Conflict Minerals. Managing Customer Expectations and Requirements! Presented by: Tim Holt Regulatory Affairs

Transcription

1 Conflict Minerals Managing Customer Expectations and Requirements! Presented by: Tim Holt Regulatory Affairs

2 Agenda Conflict Minerals Overview 3 Main Steps in Section 1502 Supplier RCOI Conflict Minerals Reporting Templates Due Diligence Common Problems - Product Level vs Company Level Declarations - Demanding Customers Summary Webinar is 50 minutes with 10 minutes of Q&A (hopefully)

3 Claigan Conflict Minerals Services Conflict Minerals - Conflict minerals compliance RCOI (Reasonable Country of Origin) Due Diligence Conflict Minerals Report Experience - Claigan work is quoted in the SEC final rules 18 times - Claigan has testified to Congress on Conflict Minerals - Worked for - Legrand, Danaher, Smiths Medical, Smith & Nephew, Covidien, Johnson & Johnson, Hamilton Beach, Honeywell, Hach, Fluke, Moog, Edwards Lifesciences, Instrumentation Laboratory, GE, Schneider Electric, KavoKerr, Microsemi, JDSU, Agilent, Barrx, Tyco, L-3, Smart Technologies, Pelton & Crane, Cooper Surgical, Carestream, Abbott Laboratories, Atricure, CAE, Philips, Plexus, FLIR, Trojan, Deltrol Controls, LoJack, Thermo Scientific, Li- Cor, Avid, and US Commercial Service.

4 US - Conflict Minerals Publicly traded US companies are required to provide due diligence that the following metals (3TGs) in their product are not sourced from the conflict regions of the Democratic Republic of Congo (DRC) and surrounding countries - Tin - Tantalum - Tungsten - Gold US publicly traded companies are required to complete three steps - Identify usage - Perform RCOI - Perform due diligence! Explained further on next slide

5 3 Steps in Section Issuer to determine whether it is subject to the requirements Necessary to the functionality or production of a product manufactured or contracted by that issuer to be manufactured 2. Issuer to conduct a reasonable country of origin inquiry regarding the origin of its conflict minerals RCOI process to determine whether or not their conflict minerals originate in the DRC or adjoining countries 3. Issuer to conduct due diligence on the source and chain of custody of its conflict minerals and provide a Conflict Minerals Report if, based on its RCOI, the issuer knows or has reason to believe, that it has necessary conflict minerals that originated in the Covered Countries and did not come from recycled or scrap sources. Only applies to those conflict minerals sourced from the DRC or adjoining countries

6 Conflict Minerals Compliance Flowchart 2014 Reporting Period 3TG RCOI Due Diligence Disclosure Create affected suppliers list Perform RCOI with Suppliers Due Diligence SEC Disclosure Create Amalgamated Smelter List Create internal report SEC Conflict Minerals Report Perform RCOI with Smelters Review with internal stakeholders

7 Supplier RCOI Purpose of RCOI - To identify if affected conflict minerals originate in the DRC or surrounding countries Reasonable Country of Origin Inquiry - Part 1 - Supplier RCOI - Part 2 - Smelter RCOI Supplier RCOI - Gathering the following key data from suppliers Do they have a conflict minerals program? Do they use 3TGs? Facilities (smelters) in their supply chain

8 Question - What do I need to provide my customers? Customer requests conflict minerals data Key items to have - Have a conflict minerals program - Have a conflict minerals policy on website - Have an ability to route request to the conflict minerals prime, or applicable conflict minerals data - Have completed CMRT including declarations smelters

9 Conflict Minerals Reporting Template (CMRT) Industry standard reporting template (excel) - From suppliers to customers Revision control - v3.02 v3 = year v3 = 2014 reporting period, v2 = 2013 reporting period, v1 = 2012 Question set and format changes from year to year.02 = 3rd iteration for 2014 (.00,.01,.02) Primarily smelter list updates (not fundamental content)

10 Page 1 - Declarations Two (2) major pages of information in CMRT - Declarations tab - Smelter tab The declaration tab includes most of the corporate information - Scope - Use of 3TGs - Commitments - Progress

11 Key Declarations - Question 2 Necessary to the functionality or manufacturing of product - do the products you provide contain 3TGs in scope of the conflict minerals requirements Very fundamental question If - supplier reports No for all four metals, and - statement is reasonable Supplier can be removed from Supplier RCOI

12 Other Declarations Supplier completeness - Useful, but does not get represented in SEC disclosure or your CMRT to your customer Other declarations - Mostly paper commitments without proof will add little to your CMRT or SEC final Key information for SEC declaration is on the smelter tab

13 Supplier Risk Assessment Common practice - Assessing each supplier - Provide a risk rating to each supplier Comment - Most supplier information is not very useful - Supplier knowledge is generally very low - Supplier rating has negligible or no impact on SEC declaration - Supply chain risk at the smelter level - Applying risk assessment at supplier level instead of smelter level is Not correct Opens up supplier data to audit review Not recommended outside of - Judging accuracy of no 3TG statements - No smelter data

14 Page 2 - Smelters Smelter page - Smelters identified by suppliers Mandatory information - Metal type - Smelter name - Verified name - (Generally the two above are the same) Additional information - There are additional fields for additional smelter information contact information address countries of origin - Not mandatory

15 Issues - Smelters Issues with developing a smelter list - Huge issues with smelter information Definition of a smelter is not well understood Duplication Translation issue Distributors listed as smelters Industry list (CFSI) not complete Some smelter listing are being split into multiple listing November 2014 (v3.02) Typical situation A company will be provided with 50,000+ unique smelter records Can be distilled down to only ~250 unique, valid smelters

16 Developing a Correct Smelter List A company needs to process the smelters provided by their suppliers into a correct list of valid smelters - Identification and removal of duplication - On average 50,000 supplier provided smelters will become ~250 valid smelters Extremely difficult task - This is a section we recommended using a specialized provider such as Claigan - Even though you have 50,000 line items, they are likely very similar to other company s 50,000 line items Using only the CFSI smelter is list is not 100% effective - Many smelters still missing - Many listed smelters are no longer valid or closed - Not nearly all alternate smelter names are on the official list

17 Due Diligence Not required for the CMRT SEC required - We do view an issuer as satisfying the reasonable country of origin inquiry standard if it seeks and obtains reasonably reliable representations indicating the facility at which its conflict minerals were processed and demonstrating that those conflict minerals did not originate in the Covered Countries... These representations could come either directly from that facility or indirectly through the issuer s immediate suppliers, but the issuer must have a reason to believe these representations are true given the facts and circumstances surrounding those representations. Additional key passage - pg This revised approach does not require an issuer to prove a negative to avoid moving to step three, but it also does not allow an issuer to ignore or be willfully blind to warning signs or other circumstances indicating that its conflict minerals may have originated in the Covered Countries.

18 Product Level vs Company Level Should I provide customers with product level declarations? Recommendation - Company level, or - Divisional level (for dramatically different businesses) example - semiconductor materials, raw chemicals, unaffected business lines (no 3TGs) as opposed to electronics or industrial products Challenge with product level - Customized for every request - Very difficult to isolate smelters for a product - Very likely to include errors and/or mislead customers Managing product level requests is discussed in a later section of the presentation

19 Demanding Customers Some customers will be more demanding than others Examples - threatening letters - request in custom format - follow on questions - request for changes in declaration - rejection of information

20 Contributing Factors Creating Demands Lack of understanding - SEC final rules are very complex - Not everyone has a complete understanding - A lot of companies are over focused on supplier risk assessment Software they purchased Service providers wanting to provide services

21 Example Customer Demand - 1 Part level data - Customer only accepts part level data - Does not accept company level declaration Notes - Less common in 2014 than in Customer is just making things difficult for everyone themselves included - Corporate declaration is normally well vetted - A customized part level declaration would not only be difficult, it would be significantly liable for error

22 Demand for Part Level Declaration Recommendation - Step 1 - Provide company declaration - Step 2 - If rejected, provide company declaration again - Step 3 - If completely not accepted, identify metals that apply to parts purchased by the customer and create a broad declaration based on the corporate declaration for just those metals! Any variance from the company level / vetted declaration creates significant opportunity for error unless significantly vetted.

23 Example Customer Demand - 2 Demand to remove a specific smelter - Remove smelter or customer will stop buying your products Common reasons - Misunderstanding of a customer request - Belief that CFSI certified smelters are only acceptable smelters - Other business issues unrelated to conflict minerals

24 Demand for Smelter Removal Recommendation - Conversation and education with customer Why is removal required? Does the customer misunderstand the requirements? - If removal warranted, Identify which suppliers identified the specific smelter Review whether parts from those suppliers actually use that metal If so, ask supplier if parts purchased from the supplier use metal from that smelter If so - a removal process will likely have to started with the supplier Having a supplier remove a smelter is non-trivial - But may be warranted and you need to be prepared

25 Summary Have a conflict minerals plan in place Provide company level CMRT Use of 3TGs Correct list of smelter Be prepared to deal with customer questions/ demands

26 Claigan Conflict Minerals Services Conflict Minerals - Conflict minerals compliance RCOI (Reasonable Country of Origin) Supplier RCOI Corrected smelter list Smelter RCOI Due Diligence Conflict Minerals Report Experience - Claigan work is quoted in the SEC final rules 18 times - Claigan has testified to Congress on Conflict Minerals tim.holt@claigan.com Q&A