Weir Group Regulatory News (WEIR)

Principal Risks and Uncertainties

Technology and innovation

Failure to innovate or to react to emerging technology developments, and therefore fail to ensure that the business continues to deliver sustainable and attractive solutions for our customers.

Why we think this is important

The strength of our business is built upon a history of delivering innovative and sustainable solutions for our customers. If we fail to keep abreast of market needs or to innovate solutions, we are at risk of losing market share to our competitors and lowering margins as demand will reduce.

How we are mitigating the risk

Our existing research and development initiatives within the business, at Weir Advanced Research Centre, are enhanced through partnerships with certain

leading universities around the world. These partnerships are designed to help the Group develop game-changing solutions to our customers' challenges and respond to their changing needs.

We devote skilled resource to reviewing and responding to developing technologies, with our agreements with specialist external parties to develop Internet of Things (IoT) technology.

Engineering strategies are in place at Group and divisional levels with strategic innovation areas defined as part of the innovation strategy.

Changes during 2018

Technological innovation continues to be at the forefront of the business due to the increasingly competitive market and the pressure to provide customers solutions to improve the efficiency of their operations.

Further information on progress made in this area is set out in the Products and Technology section of the Technology Review on pages 12-13.

Continued execution of the Technology Vision and Strategy through the year. The Innovation Strategy process has been defined, organisational structures established, and Group and divisional engineering strategies are in place.

The Weir Innovation Network was developed in order to improve knowledge sharing and collaboration across the Group.

Market volatility

Changes in key markets, including commodity prices affecting mining and oil and gas, have an adverse impact on customers' expenditure plans. This may include delaying existing expenditure commitments. As markets improve we may fail to effectively upscale operations to meet customer needs.

Why we think this is important

We need to remain sufficiently flexible to allow us to anticipate downturns, to allow us to adjust our operations accordingly, and equally to meet growth in demand when our customers' markets are buoyant and therefore capital investment is high. Otherwise, we are at risk of incurring unnecessary costs during downturns, and not maximising our potential for growth in buoyant markets.

In challenging market conditions, our value chain risks are increased. These are described in more detail on page 53.

How we are mitigating the risk

We maintain regular engagement with our customers to understand their needs and challenges, and ensure our business is appropriately aligned.

Improved demand planning and forecasting including Sales and Operations Planning within VCE.Our strategic planning utilises extensive market intelligence to assist in forecasting opportunities and dips in markets.

We maintain contingency plans

for downturns.

Changes during 2018

Global macroeconomic concerns around demand and geopolitical concerns around supply have caused oil prices to decline sharply in last quarter of 2018.

Other commodity markets are showing continued signs of recovery.

We continue to focus on customer relationships, technology development and Value Chain Excellence to manage this risk.

Information Technology and Cyber Security

Failure to maintain business systems or technical infrastructure that serves the business needs.

Failure to successfully execute changes to these business systems or technical infrastructure; together with failure to minimise disruption and maintain business as usual activity during technical infrastructure or business system changes.

Failure to adequately protect the business operations from cybercrime.

Why we think this is important

Up-to-date data allows us to make informed decisions about our business. Therefore, we require reliable and efficient IT systems and infrastructure to support our data requirements. Breaches of our IT security could have serious consequences for our business, including: interruption to business operations; and loss of intellectual property and other sensitive data.

The Group is investing in a significant IT transformation programme. If this is not managed effectively, the consequences could include interruption to business operations if data is unavailable due to unsuccessful execution of change, impacting our ability to compete and our reputation in the market.

At present, the Group's principal exposures to cybercrime relate to the misappropriation of cash and data. Our revenue streams are largely protected as our products are not currently electronic in nature and we do not, as a rule, transact over the internet.

How we are mitigating the risk

We have an IT Governance Framework with a focus on structured change management techniques, including setting project governance levels in line with risk.

Policies, procedures and baseline standards in relation to cyber risk and IT security more generally are continuously updated and rolled out to operations. A programme of user training in relation to cyber risk is in place.

All security related incidents are reported to the Group Executive.

Security Incident Responder teams monitor our various security systems.

Changes during 2018

IT security and continuity continues to be a matter of strategic priority for the Group in an environment of increasingly sophisticated cyber security threats. Progress to strengthen the Group's defences in this respect is being made through our IT Next programme.

We continually review the effectiveness of our key IT security controls in consultation with external experts. We report upon any unplanned outages and potential security breaches, with lessons learned across the Group.

Internal Audit coverage has been extended in 2018 to include increased focus on IT security and resilience.

Value Chain Excellence

Failure to achieve Value Chain Excellence improvements and the associated reduction in costs and enhanced flexibility.

Why we think this is important

If we fail to improve our value chain management, we risk:

· Losing the opportunity to invest capital into alternative value creating opportunities;

· Damaging our reputation and as a consequence losing customers and market share;

· Losing market position if the Group fails to demonstrate to customers the value of our products and services;

· Incurring penalties as a result of late delivery contractual clauses;

· Reducing margins by incurring unnecessary additional costs associated with late remedial actions taken to avoid missing delivery targets; and

· Failing to respond to market upturns or downturns quickly enough to respond to market demand or manage costs.

How we are mitigating the risk

Regular KPI monitoring of the value chain throughout the organisation.

All businesses complete VCE self- assessments, including value stream segmentation, model design and improvement project identification.

Value Chain Excellence initiatives have been operating throughout the Group to drive value chain improvements including expanding production in best cost countries.

The Group's forward purchase commitments are being closely monitored to manage inventories at levels appropriate

to market conditions.

Our credit risk management procedures are under continuous appraisal and review.

We regularly monitor market activity to ensure we remain competitive.

Changes during 2018

Value chain excellence is a key area of strategic focus for the Group with Value Chain Excellence initiatives continually developing and the Group realising the benefits of these.

The VCE model has continued to develop with audits being performed across the Group providing additional assurance.

Safety, Health and Environment (SHE)

Failure to adequately protect our people and other stakeholders from harm associated with a breach of SHE standards.

Why we think this is important

We operate in hazardous environments, and therefore have a fundamental duty to protect our people and other stakeholders from harm whilst conducting our business. As well as the personal impact on our people resulting from a failure to meet this obligation, we would also be at risk of:

· Reputational damage leading to a loss of customers;

· Legal action from regulators, including fines and penalties; and

· Exclusion from markets important for our future growth.

How we are mitigating the risk

The Weir Behavioural Safety system is in place to reduce the risk of safety incidents.

In addition, there are initiatives to prevent the most common accident types. The Weir global SHE standards are continually reviewed.

The SHE Excellence Committee is responsible for monitoring performance and compliance with Group objectives, policies and standards relating to SHE.

The Chief Executive's Safety Committee meets monthly and is committed to achieving the highest of SHE standards.

There is a formal SHE assurance programme with issues escalated as required through the reporting structures.

Improved SHE incident reporting tools which provide visibility and responsive action of any SHE related issues have now been embedded.

Changes during 2018

The Group continues to set higher benchmarks for SHE compliance and roll out cohesive programmes to address SHE risks and drive safe and sustainable working practices.

Onsite SHE audit assessments have been developed and are now operational. Life saving behaviours and improved training and on boarding is being rolled out. The first formal Groupwide recognition programme delivered in 2018.

With the creation of a new Strategy and Sustainability function at the Group, there is increased focus in this area and a number of new projects being piloted.

Political and social

Adverse political action, or political and social instability, in territories in which we operate may result in strategic, financial or personnel loss to the Group.

Why we think this is important

We operate across the globe and therefore have to work within a wide range of political and social conditions. Adverse events may occur in the territories in which we operate that may require us to act swiftly to protect our people and our property and regulatory changes could impact our competitiveness. We need to be flexible and able to anticipate such issues.

Expansions into new territories are only undertaken after rigorous assessment of the risks, including the social and political situation within the territory.

How we are mitigating the risk

Regular review of market attractiveness.

Monitoring travel by Weir employees to higher risk locations in accordance with the

Weir Group travel policy.

External expert risk assessments and regular monitoring in higher risk locations.

Contingency plans and exit strategy planning.

Our strategic planning assists in forecasting potential political and social instability in regions.

Proactive monitoring of evolving policy and development of contingency plans as situations materialise.

Changes during 2018

Given the introduction of tariffs imposed by the United States, we are continuing to assess the impact of these on our business and implement mitigating courses of action.

We will continue to monitor Brexit negotiations and risk assess the potential impacts on our UK manufacturing base.

Staff recruitment, development and retention

Failure to recruit, develop or retain key management and staff may lead to disruption to the Group's operations, functions and processes.

Why we think this is important

Our people represent our biggest asset and failure to attract, develop and retain key management and staff would have a detrimental impact on the Group's ability to deliver our key strategic objectives.

As markets improve we need to continue to recruit high quality staff building on existing capability while recruiting skilled expertise in the right areas of the business and at the right time.

How we are mitigating the risk

Promotion of the Weir Group Values & Behaviours, Code of Conduct and HR Policies sets the standards and expectations for all our staff, reinforcing our stated commitment to attracting and retaining the very best people.

High performer assessments are undertaken to identify and develop our very best talent.

Succession plans are in place and periodically reviewed for all of our key management.

Personal Development Plans are set and reviewed for the effective development of all of our staff.

We continue to offer competitive compensation and benefits packages.

Personal development programmes including Weir University and the Weir Leadership Programme are open to participation by high potential staff members and these continue to attract high calibre individuals.

Changes during 2018

Senior Leadership Conference was held during 2018 to build on the understanding of current priorities.

The Talent Development and Succession Planning process is developed and implementation underway.

The People Strategy was approved in February 2018.

The inaugural global employee engagement survey was launched in December 2018.

Ethics, governance and control

Interactions with our people, customers, suppliers and other stakeholders are not conducted with the highest standards of integrity which devalues our reputation.

Why we think this is important

We are unwilling to accept dishonest or corrupt behaviour from our people, or external parties acting on our behalf, whilst conducting our business. If we fail to act with integrity, we are at

risk of:

· Reputational damage leading to a loss of customers;

· Increased scrutiny from regulators;

· Legal action from regulators including fines, penalties and imprisonment; and

· Exclusion from markets important for our future growth.

· Failure to meet required social standards to maintain licence to operate in our communities.

We expect all areas of the business to do the right thing and conduct business in compliance with procedures, applicable laws, Weir Group operating policies and procedures, and the highest ethical standards.

How we are mitigating the risk

The Code of Conduct, supplemented with Group policies on related topics, provides a clear benchmark for how we expect our business will be conducted.

Regular training is provided using a range of mechanisms including Town Hall style sessions, online and induction training.

The financial control framework is continually monitored for effectiveness.

Internal Audit's remit includes regular review of the anti-bribery and corruption and financial controls across the Group. The Group Legal team is responsible for monitoring compliance with the Code of Conduct.

A Whistleblower hotline is available to all members of staff. Reports are investigated on a timely basis and summary reports provided to Group Executive and Board.

Changes during 2018

The governance and legislative environment in which the Group operates continues to evolve and become more complex. We routinely review operations in geographies where ethical standards may not be as well established as in other countries.

With the introduction of General Data Protection Regulation (GDPR), we have taken proportionate measures to ensure compliance with the regulations.

Compliance "sub-function" within Group Legal created to enhance global focus on compliance

Contract risk

Failure to adequately manage contract risk and, as a result, commit to obligations which the Group is unable to meet without incurring significant unplanned costs.

In addition, failure to follow Group policies and procedures may lead to commitments without the desired level of contractual protections.

Why we think this is important

We operate in an increasingly complex and competitive environment where customers are not only highly focused on price and service but are also more challenging in contract negotiations. Business models are also changing, reflecting these developments.

As we offer a broader range of products and services to our customers, including those that are more technologically advanced, we risk exposing the Group to reputational and financial loss should our contract acceptance, negotiation and approval processes fail to protect the Group accordingly.

How we are mitigating the risk

The Group has policies and procedures for contract acceptance and approval.

These are under continuous review and improvement to ensure they are adequate for current and future circumstances.

The tools and training available to employees responsible for contract management are similarly under continuous review.

Changes during 2018

Given the competitive environment in which the Group operates contact

management continues to be a key area of focus. Existing policies and procedures are continually reviewed and refreshed to provide employees with improved tools to assist them in their contract training and management activities.