Prysmian Group ERM Project A journey
Prysmian Group 50 COUNTRIES 98 PLANTS 22,000 PEOPLE 8 B SALES 21 R&D CENTRES 2 Risk Management in Evolution
History Founded in 2005, Prysmian s origin has its roots in the history of the Pirelli Group 1879 Società Cavi Pirelli is established in Italy as the cable division of the recently founded Pirelli Group 1902 The Company continues to expand its product range and begins its international expansion with the construction of its first overseas plan in Spain 1925 Pirelli wins its first transatlantic business, connecting Italy to North and South America with 5,150 km of submarine cable. 1982 The Pirelli Group becomes the first company in Italy to produce optical fibre for telecommunications and data transmission 1998 Pirelli begins targeted acquisitions, including the power cable businesses of Siemens, BICC, Metal Manufacturers Ltd. and NKF 2005 The Prysmian Group is founded in July 2005 through the acquisition of the energy and telecom cables and systems activities of Pirelli. 2007 Within two years Prysmian becomes a listed company, quoted in the blue chip sector of the Milan Stock Exchange. 2010 The Prysmian Group became a full Public Company 2011 After the acquisition of Draka Holding Prysmian Group is the Worldwide Leader in Energy and Telecom Cables Industry 3 Risk Management in Evolution
Sales breakdown - FY 2012 Results Sales breakdown by geography Sales breakdown by business Latin America 9% APAC 15% 7.8 bn Other 2% Telecom 19% 7.8 bn Utilities 29% N. America 14% EMEA 62% Industrial 23% T&I 27% 4 Risk Management in Evolution
Overview of the ERM journey 1 2 3 4 Top risks identification Project set up Top risks mitigation & measurement Road map definition From Project To Process Framework definition Prysmian Risk Model Risk measurement methodologies First implementation on-field Top-down approach (involving Senior Management at the early stage) Top Risk priorities definition Detailed Top Risk Analysis and Measurement (involving Middle Management) Detailed Risk Mitigation Strategies and Action Plan ERM Process Risk management policy (drafted) Common language Uniform process Consistent risk reporting ERM Governance Risk Officer appointment at Group level Regular reporting to the Executive Management Team Risk & Control Committee oversight at Board level 5 Risk Management in Evolution
Overall results Risk Assessment phase PERIOD OF THE ANALYSIS Dec 12 - Mar 13 PEOPLE INVOLVED IN THE ASSESSMENT PHASE (through > 40 meetings with the Project Team) TOP RISK ANALYZED IN DETAIL of which quantified: 17 > 30 23 Risk Assessment results overall risk ranking High Medium Low Today s focus STRATEGIC RISKS - 4 3 Results discussed on February OPERATIONAL RISKS 2 4 4 LEGAL & COMPLIANCE RISKS 1 1 - FINANCIAL RISKS 1 2 1 8 11 4 TOTAL 4 11 8 6 Risk Management in Evolution
Prysmian Risk Model Top Risk Areas selected & n. of related relevant topics STRATEGIC FINANCIAL OPERATIONAL Macroeconomic, demand trends & Competitive environment Stakeholder expectations Key customer & business partners Emerging country risk Law & regulation evolution Research & Development M&A / JVs and integration process Operative CAPEX Strategy implementation Organizational framework & governance Raw materials price volatility Exchange rate volatility Interest rate volatility Financial instruments Credit risk Liquidity risk / Working Capital risk Capital availability / cost risk Financial counterparties Sales & Tendering Production Capacity / Efficiency Supply Chain Capacity / Efficiency Business interruption / Catastrophic events Contract execution / liabilities Product quality / liabilities Environmental Information Technology Human Resources Outsourcing LEGAL & COMPLIANCE PLANNING & REPORTING Intellectual Property rights Compliance to laws and regulations Compliance to Code of Ethics, Policies & Procedures Budgeting & Strategic planning Tax & Financial planning Management reporting Financial reporting 7 Risk Management in Evolution
Risk Assessment Methodology For the selected Top Risks, the following information has been gathered and analyzed:» Likelihood of risk event occurrence over the 3Y Plan (20132015) RISK SCORING SCALES (rif. Annex 2) Level Description 4» Economic impacts on the 3Y Plan EBITDA / Cash Flow (2013-2015 unless otherwise disclosed) net of any existing insurance/hedging coverage VERY HIGH Financial impact > 50 M Euro on expected EBITDA / CASH FLOW* Level Description Reputational impact IMPACT Operational Impact Negative judgments widespread at global level, significantly affecting, stock exchange performance and Consequences on Group ability to undertake "key" strategy for business firm reputation, public opinion and clients relationships. growth and sustainability Serious threatens to business continuity. Likelihood LIKELIHOOD 20 50 M Euro on 3 HIGH 2 MODERATE 4 Negative judgments widespread at national level, Consequences on efficiency / continuity of >50% expected EBITDA / likelihood of occurrence on an annual basis affecting firm reputation and image. one or more critical business processes PROBABLE CASH FLOW* The future event or events are expected to occur in most circumstances (with a likelihood greater than 50%) RM CAPABILITIES 1 3 5 20 M Euro on Competitors' negative judgments expressions 25 50% likelihood of occurrence on an annual basis in case of Consequences on efficiency / continuity of expected EBITDA / non critical business processes negative performances and events LIKELY CASH FLOW* The chance of the future event or events is less than likely but still with a good possibility to occur MINOR / < 5 M Euro on expected Competitors' negative and unjustified judgments 5 25% likelihood of occurrence on an annual basis INSIGNIFICANT EBITDA / CASH FLOW expressions 2 UNLIKELY Consequences on efficiency of one non critical business process The chance of the future event or events occurring is slight» Any additional qualitative considerations on reputational and operational effects on the Group, where financial calculation was difficult 1 REMOTE <5% likelihood of occurrence on an annual basis The future event or events may occur only exceptional circumstances. HEAT MAP» Assumptions forming the basis of the above estimates 1» Risk Management Capabilities in place in terms of existing insurance coverage or hedging instruments, specific procedures / control activities, specific organizational or governance protections, etc. 3 2» Final risk ranking resulting from combination of Likelihood, Impact and RM Capabilities Simplification: at this stage, no correlation across risks has been considered for risk ranking purposes 8 Risk Management in Evolution
Strategic Risks Heat Map STRATEGIC RISK BEYOND INFLUENCE S.1 m S.2 S.3 S.4 S.5 S.6 RISK TO BE ADDRESSED RISK BEYOND INFLUENCE S.7 1 IMPA CT <5 5-20 20-50 >50 4 3 2 S.1 S.7 S.6 S.5 S.2 S.4 a S.4 b S.3 1 <5% 2 3 4 5-25% 25-50% >50% LIKELIHOOD Risks quantified in terms of financial / economic impacts Risk positioning based on qualitative estimate 9 Risk Management in Evolution
Other Risks Heat Map OPERATIONAL O.1 O.2 RISK TO BE PREVENTED m O.3 O.4 O.5 O.6 O.7 O.8 O.9 O.10 LEGAL & COMPLIANCE C.1 C.2 IMPA CT <5 5-20 20-50 >50 4 3 2 1 O.2 F.1 O.6 O.1 O.4 C.2 F.2 O.9 O.10 O.7 C.1 O.3 O.5 F.3 O.8 F.4 FINANCIAL F.1 1 <5% 2 3 4 5-25% 25-50% >50% F.2 LIKELIHOOD F.3 F.4 Risk positioning based on quantitative estimate Risk positioning based on qualitative estimate 10 Risk Management in Evolution
Top Risks Action Plan jun jul aug 2013 2014 sep oct nov dec jan feb mar apr jun O.1 O.2 O.3 O.4 O.5 O.6 C.1 C.2 F.1 F.2 Today 11 Risk Management in Evolution
new ERM Governance Risk Officer On-going ERM process development and maintenance is under Risk Officer responsibility: RO responsibilities Facilitate the Group ERM process in accordance with the guidelines defined Establish and communicate the risk management philosophy across the organization Implement an appropriate infrastructure of processes, tools, methodologies and policies for managing and monitoring key risks Implement appropriate risk reporting to senior management and the Board Integrate risk management with strategy-setting and business planning On-going main activities» Annual Risk Assessment updates» Periodic monitoring of Top Risks and related responses» Mitigation action plans monitoring» Periodic Reporting to CEO/Senior Management, Risk & Control Committee, Statutory Board» Ad-hoc / extraordinary risk analysis 12 Risk Management in Evolution
Reporting cycling Frequency and time of CRC updates (4 times a year close to BoD Meeting Vs. specifically dedicated meeting) Content and format of reporting to CRC Main focus on action plan status Reporting by exception on changes in existing risks/new risks Reporting by exception on changes on risk quantification/likelihood Timing of annual update and revision of Risk ranking and quantification Proposal to coincide with BoD to approve full year financial statement 13 Risk Management in Evolution