Risk management is the responsibility of the Board and is a key factor in the delivery of the Group’s strategic objectives. The Board establishes the culture of effective risk management and is responsible for maintaining appropriate systems and controls.
The Board sets the risk appetite and determines the policies and procedures that are put in place to mitigate exposure to risks. The Group's risk review process covers emerging risks and incorporates scenario planning and stress testing. The implications of an increase in the impact of the coronavirus are currently being assessed and contingency planning is being undertaken.
There is a formal ongoing process to identify, assess and analyse risks and those of a potentially significant nature are included in the Group Risk Register.
The Group Risk Register is reviewed and updated by the full executive management team at least every 6 months and the overall process is the subject of regular review. Risks are recorded with a full analysis and risk owners are nominated who have authority and responsibility for assessing and managing the risk. KPMG, as the Group’s internal auditor, attended the most recent risk review meeting. The conclusion of KPMG is that the process continues to be a robust mechanism for monitoring and controlling the Group’s principal risks. All risks are aligned with the Group’s strategic objectives and each risk is analysed for impact and probability to determine exposure and impact to the business and the determination of a “gross risk score“ enables risk exposure to be prioritised.
The Group seeks to mitigate exposure to all forms of strategic, financial and operational risk, both external and internal. The effectiveness of key mitigating controls is continually monitored and such controls are subjected to internal audit and periodic testing in order to provide independent verification where this is deemed appropriate. The effectiveness and impact of key controls are evaluated and this is used to determine a “net risk score“ for each risk. The process is used to develop action plans that are used to manage, or respond to, the risks and these are monitored and reviewed on a regular basis by the Group’s Audit Committee.
In addition, the Group has established a formal framework for the ongoing assessment of operational, financial and IT-based controls. The overriding objective is to gain assurance that the control framework is complete and that the individual controls are operating effectively. Additional independent verification checking of key controls and reconciliations are undertaken on a rolling basis. Such testing includes key controls over access to, and changing permissions on, base data and metadata.
The Group is prepared to accept a certain level of risk to remain competitive but continues to adopt a conservative approach to risk management. The risk framework is robust and provides clarity in determining the risks faced and the level of risk that we are prepared to accept. Marshalls continues to put in place detailed plans to manage all risks through strategies that are designed to either treat, transfer or terminate the source of the identified risk.
Reviews the effectiveness of the Group’s risk management and internal control procedures; and
Monitors the effectiveness of the internal audit function and the independence of the external audit.
Oversee the management of risk;
Monitor risk mitigation and controls; and
Monitor the effective implementation of action plans.
Report on effectiveness of management actions; and
Provide assurance to the Audit Committee.
Are responsible for ownership and control of specific risks; and
Are responsible for establishing and managing the implementation of appropriate action plans.
Are responsible for the impact of controls (net basis).
After considering the principal risks overleaf, the Directors have assessed the prospects of the Group over a longer period than the period of at least 12 months required by the “going concern“ basis of accounting. The Directors consider that the Group’s risk management process satisfies the requirements of provision 31 of the UK Corporate Governance Code.
The Board considers annually, and on a rolling basis, a strategic plan, which is assessed with reference to the Group’s current position and prospects, the strategic objectives and the operation of the procedures and policies to manage the principal risks that might threaten the business model, future performance and target capital structure. In making this assessment the Board considers emerging risks and longer-term risks and opportunities. The aim is to ensure that the business model is continually reviewed to ensure it is sustainable over the long term. Security, flexibility and efficiency continue to be the guiding principles that underpin the Group’s capital structure objectives. The Group’s funding strategy is to ensure that headroom remains at comfortable levels under all planning scenarios. The objective continues to be to have a range of competitively priced funding lines in place, at all times, with different maturity dates. An additional bank revolving credit facility of £35 million was introduced in August 2019 to replace a maturing facility.
The Group's new 5 year Strategy confirms the objectives and priorities over this 5-year period and has addressed appropriate risks and opportunities. For the purposes of the Viability Statement, however, the Board continues to believe that 3 years is an appropriate period of assessment and considers that it has reasonable visibility of the market over a 3-year period to 31 December 2022. This period is consistent with available CPA forecasts and is aligned with the Group’s corporate planning process. The Group’s strategic plan includes an integrated model that incorporates the Income Statement, balance sheet and cash flow projections. Key KPIs and financial ratios are reviewed along with the ongoing appropriateness of all assumptions used. Scenario planning is undertaken along with stress testing against downside sensitivities. The Board has considered a number of downside scenario combinations. These include disaster recovery scenarios to ensure that mitigation and business continuity planning is effective.
The stress testing reflects the principal risks that could conceivably threaten the Group’s ability to continue operating as a going concern and focuses on scenarios that might give rise to sales volume reductions, deteriorating operating margins and increases in interest rates. The macro-economic and political background remains the Group’s key risk area and all of the Group’s other principal risks are covered within the same downside stress tests.
The stress testing applied in 2019 has taken full account of continuing Brexit uncertainty and an increase in market risk due to political and economic uncertainty. The stress testing undertaken consequently reflects a very cautious economic outlook. Scenario modelling remains a key part of the Group’s detailed approach to capital structure and forecasting. A significant stress test has been applied to reflect a dramatic economic downturn and to replicate the financial impact of the last recession in 2008. This has assumed significantly reduced sales volumes giving rise to a 33 per cent decrease in revenue over the next 3 years. None of the individual sensitivities applied impact the Directors’ assessment of viability. Even under the deep stress test all bank covenants are met and the gearing and net debt / EBITDA metrics remain sustainable. The Group would undertake significant mitigation measures in a deep downturn and this would create additional contingency.
In undertaking its review, the Board has considered the appropriateness of any key assumptions, taking into account the external environments and the Group’s strategy and risks. Based on this assessment, and taking account of the Group’s principal risks and uncertainties, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due for the next 3 years.
The result of the recent election, the parliamentary approval of the EU Withdrawal Bill and the United Kingdom’s subsequent exit from the EU on 31 January 2020 have removed key elements of uncertainty. However, further delays in the transition process or issues surrounding the negotiation of trade agreements could trigger renewed weakness in Sterling, a reduction in consumer confidence and a further slowdown in the UK economy. Marshalls continues to have strong market positions and a strategy of targeting those market areas where growth prospects are greatest. The potential impact of wider economic and political uncertainties has been considered in the assessment of the macro-economic environment. This assessment has included significant stress testing of financial models and risk mitigation measures within the Group’s supply chain. The Group has developed a detailed Brexit plan to mitigate the risk of raw material shortages.
The Directors have undertaken a robust, systematic assessment of the Group’s emerging and principal risks. These have been considered within the timeframe of 3 years, which aligns with our Viability Statement above. The risk process has included extended reporting during 2019 to facilitate greater focus on emerging risks and risk outlook. The reporting includes more detailed assessments of proximity (how far away in time the risk will occur) and velocity (the time that elapses between an event occurring and the point at which the effects are felt).
There have been no changes to the principal risks and uncertainties compared to prior years.
- Shareholder value
- Sustainable profitability
- Relationship building
- Organic expansion
- Brand development
- Effective capital structure & control framework
Macro-economic & political
- Delays in the awarding of and completion of contracts.
- Reductions in consumer confidence and order pipeline.
- The Group closely monitors trends and lead indicators, invests in market research and is an active member of the CPA.
- The Group benefits from the diversity of its business and end markets. The proactive development of the product range continues to offer protection.
- The Group has developed detailed plans to mitigate the risk of raw material shortages.
- The Group undertakes scenario planning to support improved business resilience.
- The Group continues to target those market areas where growth prospects are greatest, e.g. New Build Housing, Road, Rail and Water Management.
- The Group focuses on its supplier relationships, flexible contracts and the use of hedging instruments.
Cyber security risks
Inadequate controls and procedures over the protection of intellectual property, sensitive employee information and market influencing data. The failure to improve controls against cyber security risk quickly enough, given the rapid pace of change and the continuing introduction of new threats. Increasingly, all business are becoming more IT dependent.
Risk of data loss causing financial and reputational risk
- Emergence of new cyber security risks.
- Increased examples of data loss in the wider market.
- Use of IT security policies.
- The undertaking of regular cyber security risk audits by specialists and the quick introduction of mitigation controls and other recommended procedure updates.
- Sensitive data is currently restricted to selected senior and experienced employees who are used to handling such data.
- Appropriate tools and training procedures are in place to protect sensitive data when stored and transmitted between parties (e.g. encryption of hard drives, restricted USB devices, secure data transmission mechanisms and third party security audits).
- A continuous programme of awareness training for staff.
Security of raw materials
Brexit transition uncertainty continues to bring a risk to the security of raw material supply and the risk of shortages in some areas. Changes in the market for certain raw materials have created an increased reliance on imports. The Group is susceptible to significant increases in the price of raw materials, utilities, fuel oil and haulage costs and decreases in vehicle availability.
The increased costs could reduce margins and may be further impacted in the event of imbalances in the mix of regional activity. The risk of market demand exceeding raw material supply could lead to inefficient production, which could reduce margins.
- Temporary shortages and exchange rate cost inflation.
- Decreases in vehicle availability and labour / driver shortages.
- The Group benefits from the diversity of its business and end markets.
- We are collaborating with all EU-based Tier 1 and Tier 2 suppliers to ensure any supply risks from the Brexit transition process are minimised.
- A focus on governance and financial controls including a rolling “material risk” review process.
- The digitisation of the supply chain through the implementation of a best-in-class Supply Relationship Management System.
- The Group focuses on its supplier relationships, flexible contracts and the use of hedging instruments.
- The Group utilises sales pricing and purchasing policies designed to mitigate the risks.
- The Group uses specialist delivery vehicles.
The risk of temporary shortages is mitigated by proactive supply chain management and the use of alternative suppliers. However, cost inflation remains a risk as demand for raw materials increases against a backdrop of continuing economic uncertainty. All importers are faced with the same issues.
- The Group is exposed to the impact of climate change giving rise to unpredictable and extreme weather events.
- The longer-term implications of climate change give rise to the transition risk to address the challenges quickly enough.
- Adverse working conditions could give rise to disruption and delays that might reduce short-term activity levels. This could reduce sales and production volumes and therefore have an adverse effect on the Group’s financial results.
- The cost impact of the “Environmental Protocol“, and mitigation programmes could lead to increasingly expensive processes.
- Financial risk caused by adverse impact on margins and cash flows as well as sales and production volumes.
- Prolonged periods of bad weather (e.g. snow, ice and floods) which make ground working difficult or impossible.
- Changing public perceptions of the longer-term implications of climate change.
- The Group utilises centralised specialist functions to support mitigation plans and the management of relationships on commercial contracts. We are committed to water harvesting and recycling schemes and have an environmental target of not using any mains schemes.
- The development of resilience strategies for climate change is a key element of the Group’s Climate Change Policy.
- The Group has a continuing focus on new product development, including landscape water management.
- The development of the Group’s Water Management business is a significant opportunity. The acquisition of CPM has been a significant step
- Weather conditions continue to be closely monitored but are beyond the Group’s control. The Group is committed to the Science Based Targets initiative.
- Significant increase in public awareness of climate change and media coverage.
The increased pace of digital change in the market
The rapid pace of digital change in the market continues and there is an increasing risk that new emerging technology could lead to changes in the external marketplace.
Despite significant additional focus made by the Group in this area in recent years, there remains a risk that a new third party could use emerging digital technology to enter the market and transition more quickly and effectively.
The emergence of new digital third parties, possibly from outside the sector, and the more widespread availability of artificial intelligence technology.
- The Group’s digital strategy has been progressing well for several years.
- The Group is committed to further investment in this area; the digital strategy is a key part of the Group’s new 5 year Strategy.
- The introduction of new trading websites covering both Public Sector and Commercial and UK Domestic.
- The ongoing monitoring of competitive threats.
The pace of digital change in the market continues to increase and the risk is increasing. This is now seen as a major risk by the market.
The UK business has a number of key customers, in particular the national merchants. This is partly as a result of the consolidated nature of this.
The loss of a significant customer may give rise to a significant adverse effect on the Group’s financial results.
- Changes to market structure or trading relationships.
- New customer strategies.
- The Group focuses on brand and new product development, quality and customer service improvement.
- The Group maintains a national network of manufacturing and distribution sites.
- The Group undertakes ongoing reviews of trading policies and relationships and maintains constant communication with customers.
Although the underlying risk continues, the effective management of key relationships and the ongoing diversification of the business continue to mitigate the risk.
The Group has a number of existing competitors which compete on range, price, quality and service. Potential new low cost competitors may be attracted into the market through increased demand for imported natural stone products.
The increased competition could reduce volumes and margins on manufactured and traded products.
- Threat from new competitors and new technologies.
- Less demand for traditional products and the increased emergence of new digital business models and product solutions.key
- The Group has unique selling points that differentiate the Marshalls branded offer.
- The Group focuses on quality, service, reliability and ethical standards that differentiate Marshalls from competitor products.
- The Group has a continuing focus on new product development.
- The continued development of the Group’s digital strategy and its focus for customers and all stakeholders.
The more uncertain market environment has not led to any significant changes in competitive pressure.
Threat from new technologies & new business models
Reduction in demand for traditional products. Risk of new competitors and new substitute products appearing. Failure to react to market developments, including digital and technological advances.
The increased competition could reduce volumes and margins on traditional products.
- Less demand for traditional products and routes to market.
- Emergence of new competitors and new digital business models.
- Good market intelligence.
- Flexible business strategy able to embrace new technologies.
- Significant focus on research and development and new products.
- Development of the Group’s e-platform and developing digital strategy.
The ongoing diversification of the business, the continued development of the Marshalls brand and the focus on new products and greater manufacturing efficiency continue to mitigate the risk.
Corporate, legal & regulatory
Inadvertent failure to comply with elements of a significantly increased governance, legislative and regulatory business environment. The Group may be adversely affected by an unexpected reputational event, e.g. an issue in its ethical supply chain.
Significant increases in the penalty regime across all areas of business (e.g. competition law, the Bribery Act and GDPR) could lead to significant fines in the event of a breach. An environmental incident could lead to a disruption to production and the supply of products for customers. Such incidents could lead to prosecutions and increased costs and have a negative impact on the Group’s reputation.
- Increased regulatory and compliance requirements.
- Integration requirements for new acquisitions.
- Significant increases in the penalty regime for environmental incidents.
- Centralised legal and other specialist functions, the use of specialist advisers and ongoing monitoring and training.
- The Group has a formal Group sustainability strategy focusing on impact reduction.
- The Group employs compliance procedures, policies, ISO standards and independent audit processes which seek to ensure that local, national and international regulatory and compliance procedures are fully complied with.
- The Group uses professional specialists covering carbon reduction, water management and biodiversity.
The significant increase in governance and regulation continues to increase risk in this area. The Group continues to improve compliance procedures within all areas of the business. The potential impact of the Bribery Act continues to be a high profile risk area. It is receiving additional management focus.
Health and safety
Unexpected health and safety incident, possibly caused by human error or the actions of a subcontractor.
- Risk of harm to employee or subcontractor.
- Significant increases in penalty regime could lead to significant fines and prosecution.
- A major incident could lead to a disruption to production and a negative impact on the Group’s reputation.
- Integration requirements for new acquisitions.
- Significant increases in the penalty regime.
- Centralised specialist functions.
- Comprehensive 5-year health and safety strategy.
- Ongoing monitoring, training and health and safety audits.
- All senior managers receive the Marshalls Health and Safety and Environmental stage 3 training.
- The integration of CPM and Edenhall into the Marshalls Health and Safety Management System.
- The significant increase in regulation.
- Health and safety continues to be a high profile risk area at the heart of The Marshalls Way.