CHANGING CUSTOMER AND COMPETITOR LANDSCAPE

INHERENT RISK: HIGH

TREND: STATIC

STRATEGY:

Best-in-class service

Focus on trade

Advantaged businesses

IMPACT:

Adverse effect

on financial results

Loss of market share

RISK DESCRIPTION

The Group sells and distributes building materials through a number of channels. The number of outlets and channels where building materials can be purchased continues to grow with new competitors entering the market. These new entrants may operate business models which differ significantly from the traditional merchanting, retail and online formats from which the Group operates and may take market share.

At the same time, customer purchasing habits continue to evolve with increasing online transactions. Customers' preference for purchasing materials through a range of supply channels and not just through the Group's traditional competitors may affect the Group's performance and adversely impact the profitability of branch-based  operations.

Increasing price transparency could lead to a perception that the Group is less price competitive leading to downward pressure on price and margins.

RISK MITIGATION

Changes to market practice are tracked on an ongoing basis and reported to the Board.

The Group continues to build multi-channel capabilities that complement its existing operations and provide its customers with the opportunity to transact with the Group through channels that best suit their needs.

The Group's strategy allows it to use sites flexibly. Alternative space utilisation models are possible, including maintaining smaller stores and implanting additional services into existing branches.

The development of new, innovative and competitive supply solutions is a key strength of the Group. It works closely with customers and suppliers on a programme of continuous improvement designed to improve its customer proposition.

Pricing strategies across the Group are regularly reviewed and where necessary refined to ensure they remain competitive.

COLLEAGUE RECRUITMENT, RETENTION AND SUCCESSION PLANS DO NOT DELIVER THE REQUIRED SKILLS AND EXPERIENCE

INHERENT RISK: MEDIUM

TREND: STATIC

STRATEGY:

Best-in-class service

Focus on trade

Simplifying the Group

IMPACT:

Inability to develop and execute development and succession plans

Adverse effect on delivery of strategy

Competitive disadvantage

RISK DESCRIPTION

The ability to recruit, develop, retain and motivate suitably qualified staff is an important driver of the Group's overall performance. The Group may also be exposed to skills shortages in certain areas which can result in salary cost pressures. The availability of suitably qualified commercial drivers is one such area of focus for the Group, which is critical to the operation of its fleet to meet customer delivery expectations.

The strength of the Group's customer proposition is underpinned by the quality of people working throughout the Group, particularly in customer facing roles. Many of them have worked for Travis Perkins for some considerable time, during which they have gained valuable product and customer knowledge and expertise.

The Group faces competition for the best people from other organisations. Ensuring the retention and development of employees and that robust succession plans exist for key positions is important for the Group to deliver on its strategic objectives.

RISK MITIGATION

The Group's employment policies and practices are kept under regular review.

Staff engagement and turnover by job type is reported regularly to the Executive Committee and to the Board. Succession plans are established for the most senior positions within the Group and these are reviewed annually.

The Group's reward and recognition systems are actively managed to ensure high levels of employee engagement.

Salaries and other benefits are benchmarked regularly to ensure that the Group remains competitive and the Group operates incentive structures to ensure that high performing colleagues are adequately rewarded and retained.

A wide range of training programmes are in place to encourage staff development, whilst management development programmes are available to those identified for more senior positions.

SUPPLIER DEPENDENCY, RELATIONSHIP AND DISINTERMEDIATION LEADING TO ADVERSE IMPACTS ON RANGING AND PRICE

INHERENT RISK: MEDIUM

TREND: STATIC

STRATEGY:

Best-in-class service

Focus on trade

Simplifying the Group

Financial strength

IMPACT:

Adverse effect on financial result

Adverse effect on reputation

RISK DESCRIPTION

The Group is the largest customer to a number   of its suppliers. In some cases, those suppliers are large enough to cause significant supply difficulties to the Group if they are unable to meet their supply obligations due to either economic or operational factors.

Alternative sourcing may be available, but the volumes required and the time it may take those suppliers to increase production could result in significant stock-outs for some considerable time leading to poor customer service.

The Group has increased the sourcing of products from overseas factories. This has increased the Group's exposure to sourcing, quality, trading, warranty and currency issues, which again may lead to an adverse impact on customer service.

Manufacturers of building materials sold by the Group may also look to sell their products directly to end customers in the future diminishing the role of distributors such as merchanting and retail distribution businesses.

RISK MITIGATION

Making decent returns is one of the Group's cornerstones which requires it to treat both customers and suppliers fairly. The commercial and financial teams have established strong relationships with the Group's key suppliers and work closely with them to ensure contracts that are beneficial to both parties and the continuity of quality materials.

To spread the risk where possible contracts exist with more than one supplier for key products.

The Group has made a significant investment in its Far East infrastructure to support its direct sourcing operation which allows the development of own brand products, thereby reducing the reliance on branded suppliers. The Group has also adopted a conservative hedging policy to reduce its exposure to currency fluctuations.

Comprehensive checks are undertaken on the factories manufacturing products and the quality and the suitability of those products before they are shipped to the UK.

UNSAFE PRACTICES RESULT IN HARM TO COLLEAGUES, CUSTOMERS, SUPPLIERS OR THE PUBLIC

INHERENT RISK: MEDIUM

TREND: STATIC

STRATEGY:

Best-in-class service

Financial strength

IMPACT:

Harm to our colleagues, customers and the wider community

Potential legal action, fines and penalties

Adverse effect on financial results

Adverse effect on reputation

RISK DESCRIPTION

Keeping the Group's colleagues, customers, suppliers and the public safe is a cornerstone of the business. The Group operates over 2,000 sites, many with complex and busy yards. It also operates one of the largest vehicle fleets in the UK, distributing heavy and bulky materials. Poorly implemented safety practices on site, on the road or at delivery locations could result in significant harm to people which would damage the Group's reputation and could impact trading performance.

RISK MITIGATION

The Group continues to challenge its thinking and approach to improving its safety performance through its 'Stay Safe' brand.

Governance of Stay Safe is well-established and designed to promote a continual focus on health and safety. Stay Safe performance is reviewed at all Board meetings, by the Executive Committee and by the dedicated Stay Safe Committee, which is chaired by a Non-executive Director.

The Group's regular Divisional leadership meetings also focus on performance and continuous improvement in this area. These forums also monitor the achievement of transport-related compliance requirements, including driver licencing and professional competence.

Incidents are monitored, investigated and corrective action taken to reduce the likelihood of similar incidents in future. Stay Safe assurance reviews are regularly undertaken at sites by dedicated safety professionals with any resulting improvement actions tracked to completion.

De-risking the Group's operations, improving health and safety awareness and implementing improved ways of working are at the forefront of the Group's activities. Further information on progress made during 2018 can be found in the Health and Safety report on pages 47 to 49.

THE GROUP ALLOCATES CAPITAL INEFFICIENTLY OR UNDER INVESTS IN ADVANTAGED BUSINESS AND DOES NOT ACHIEVE DESIRED RETURNS

INHERENT RISK: MEDIUM

TREND: STATIC

STRATEGY:

Focus on trade

Advantaged businesses

Financial strength

IMPACT:

Adverse effect on financial results

RISK DESCRIPTION

The Group operates a number of different businesses in the UK which operate in different but complementary channels. As the Group's markets continue to develop, it is investing to enhance its existing businesses and to develop new propositions to better serve its customers.

Whilst the Group operates a disciplined capital allocation process, there is a risk that it may be over-investing in channels which may decline or that it may not be allocating sufficient capital to new propositions resulting in sub-optimal returns on capital.

RISK MITIGATION

Return on capital is one of the Group's key performance indicators as shown on page 19.   The Group's decision to refine its strategy and focus on trade customers in the most advantaged businesses will impact the allocation of capital with more focused management attention and capital deployment in areas of higher return.

Responsibility for identifying and implementing opportunities to expand, improve or modify the Group's operations rests with each of the Divisional Boards. Capital is deployed or re-deployed through a Group-led forum to the strategically-aligned opportunities expected to achieve the best return on capital.

Major projects are kept under review to monitor progress and ensure the deployment of capital remains appropriate.

Post-implementation reviews are undertaken on all major projects and returns are monitored on an ongoing basis to ensure that the expected returns are achieved and allow the Group to modify its capital allocation when appropriate.

BUSINESS TRANSFORMATION AND IMPROVEMENT PROJECTS FAIL TO DELIVER THE EXPECTED BENEFITS, COST MORE OR TAKE LONGER TO IMPLEMENT THAN ANTICIPATED

INHERENT RISK: MEDIUM

TREND: STATIC

STRATEGY:

Best-in-class service

Advantaged businesses

Simplifying the Group

Financial strength

IMPACT:

Adverse effect on financial results

Adverse effect on shareholder value

RISK DESCRIPTION

The Group undertakes a variety of projects throughout its business in order to generate returns for its shareholders. These projects include the transformation of the Group's core IT systems and infrastructure, ongoing development of its supply chain operations and its branch and store networks, and the simplification of the Group to speed up decision making and reduce costs.

By their nature, such strategic projects are often complicated, interlinked and may require considerable resource to deliver them. As a result, the expected benefits, timescale for delivery and costs of implementation of each project may deviate from those anticipated at their outset. Colleague engagement may be impacted during a period of significant change and cost-focus.

RISK MITIGATION

All potentially significant projects are subject to detailed investigation, assessment and approval prior to commencement.

Dedicated teams, including financial resource, are allocated to each project, with additional expertise brought into the Group to supplement existing resource when necessary.

All strategic projects are supported by an appropriate governance structure and are closely monitored by the Executive Committee with regular reporting to the Board.

Regular communications are undertaken to keep affected colleagues informed.

UNCERTAINTY CAUSED BY THE UK'S DECISION TO LEAVE THE EUROPEAN UNION

INHERENT RISK: HIGH

TREND: INCREASING

STRATEGY:

Best-in-class service

Financial strength

IMPACT:

Adverse effect on financial results

RISK DESCRIPTION

The result of the UK vote to leave the European Union and the subsequent process to determine   the terms of the withdrawal agreement continues to cause considerable market uncertainty. It remains difficult to predict the economic outlook and impact to the Group in the short-term. The Group continued to experience significant volatility in the value of Sterling against the principal currencies used to pay for imported goods during 2018.

Future trading relationships with foreign markets have yet to be determined and these may result in higher tariffs or duties on imports of construction products as well as extended lead times on imported supplies or result in the need to source some products elsewhere. These risks have the potential to impact the Group significantly. Of less risk to the Group, but potentially significant for its customers, are the significant numbers of non-UK nationals employed in the construction industry and the distribution and logistics markets. If the UK becomes a less attractive place for them to work this could result in labour shortages and consequent salary cost pressures and could change dynamics in our key markets. Whilst significant changes to product standards and legislative requirements more generally are not anticipated in the short-term, they could impact the Group if introduced in the future.

The continued uncertainties that surround Brexit mean that a more precise assessment of the impact on the Group's operations is unlikely to be possible until the terms of the withdrawal agreement are confirmed.

RISK MITIGATION

It remains too early to determine the full impact of the UK's decision to leave the European Union, but the Board is closely monitoring market conditions and will react accordingly.

The Board has undertaken a process to assess the known and proximate risks associated with Brexit. This includes assessment of existing risk mitigations and actions in progress and is updated on a regular basis.

The Board has already taken steps to reduce some costs, but is carefully balancing the current needs of the business against what may or may not occur in the future.

The Group continues to invest in the business where those investments are expected to realise acceptable returns, but it is prepared to reduce activity levels should market conditions so dictate.

Exercises have been undertaken by the divisional leadership teams to assess the level of stock holding required in each business unit to minimise disruption to customers. A customer statement is in place and will be reassessed as the terms of the UK's withdrawal are clarified. Engagement with the Group's key suppliers is ongoing.

Where the cost of goods increases due to the exchange rate deteriorating or additional tariffs and duties, the Group will seek to pass those price increases through to its customers, but its ability to do so will depend upon market conditions at  the time.

The processes in place around the recruitment and retention of people are set out in the principal risk pertaining to such matters on page 36.

MARKET CONDITIONS LEADING TO DEMAND UNCERTAINTY

INHERENT RISK: HIGH

TREND: INCREASING

STRATEGY:

Best-in-class service

Focus on trade

Advantaged businesses

IMPACT:

Adverse effect on financial results

RISK DESCRIPTION

The Group's products are sold to businesses, trade professionals and retail customers for a broad range of end uses in the built environment. The Group's markets are cyclical in nature and the performance of those markets is affected by general economic conditions and specific drivers of construction, Renovation, Maintenance and Improvement and DIY activity. These include mortgage availability and affordability, housing transactions and the timing and nature of government activity to stimulate activity, net disposable income, house price inflation, consumer confidence, interest rates and unemployment.

A significant downturn in economic conditions or alternatively major uncertainty about the future outlook could affect the levels of construction activity in the Group's markets and the confidence levels of the Group's customers, which could reduce their propensity to purchase products and services from the Group's businesses.

RISK MITIGATION

The Board conducts an annual review of strategy, which includes an assessment of likely competitor activity, market forecasts and possible future trends in products, channels of distribution and customer behaviour.

The Group maintains a comprehensive tracking system for lead indicators that influence the market for the consumption of building materials in the UK.

Significant events including those in the supply chain that may affect the Group are monitored by the Executive Committee and reported to the Board monthly by the Group CEO.

Should market conditions deteriorate then the Board has a range of options dependent upon   the severity of the change. Historically these have included amending the Group's trading stance, cost reduction, lowering capital investment and cutting the dividend.

EXECUTION OF PLANNED DISPOSALS AND POTENTIAL ACQUISITIONS FAILS TO DELIVER THE EXPECTED BENEFITS TO THE EXPECTED COST AND TIMESCALE

INHERENT RISK: MEDIUM

TREND: INCREASING

STRATEGY:

Focus on trade

Advantaged businesses

Simplifying the Group

Financial strength

IMPACT:

Adverse effect on financial results

Adverse effect on shareholder value

RISK DESCRIPTION

The Group undertakes acquisition and disposal activity to optimise its portfolio of businesses and drive shareholder return. In December 2018, the Group announced its intention to explore the potential divestment of the Plumbing & Heating division, as part of the broader strategy of simplifying the Group. This division comprises a number of businesses of varying size which operate on a range of systems, some of which are shared with the wider Group.

The programme to separate the Plumbing & Heating businesses for a potential sale is complex with many linkages to Group systems and processes. The Group has not undertaken a restructure and disposal on this scale for some time and it requires careful management. The costs and timescale for the separation may deviate from those originally planned, which could in turn impact the progression of a sale process and the value realised.

RISK MITIGATION

All merger, acquisition and disposal activities are subject to a detailed appraisal process and ultimate approval by the Board.

A formal programme of work with dedicated resource has been put in place to support the execution of the Plumbing & Heating disposal. External expertise and advisors are involved as required to support the programme team.

All activity of this kind is supported by robust governance and monitoring. The Plumbing & Heating programme is closely monitored by a programme Steering Committee, with Executive sponsorship and representation. There is regular reporting to the Executive Committee and Board.

DATA SECURITY

INHERENT RISK: MEDIUM

TREND: INCREASING

STRATEGY:

Best-in-class service

Financial Strength

IMPACT:

Adverse effect

on financial results

Adverse effect on

the Group's reputation

RISK DESCRIPTION

Incidents of sophisticated cyber-crime represent a significant and increasing threat to all businesses including the Group. A major breach of cyber security could result in disruption to customer- facing, supplier-facing and financial systems through theft and misuse of confidential data, damage to or manipulation of operationally critical data or interruption to IT services, any of which may have serious impacts on the Group's reputation or ability to trade.

RISK MITIGATION

The strategic demands of the business, the resources available to IT, the performance levels of key systems and IT security are kept under review by the Executive Committee, with responsibility for monitoring and maintaining cyber security delegated to a data security committee.

Investments in best-of-breed solutions are made that continually adapt and are updated to mitigate the risk associated with the most advanced threats and the evolution of Group technology adoption.

Cyber security controls are in place to protect IT systems and data including firewalls, virus protection and penetration testing. A programme of risk-oriented reviews is undertaken to ensure the level of control around IT systems remains robust.

An IT disaster recovery plan exists together with a business continuity plan. Arrangements are in place for alternative data sites for both trade and consumer businesses. Off-site back-up routines are in place.

THE CHANGING REGULATORY FRAMEWORK INCREASES THE RISK OF NON-COMPLIANCE AND FINES

INHERENT RISK: MEDIUM

TREND: STATIC

STRATEGY:

Best-in-class service

Focus on trade

Advantaged businesses

Simplifying the Group

Financial strength

IMPACT:

Adverse effect on the Company's reputation

Adverse effect on financial and operational performance

Potential legal action, fines and penalties

RISK DESCRIPTION

The Group is subject to a broad range of   existing and evolving governance requirements, environmental, health and safety and other laws, regulations, standards and best practices which affect the way the Group operates and give rise to significant compliance costs, potential legal liability for non-compliance and potential limitations on the development of the Group's operations.

RISK MITIGATION

The Group's in-house legal team is responsible for monitoring changes to laws and regulations that affect the business and is supported by external advisors.

The Group has a comprehensive framework of policies in place that sets out the ways employees and suppliers are expected to conduct themselves. Those expectations are widely disseminated using a range of methods to ensure colleagues and suppliers understand their responsibilities to comply with the law and other regulations affecting the Group at all times.

The Group provides online training to colleagues in key areas of legal and regulatory compliance, including a suite of mandatory training for those that join the Group. During 2018 Group-wide training was undertaken in respect of GDPR.

The Executive Committee and the Board regularly monitor compliance with laws and regulations.

The Group operates a whistleblowing process   that allows the anonymous reporting through an independent hotline of any suspected wrongdoing or unethical behaviour, including reporting instances of non-compliance with laws and regulations. All reported cases are investigated.