely all changes in interpretation as well as guidance documents which might affect its REACH implementation strategy. Umicore is actively involved in industry association working groups to make sure a consistent approach is followed and that the metal specifics are understood by the regulators and the companies.

While the regulatory landscape may shift in the future, only a few of our substances feature today on the Candidate list for potential REACH authorization. In total, the products sold that contain these substances account for less than 0.5% of Umicore’s revenues. The placing of a substance on the REACH “Candidate List” is designed as a first step in subjecting that substance to robust and detailed scientific evaluation of risk as a basis for its continued use or substitution if economically and technically feasible alternatives to that substance exist.

Comments on 2015: As part of regular maintenance, about 20 REACH dossiers have been updated in 2015 with new information on composition, uses, Chemical Safety Report. Four of them were updated in line with a request of ECHA, including additional study results. Also 6 new registrations were submitted.

18.2 Financial risk

As indicated above, Umicore has implemented a specific series of Minimum Internal Control Requirements to mitigate financial risks. The 12 specific areas covered by MICR are: Internal Control Environment, Financial Closing & Reporting, Fixed Assets, Procure-To-Pay, Order-To-Cash, Inventory Management, Hedging, Treasury, Tax, Information Systems Management, Human Resources, Travel & Entertainment. An internal guide – the Umicore Financial Reporting Standard – provides the framework for common understanding of Umicore’s accounting policies, application of IFRS, and general reporting practices. Below three of the most salient financial risks have been summarized. A full description of pure financial risks and their management can be found in note F3 to Consolidated Financial Statements.

18.2.1 Debt and credit risk

Umicore aims to safeguard the business through sound financial management and by maintaining a strong balance sheet. Although there is no fixed target regarding debt levels the Company aims to maintain an investment grade status at all times. We also seek to maintain a healthy balance between short term and longer term debt and between debt secured at fixed and floating interest rates. Umicore has a monitoring process to screen banks for counterparty risk. Umicore is exposed to the risk of non-payment from any counterparty in relation to sales of goods or other commercial operations. Umicore manages this risk through application of a credit risk policy. Credit insurance is often used to reduce the overall level of risk but in certain businesses no insurance is used. This is primarily in those businesses with a significant level of customer concentration or those with a specific and close relationship with their customers and where the cost of insurance is not deemed justifiable in proportion to the risks involved. Business managers are also encouraged to pay particular attention to the evolution of trade receivables. This is done in the broader context of working capital management and Group efforts to reduce capital employed. A major part of the variable pay of managers is linked to return on capital employed (ROCE).

18.2.2  Currency risk

Umicore is exposed to structural, transactional and translational currency risks. Structural currency risk exists where the Company generates more revenues in one currency compared to the costs incurred in that currency. The biggest sensitivity of this nature exists for the US dollar. Transactional currency exposure is hedged systematically while the Company sometimes engages in structural currency hedges that help secure future cash flows.

Umicore also faces translational currency risks where it consolidates the earnings of subsidiaries not using the Euro as their reporting currency. While Umicore does not systematically hedge its translational currency exposures, it may enter into ad hoc translational hedges

18.2.3  Metal price risk

Umicore is exposed to risks relating to the prices of the metals which it processes or recycles. The structural metals-related price risks relate mainly to the impact that metal prices have on surplus metals recovered from materials supplied for treatment. Transactional metal price risks are linked to the exposure to any fluctuations in price between the moment raw materials are purchased (i.e., when the metal is “priced in”) and the moment the products are sold (i.e., when the metal is “priced out”). A risk also exists in the Company’s permanently tied up metal inventories. This risk is related to the market metal price moving below the carrying value of these inventories. Transactional metal price exposure is hedged systematically to the maximum extent possible. In addition, the Company sometimes engages in structural metal price hedges that help secure future cash flows.

18.2.4  Taxation

The tax charge included in the financial statements is the Group’s best estimate of its tax. There is a degree of uncertainty regarding the final tax liability for the period until completion of tax audits by the authorities. The Group’s policy is to submit tax returns within the statutory time limits and engage tax authorities to ensure that the Group’s tax affairs are as current as possible and that any differences in the interpretation of tax legislation and regulation are resolved as quickly as possible. Given the scale and the international nature of the Group’s business, VAT, sales tax and intra-Group transfer pricing are an inherent tax risk as it is for other international businesses. Changes in tax laws or in their application with respect to matters such as transfer pricing, VAT, foreign dividends, R&D tax credits and tax deductions, could increase the Group’s effective tax rate and adversely affect its financial results.

Comments on 2015: No material changes took place with regards to the nature of the financial risks faced by Umicore during 2015.