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 Board plays a central role in the Group’s risk review process, which covers emerging risks and incorporates scenario planning and detailed stress testing.
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 updated by the full Executive Management team at least every six months and the overall process is the subject of regular review by the Board. 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, regularly attends the risk review meetings. The process continues to be a robust mechanism for monitoring and controlling the Group’s principal risks, and for challenging the potential impact of new emerging risks. All risks are aligned with the Group’s strategic objectives, each risk is analysed in terms of likelihood and impact to the business and the determination of a “gross risk score” enables risk exposure to be prioritised. The Marley business has historically utilised a similar risk management process, and this has been mapped across and embedded in the Marshalls risk management process.
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 subject 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 detailed 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.
The Group has 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 is undertaken on a rolling basis. Such testing includes key controls over access to, and changing permissions on, base data and metadata
After considering the principal risks on pages 69 to 75, the Directors have assessed the prospects of the Group over a longer period than the period of at least twelve 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.
For the purposes of the Viability Statement, the Board continues to believe that three years is an appropriate period of assessment as this aligns with the current planning horizon. Although our central forecasting models cover a 5-year period, it remains the case that there is less visibility beyond three years. The Construction Products Association’s forecasts currently go out to 2024. This remains compatible with the five-year Strategy and the longerterm objectives for our strategic growth pillars over a five-year period. The Group’s financial forecast includes an integrated model that incorporates the income statement, balance sheet and cash flow projections.
The detailed stress testing reflects the principal risks that could impact the Group and could conceivably threaten the Group’s ability to continue operating as a going concern. The assessment concluded that the deteriorating macro-economic environment is the key risk for this purpose and, in response to this, two scenarios have been run, namely a “reasonable worst-case scenario” and a “reverse stress test.”
The reasonable worst-case scenario comprises a significant stress test sensitivity run against the base case model. This sensitivity reflects a scenario that is worse than the assumptions in the CPA’s lower scenario from the 2022/2023 Winter forecast. This scenario results in a reduction in Group revenue of 9 per cent in 2023 and 12 per cent in 2024 against the base case forecast. In total this reflects a reduction in revenue of £178 million over the two years. A contribution “drop-through” rate has been applied based on the operational gearing of each business unit. Under the downside model, net debt reduces to £234 million by the end of 2023, and bank covenants are still comfortably met. The net effect of reduced operating profit and increased interest is mitigated by reduced tax and dividend cash flows. Gearing reduces to 34.7 per cent at the end of 2023, and there remains comfortable headroom against bank facilities and bank covenants are still comfortably met with the net debt to EBITDA covenant peaking at 1.9 in December 2023. In this scenario, we would have £27 million headroom against EBITDA and £96 million against net debt.
In practice, such a downside scenario would see the Group instigate certain mitigation measures. These might include significant reductions in fixed overheads, lower capital expenditure and actions to further reduce capacity, for example reducing shifts, production lines and potentially mothballing or closing sites.
The reverse stress test scenario aims to identify a deeper downside trading position that would give rise to a covenant breach. Against the base budget revenue reductions of 18 per cent would be required across 2023 and 2024 (all other things remaining unchanged) to increase the pre-IFRS 16 netdebt: adjusted EBITDA covenant to 3 times at 31 December 2023. This scenario equates to just under twice the reduction in revenue (in percentage terms) assumed in the CPA’s lower scenario from the 2022 Winter forecast.
This reverse stress test scenario reduces revenue by approximately £300 million over 2023 and 2024. Under this scenario, gearing peaks at 41 per cent at the end of 2023. There remains reasonable headroom against bank facilities, but the net debt: EBITDA bank covenant marginally breaches 3 times at 31 December 2023. The model assumes no further cash mitigation (e.g. reduced capital expenditure). Dividends have been reduced in line with the two times cover policy but the Board would retain the ability to further reduce or cancel dividends in order to maintain liquidity.
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 three years.
The reverse stress test scenario provides an indication of the scale of downturn that could be absorbed by the Group without taking action to reduce cash flows on capex and dividends or undertake more severe restructuring. The analysis provides the required evidence that the Directors’ assessment that the going concern assumption remains appropriate and supports a positive conclusion for the longer-term Viability Statement.
The Directors have undertaken a robust, systematic assessment of the Group’s emerging and principal risks. These have been considered within the timeframe of three years, which aligns with our Viability Statement. The risk process has increasingly allocated 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).
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 2022, higher interest rates and significant cost inflation (particularly in relation to energy costs) 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 geo-political factors (including the conflict in Ukraine) and the impact of unprecedented levels of Government borrowing.
Mandatory human rights disclosure from 2022 and increased focus on modern slavery and diversity reporting. Lack of visibility of human rights within the supply chain.
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 [•] and [•].
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
No change in risk
Significantly heightened focus from stakeholders, Government, customers and investors and increased operational and reporting requirements.
• Develop strategic partnerships. These include the UN Global Compact (“UNGC”) together with 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
Fast growing and indiscriminate risk of cyber attack. 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 threat of ransomware and denial of service attacks and new cyber threats. IT is increasingly integrated into all business processes.
Operational disruption and financial loss. The Group’s industrial network is becoming more IT dependent and the risk is one of data loss causing financial and reputational risk
Globally, the impact of the ongoing Ukrainian conflict and general energy supply continues to impact material availability and has resulted in significant cost inflation. There continues to be market capacity stresses for sand, cement and other raw materials. Longer term there is a risk of “carbon taxation.”
Cost inflation could lead to customer dissatisfaction and reduce demand and margins.
Weakening 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.
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 now 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.
No change in risk
Weather conditions continue to be closely monitored but are beyond the Group’s control. Significant increase in public awareness of climate change.
• 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 2023 outlook. Failure to react to market developments, including digital and technological advances.
The increased competition could reduce volumes and margins on traditional products. Increased costs and production capacity tied up in redundant technologies. 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 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. The pace of digital change in the market continues to increase although this is balanced by a challenging outlook.
• Collaboration with universities to develop new products and processes.
• 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.
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.
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.
• Continue to 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 new low cost competitors may be attracted into the market although the 2023 outlook is challenging. In addition, cost inflation and higher energy costs are now impacting all suppliers and consumers.
Competitive risk increases if we fail to maintain high levels of customer service.
Increased competition could reduce volumes and margins on manufactured and traded products.
Reputational damage if the Group loses competitive advantage.
• 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.
• Restructuring programme implemented in Q4 2022 will reduce cost base by approximately £10 million
The impact of cost inflation potentially changes competitive pressure in certain areas.
• 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
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 2022 such projects included the integration of Marley, the construction of the dual block plant at St. Ives and the successful implementation of a restructuring programme, which has included the mothballing of the Sandy manufacturing site
The extent and complexity of projects may cause delays and inefficiency. Potential failure to realise expected benefits from strategic business projects. Reputational damage, service underdelivery and staff retention risks.
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.
• 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. Additional risks introduced in relation to the acquisition of Marley. Ongoing risks in relation to COVID-19 and the need to maintain safe working environments. Ongoing welfare and mental health of employees
No change in risk
Health and safety continues to be a high profile risk area. Continuing risks arising from COVID-19, including mental health and employee welfare. Development in risk profiling procedures leading to improved root cause analysis.
• Ensure health and safety embedded in the “day‑to-day” culture.
• Improve reporting structures.
• Full integration of Marley into the Group’s health and safety and employee wellbeing protocols.
• Skill shortages and lack of diversity within the workforce.
• Increased stress levels within workforce leading to employee absenteeism.
• Increased levels of staff turnover.
No change in risk
Increasingly competitive labour market.
The emergence of challenges for employees caused by new working requirements, health and safety regulations and operational working practices. These include issues that could give rise to heightened employee wellbeing issues and risks to mental health.
• Develop retention and recruitment strategies.
• Effective marketing and communications.
• Focus on succession planning, internal development and diversification in the leadership teams.
• Integration of Marley into all of the Group’s “People” strategies, policies and procedures