Managing risk to deliver strategic objectives

The Group is dependent on the level of activity in its end markets. Accordingly, it is susceptible to economic downturn, the impact of Government policy, volatility in UK and world markets and supply chain and labour market issues. During 2023, higher interest rates and significant cost inflation have created a cost of living crisis for large elements of the UK population. This uncertainty has impacted market sentiment and this has been exacerbated by the increasing impact of wider geopolitical factors (including the conflict in Ukraine and the Middle East) and the impact of unprecedented levels of Government borrowing. These factors led to a significant reduction in new house building and lower private housing RMI activity.

The potential longer-term impact of macroeconomic uncertainty and continued cost inflation and higher interest rates could further reduce consumer confidence and demand and lead to lower activity levels. This could have an adverse effect on the Group’s financial results. There continues to be volatility in world markets and global economic uncertainty continues to be a risk. A continuation of high interest rates and inflation could lead to disrupted markets over a more extended period.

• Increasing inflation, gilt rates and interest rates.
• An escalation of the war in Ukraine and the Middle East and other increased global uncertainty.
• 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 also continues to offer protection.
• The Group undertakes scenario planning to support improved business resilience.
• The Group continues to focus on those market areas where growth prospects are greatest.
• Restructuring activities have reduced the Group’s cost base.
• Focus on innovation, new product development and the ESG-driven opportunities to drive competitive advantage.

No change in risk The UK Government’s stated objective is to support construction and significant investment support for infrastructure and housing is expected over the medium term; however, the short-term outlook for construction continues to be weak. The economic slowdown has resulted in a loss of business and consumer confidence in 2023, leading to delays in investment decisions. It appears increasingly likely that the current interest rate cycle has peaked leading to lower borrowing cost expectations which should support increasing activity levels in the Group’s key end markets.

Priorities

• Regular scenario planning to assess various market risks and disruptive events.
• Strategic reviews focusing on business resilience and diversification.
• Increase operational efficiency and maintain flexibility in the manufacturing network.

Constantly evolving and indiscriminate risk of cyber-attack.

Inadequate controls and procedures to protect 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 threat of ransomware and denial of service attacks, as well as any new cyber threats.

Heightened risk as IT is increasingly integrated into all business processes including the industrial network and equipment.

The introduction of AI-led attacks which make it harder to identify, prevent and mitigate due to the increased sophistication.

Operational disruption and financial loss due to the increased dependence on IT from the Group’s industrial and corporate networks and equipment. As well as data loss, fraud and fines causing financial and reputational risk.

• Emergence of new and evolving cyber security risks.
• Increased examples of data loss and security breaches in the wider market, with specific focus on manufacturing and construction.

• IT security policies and procedures aligned to internationally recognised standards.
• Regular external cyber security risk audits undertaken by specialists and the use of industry recognised controls and procedures.
• Annual penetration and vulnerability tests of external and internal systems and networks.
• A continuous programme of awareness, training, and phishing simulation for staff.
• Appropriate tools and training procedures are in place to protect sensitive data when stored and transmitted between parties.
• Industry-recognised cyber security tools and software.
• Cyber insurance to cover business interruption, loss of earnings and response services for the majority of the Group.
• Deployment of additional controls to help prevent and respond to a ransomware attack.
• Improvements and testing of our incident response process including business-wide simulations and playbooks.

No change in risk
The Group’s cyber maturity assessment continues to improve but cyber remains a high‑profile area. We are witnessing more incidents, especially in the construction industry. Improvements have been made to the cyber control environment in Marley to bring it in line with that of Marshalls; however, this continues to be an area of focus. Considerable effort continues to be given to promoting awareness of cyber security threats and our own IT security policies. The risk of data loss through new (or unknown) security threats continues to increase

Priorities
• Bolster our controls of our industrial network and equipment.
• Continue to develop cyber risk strategy.
• Alignment of controls in Marley.
• Improve our cyber security response plans and identify and rectify any gaps

Globally, the impact of the ongoing Ukrainian and Middle East conflicts coupled with general energy supply continues to impact material availability and has resulted in significant cost inflation. There continues to be availability issues with imported materials and longer term there is a risk of “carbon taxation”.

Cost inflation or interruption of supply could lead to customer dissatisfaction and reduce demand and margins.

• Temporary shortages and cost inflation, impacting materials and labour.
• Decreases in labour availability and skills shortages, particularly in engineering.

• The Group benefits from the diversity of its business and end markets.
• The acquisition of Marley has increased diversification and created additional procurement opportunities.
• Maintaining adequate, but not excessive, stocks.
• Collaboration with all EU-based tier one and tier two suppliers to ensure any supply risks are minimised.
• The digitalisation 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 long-term supply agreements, the use of hedging instruments and the use of flexible freight forwarding options.
• The Group utilises sales pricing and purchasing policies designed to mitigate the risks.
• Consideration of alternative technologies, including the reduction of cement content.

Reduced risk

Continued weak demand has led to reduced availability issues, although cost inflation has continued.

The risk of temporary shortages is mitigated by proactive supply chain management and the use of alternative suppliers.

Priorities
• Increase productivity and manufacturing efficiency.
• Continue to develop supply chain strategies to reduce risk

Increasing focus on ESG and the heightened awareness of environmental challenges, with increased operational and reporting requirements, hardening targets and greater scrutiny by investor and stakeholder groups. The acquisition of Marley means we are having to review and revise our targets and environmental roadmap to reflect the change in energy consumption profile. Risk of allocating insufficient resource and investment to support our environmental roadmap and product innovation towards adaptation. A summary of more specific environmental risks is included in the ESG section on pages 46 and 47.

Risk that investors and customers could reduce support if the Group failed to improve performance against targets or did not report appropriately. Risk of customers switching products away from those with a higher carbon footprint. Cost impact of the “Environmental Protocol” and mitigation programmes could lead to increasingly expensive processes.

• Negative feedback from stakeholders – loss of business and investment.
• Failure to meet internal targets.

• The Group utilises experienced, specialist staff to support the Group’s focus in this area.
• Clear governance structure and reporting processes in place. ESG Board Committee meetings supported by an experienced ESG Steering Committee with Executive and Board level representation. This is further supported by an ESG Delivery Team with responsibility for delivering the ESG strategy.
• Specialist third parties including the Carbon Trust and Verisk Maplecroft (see further details on pages 44 and 45).
• Climate risk analysis.
• Agreed carbon reduction plan and a set of KPIs established.
• The Group is committed to the SBTi and a new Group plan is now being developed to include the impact of the Marley business on our Group carbon footprint.
• Working groups established in all focus areas and controls being progressively embedded across the business, including the Climate Disclosures Working Group.

No change in risk

Significantly heightened focus from stakeholders, Government, customers and investors. Expectation of clarity over financial impact of strategic plans and transition risk. TCFD and CFD disclosure requirements.

Priorities
• Integration of Marley into the Group’s ESG policies and procedures.
• Re-calculation of carbon reduction targets and net zero timeline to include Marley.
• Ongoing assessment of climate change and risks for production, facilities, products and distribution.
• Monitor progress on strategy covering targets, products and business processes.
• Review of opportunities to improve ESG reporting

Lack of visibility of human rights within the supply chain. Increased global attention on modern slavery and diversity reporting. The continuing requirement to identify risk across the whole supply chain and the need to maintain reliable and consistent internal systems, processes and procedures. A summary of more specific social risks is included in the Sustainability section on pages 38 to 43.

Risk that stakeholders could reduce support if the Group failed to address issues around modern slavery and diversity appropriately.

• Negative feedback from stakeholders – loss of business and investment.
• Inadequate data to support systems and procedures.
• Increase in general level of disclosure required and administrative compliance.
• Failure to make tender lists if basic due diligence requirements are not met.

• Human rights strategy oversight by the ESG Steering Committee and revised ESG governance framework.
• The Group utilises experienced, specialist staff to support the Group’s focus in this area and the development of a comprehensive strategy.
• Regular internal cross-functional meetings to discuss progress, issues and focus areas.
• Specific supply chain human rights training for entire procurement team.
• Annual analysis of sourcing country risk.
• Focus on ethical sourcing processes with BES 6001.
• Working groups established in all focus areas

Reduced in risk

Focus from stakeholders, Government, customers and investors and increased operational and reporting requirements. Disposal of the business in Belgium reduces this risk for the Group.

Priorities
• Strategic partnership working with stakeholders including UK and overseas governments, NGOs and industry groups.
• Increase focus on the development of the Group’s comprehensive strategy.
• Develop robust IT platform for data collection and analysis.
• Use of independent third-party audits to cover more regions and product lines

Increasingly unpredictable weather conditions and extreme weather events. Increased incidence of flooding and droughts across the country. The longer-term implications of climate change give rise to the transition risk of not addressing the challenges quickly enough.

Disruption to supply chain and operations that might reduce short-term activity levels. Operational difficulties at manufacturing sites due to flooding and droughts. 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

• Diversity of the business.
• The Group utilises centralised specialist functions to support mitigation plans and the management of relationships on commercial contracts.
• Climate change risk analysis in place.
• Commitment to water harvesting and recycling schemes.
• The development of resilience strategies for climate change is a key element of the Group’s Climate Change Policy.
• The development of the Group’s Water Management business and the continuing focus on new product development

Reduced in risk

Weather conditions continue to be closely monitored but are beyond the Group’s control.

Significant increase in public awareness of climate change.

Priorities

• Continue to develop resilience strategies.
• Development of Civils and Drainage business

Reduction in demand for traditional products. Risk of new competitors and new substitute products appearing although this risk is set against a challenging 2024 outlook. Failure to react to market developments, including digital and technological advances. Competitor application of AI to add value to customer offer.

The increased competition could reduce volumes and margins on traditional products. Increased costs and production capacity tied up in redundant technologies. There is also the risk that a disruptor could use emerging digital technology to enter the market through non-traditional routes to market. Loss of business to competitors who deliver advantage through AI.

• Less demand for traditional products and routes to market.
• Emergence of new competitors and new digital business models.
• More widespread availability of artificial intelligence technology.

• Good market intelligence and ongoing monitoring of competitive threats.
• Flexible business strategy able to embrace new technologies.
• Significant focus on research and development and new products.
• A focus on the ease of doing business with the Group.
• Specification strategy to keep us close to customers.
• Use of AI in quotation process

No change in risk

The ongoing diversification of the business, the continued development of the Group’s brands and the focus on new products and greater manufacturing efficiency continue to mitigate the risk. The pace of digital change in the market continues to increase although this is balanced by a challenging outlook.

Priorities
• Increase pace of digital change and technological solutions (e.g. Dropship).
• Focus on cost reduction and projects that improve business flexibility and agility

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 supply chain or due to a health and safety incident, media, NGO exposé on a sector, region or supplier.

Significant increases in the penalty regime across all areas of business (e.g. health and safety, competition law, the Bribery Act and GDPR) could lead to significant fines and/or prosecution in the event of a breach.

A health and safety or environmental incident could lead to a disruption to production and the supply of products for customers. Such incidents could lead to prosecutions, 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 health and safety and environmental incidents. Penalty regimes becoming generally more punitive.

• Centralised legal and other specialist functions, the use of specialist advisers and ongoing monitoring and mandatory compliance training programmes.
• Centralisation of certain Marley functions into the central legal team.
• Regular reviews of policies and procedures.
• Regular compulsory data protection training.
• The Group has a formal Group ESG 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.

No change in risk

The significant increase in governance requirements and regulation continues to require additional management focus and robust compliance procedures within all areas of the business.

Priorities

• Continue to review and, where appropriate, renew all compliance processes and control effectiveness.

• Develop stress tests and crisis planning procedures

The Group has a number of existing competitors which compete on range, price, quality and service. Potential low price competitors may be attracted into the market despite the challenging outlook in 2024.

Competitive risk increases if we fail to achieve a sustainable competitive advantage through our approach to customer service and innovation.

Increased competition could reduce volumes and margins on manufactured and traded products.

Erosion of brand equity if the Group loses competitive advantage.

• Threat from new low-cost competitors and new technologies.
• Less demand for traditional products and the increased emergence of new digital business models and product solutions.
• Gross margins under pressure.

• 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 on customers and all stakeholders.
• Restructuring programme implemented in 2023 will reduce cost base to support market competitiveness

Increase in risk

Risk that competitors accept lower margins putting pressure on the Group to reduce pricing.

Priorities

• New product development.
• Research into green technologies.
• Review marketing and communications.
• Continue to review all elements of customer service, including the continuing development of KPIs.
• Develop low-cost supply chain routes.

Ineffective management of major development projects, from initial scoping to final delivery and benefits management, due to constraints that might impact the Group’s ability to absorb change. During 2023 such projects included the implementation of the D365 ERP system in the Marshalls businesses, the construction and commissioning of the dual block plant at St Ives and the successful implementation of a series of major restructuring programmes.

The extent and complexity of projects may cause delays and inefficiency. Potential failure to realise expected benefits from strategic business projects. Reputational damage, service under-delivery and staff retention risks.

• Delays to project delivery.
• Inefficiencies in resource utilisation.

• Robust and standardised project appraisal process.
• Change management framework and process in place.
• Programmes are continually reviewed with strong governance and Executive oversight, including project-specific steering committees where appropriate.

No change in risk

Although the underlying risk continues, effective control and the ongoing development of an appropriate management framework continue to mitigate the risk.

Priorities

• Develop strategies to manage growth.
• Ongoing reviews of acquisition strategy and the business model.

Unexpected health and safety incident, possibly caused by human error or the actions of a subcontractor. Ongoing risks in relation to maintaining safe working environments and ensuring compliance with health and safety legislation. Ongoing welfare and mental health of employees.

Risk of harm to all stakeholders, including on-site employees and subcontractors. 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.

• Significant increases in the penalty regime.
• Increase in HSE contravention notices

• Centralised specialist functions (including Marley) and clear policies in place.
• Regular communication and support for employees, including those working from home.
• Mental Health First Aiders.
• Group-wide health and safety strategy recognised through OGSM framework.
• Ongoing monitoring, training and health and safety audits.
• Introduction of a digital management system for enhanced data collection and analysis.
• All senior managers receive the Marshalls Health and Safety and Environmental stage 3 training.

No change in risk

Health and safety continues to be a high profile risk area. Increased visits from HSE to our factories over the last two years. Continuing risks include mental health and employee welfare.

Priorities

• Ensure health and safety embedded in the “day-to-day” culture.
• Improve reporting structures.
• Implementation of High Risk Activity (“HRA”) programmes.
• Implement Group health and safety management system into Marley.

Nature of risk and potential impact Being unable to attract and retain people with the right skills to deliver the business strategy. This risk increases in a competitive market and where there are continuing skills shortages in certain areas. Ongoing risks and requirements concerned with training, development and succession planning. Implications of technological change and automation.

Inability to recruit people with required skills, calibre and potential and insufficient training and development could lead to reduced productivity and efficiency. Implications for employee health and wellbeing and overall workforce morale. Potential risk to the Marshalls employer brand

• Reduced productivity and efficiency due to skills gap.
• Increased levels of voluntary staff turnover.
• Increased stress levels within workforce and potentially absenteeism.
• Employee relations becomes increasingly key as we drive change

• Focused human resources department with experienced staff and specialist skills.
• Group People and Organisational Plan with focused plans in each area.
• Strong employee and trade union relationships.
• Strong communication channels and employee feedback through the EVG.
• Regularly seeking employee feedback via surveys and through the EVG.
• Ongoing focus on training, apprenticeships and staff development and leadership potential

Increase in risk

People continue to be a priority focus for the Group including development, health and safety and wellbeing, especially against the backdrop of business challenges seen throughout 2023. This includes multiple restructuring exercises which have adversely impacted engagement levels. The labour market continues to be competitive with people increasingly seeking roles and organisations which offer a wider proposition including development.

Priorities

• Focused people plans across the Group building on retention and recruitment strategies.
• Focus on succession planning, development and diversity in the leadership teams.
• Continued effective communications.