Managing risk to deliver strategic objectives

Approach to risk management

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.

Our process

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 Board and 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, regularly attendsthe risk review meetings. The conclusion of KPMG is that the process continues to be a robust mechanism for monitoring and controlling the Group’s principal risks and for challenging thepotential impact of new emerging risks. All risks are aligned with the Group’s strategic objectives and 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 Group seeks to mitigate exposure to all forms of strategic, financial and operational risk, both external and internal. Theeffectiveness 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 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 assessmentof 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.

Framework

The board
determines the Group’s approach to risk, its policies and the procedures that are put in place to mitigate exposure to risk.
The audit committee
Has delegated responsibility from the Board to oversee risk management and internal controls;
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.
Executive directors
Are responsible for the effective maintenance of the Group’s Risk Register;
Oversee the management of risk;
Monitor risk mitigation and controls; and
Monitor the effective implementation of action plans.
Internal audit
Independently review the effectiveness of internal control procedures;
Report on effectiveness of management actions; and
Provide assurance to the Audit Committee.
Operational managers
Are responsible for identification of operational and strategic risks;
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).

Viability Statement

After considering the principal risks, 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.

The Group’s 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 2023. The Group’s strategic plan includes an integrated model that incorporates the Income Statement, balance sheet and cash flow projections.

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 impact of COVID-19, Brexit uncertainty and a general background macro-economic and political uncertainty all remain and combine to be the key risk areas and all of the Group’s other principal risks are covered within the same downside stress tests.

The stress testing applied in 2020 has taken full account of COVID-19 and continuing Brexit uncertainty. After the lockdown at the end of March, the Group prepared a series of downside scenario models – comprising integrated P&L, balance sheet and cash flow modelling covering the period until the end of 2021. A range of downside models were prepared covering different levels of sales reduction, over different periods and for different lengths of time. Certain models also had slower degrees of recovery during 2021.

Each downside scenario factored in the cash benefit of expected short-term furlough arrangements and the utilisation of the UK Government’s tax deferral schemes (covering VAT and other taxes). In addition, the short-term cash forecasts benefited from the impact of lower corporation tax payments, assumed reductions in capital expenditure and no dividend payments in both June 2020 and December 2020.

In each scenario model, there was significant headroom (compared with the new bank committed facilities) at the deepest downside point.

On 1 May 2020, the Group signed agreements with each of NatWest, Lloyds and HSBC for an additional £30 million, 12 month committed revolving credit facility with each, with a 12 month extension option. These additional facilities comprised £90 million and significantly strengthened the Group’s headroom. All our banking partners continue to be supportive and recognised that the impact of COVID-19 is a short-term issue and going forward they remain of the opinion that Marshalls will continue to be in a strong market position once the short-term impacts of the pandemic are behind us. Since the half year trading has been significantly better.

A further significant stress test sensitivity has been run at the end of 2020 against the base medium-term forecast. The stress test assumes a sales revenue sensitivity of 20 per cent over each of the next two years (cumulatively 64 per cent against forecast 2020 revenue) – with current growth rates assumed to apply on the revised base position from 2023. In the wake of COVID-19, the stress testing has used sales volume and margin sensitivities that aim to replicate the impact of the last sustained recession and are similar to the reductions that took place between 2007 and 2009. This sensitivity leads to a reduction in revenue of around £300 million over 2021 and 2022 and, over the same two-year period, leads to a reduction in operating margin to 5.5 per cent in 2022. This is well in excess of the reduced revenue experienced in 2020 as a consequence of COVID-19.

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.

In relation to Brexit, 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 risk 1 below. 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.

Principal risks and uncertainties

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 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 COVID-19 pandemic has inevitably challenged the Group’s risk framework and the effectiveness of mitigation controls. Certain significant risks and uncertainties have changed in comparison to prior years and the Group’s procedures and controls have held up well. In August 2020, KPMG undertook an internal audit review of the Group’s response to COVID-19 in relation to controls and governance. The audit’s conclusion was that Marshalls’ response to COVID-19 was underpinned by good governance. Key controls in high risk areas, such as resource planning, supplier terms, financial modelling and forecasting, were supported by higher levels of scrutiny and stakeholders were consulted throughout. Controls were re designed in response to the logistical challenges of home working.

Strategic Objectives

  • Shareholder valueShareholder value
  • Sustainable profitabilitySustainable profitability
  • Relationahip buildingRelationship building
  • Organic expansionOrganic expansion
  • Brand developmentBrand development
  • Effective capital structure & control frameworkEffective capital structure & control framework

Macro-economic & political

Nature of risk

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, interest rates, volatility in world markets and any continuing issues
following the UK’s departure from the EU.

 

Potential impact
The potential longer-term impact of Brexit or wider global macro-economic tension and uncertainty could lead to lower activity levels which could reduce sales and production volumes. This could have an adverse effect on the Group’s financial results. The impact of supply
chain issues, exchange rate fluctuations and increased interest rates could also have an adverse impact on material costs.
Key risk indicators
  • Delays in the awarding of and completion of contracts.
  • Reductions in consumer confidence and order pipeline.
Mitigating factors
• 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 support its supply chain following the UK’s departure from the EU and 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.
Change in risk in the year
No change in risk
The sharp reduction in sales due to COVID-19 in the second quarter of 2020 was reversed from quarter
3 and the second half of the yearsaw significant sales growth and increase in activity levels throughout
the sector. The UK Government’sstated objective is to support construction and manufacturing to fuel economic growth and significant investment support for infrastructure and housing has been announced. There continues to be volatility in world markets and global economic uncertainty continues to be a risk.

Prolonged impact and further waves of the COVID-19 virus

Nature of risk

Continued disruption caused by further longer-term effects of COVID-19 giving rise to further
lockdowns and Government restrictions.

Potential for further waves caused by new virus variants.

Potential impact

Longer than expected disruption could lead to prolonged uncertainty and lower activity
levels which could reduce sales and production volumes. This could have an adverse effect on
the Group’s financial results.

The requirement for longer-term home working could give rise to increased wellbeing or mental health issues.

Key risk indicators
• Government policy and delays in the full implementation of the vaccine programme.
• Delays in the awarding and completion of contracts.
Mitigating factors
• The Group closely monitors trends and lead indicators.
• The Group has detailed business continuity plans to maintain flexibility and appropriate working practices and procedures.
• The Group undertakes ongoing scenario planning to assess business resilience and risks that could lead to business disruption.
• The Group focuses on communication with employees and other stakeholders, and maintains strong customer and supplier relationships.
Change in risk in the year
Increased risk
Trading recovered strongly in the second half of 2020 and this has continued into the first quarter of 2021. Construction and manufacturing have been designated as essential industries and the Group has already
demonstrated strong business resilience. However, further delays could generate renewed uncertainty.

Cyber security risks

Change in risk in the year
No change in risk
Cyber risk has increased duringthe COVID-19 pandemic. Thisremains a high profile area and considerable focus continues tobe given to promoting awareness of IT security policies. The risk is mitigated by the extension of controls. The risk is fast growing and indiscriminate and the perception is that the risk of data loss through new (or as yet unseen) security threats continues to increase.
Nature of risk

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.

Potential impact

Risk of data loss causing financial and reputational risk

Key risk indicators
  • Emergence of new cyber security risks.
  • Increased examples of data loss in the wider market.
Mitigating factors
• Use of IT security policies.
• Regular cyber security risk audits undertaken by specialists and the use of mitigation controls and other recommended procedure updates. The Group’s “cyber maturity assessment” score has increased during the last year and Marshalls is accredited with “Cyber Essentials” approval.
• Restriction of sensitive data 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

Nature of risk

Although the UK has now left the EU, there remains 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 tariffs for certain commodities and
significant increases in the price of raw materials, utilities, fuel oil and haulage costs and decreases in vehicle availability. Longerterm risk of “carbon taxation.”

Potential impact

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.

Key risk indicators
  • Temporary shortages and exchange rate cost inflation.
  • Decreases in vehicle availability and labour / driver shortages.
Mitigating factors
  • 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.
Change in risk in the year

No change in risk

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.

ESG focus and increasing requirements

Nature of risk

Increasing focus on ESG and the heightened awareness of environmental challenge which
is translating into politics and consumer behaviour. Risk of allocating insufficient resource and investment to
support the Science-Based Targets and other environmental protocols. Mandatory human rights disclosure from 2022 and increased focus on modern slavery and diversity reporting.

Potential impact

Hardening targets and greater consideration amongst investor and stakeholder groups. Risk
that investors and customers could reduce support if the failed to improve performance against targets or
did not report appropriately. Risk of customers switching products away from those with a higher carbon footprint.

Key risk indicators

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

Mitigating factors
• The Group utilises experienced, specialist staff to support the Group’s focus in this area.
• Agreed carbon reduction plan and a set of KPIs established.
• The Group is committed to the Science Based Targets initiative.
• Working groups established in all focus areas and controls being progressively embedded across the business.
Change in risk in the year

Increased risk

Significantly heightened focus from stakeholders, Government, customers and investors and increased operational and reporting requirements.

Climate change

Nature of risk
  • The increase in frequency and impact of extreme weather events such as flooding, drought
    and coastal erosion. The longer-term implications of climate change give rise to the transition risk to address the challenges quickly enough.
  • The longer-term implications of climate change give rise to the transition risk to address the challenges quickly enough.
Potential impact
  • 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.
Key risk indicators
  • 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.
Mitigating factors
• The Group utilises centralised specialist functions to support mitigation plans and the management of relationships on commercial contracts.
• Climate change risk analysis in place.
• 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 development of the Group’s Water Management business and the continuing focus on new product development.
Change in risk in the year
No change in risk
  • 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.

Threat from new technologies & new business models

Nature of risk

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.

Potential impact

The increased competition could reduce volumes and margins on traditional products.

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.

Key risk indicators
  • 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.
Mitigating factors
  • 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.
Change in risk in the year

No change in risk

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 and the risk is increasing. This is now seen as a major risk by the market.

Corporate, legal & regulatory

Nature of risk

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 or due to a health and safety incident.

Potential impact

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.

Key risk indicators
  • Increased regulatory and compliance requirements.
  • Integration requirements for new acquisitions.
  • Significant increases in the penalty regime for environmental incidents.
Mitigating factors
  • 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.
Change in risk in the year

No change in risk

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

Competitor activity

Nature of 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.

Potential impact

The increased competition could reduce volumes and margins on manufactured and traded products.

Key risk indicators
  • 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
Mitigating factors
  • 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.
Change in risk in the year

No change in risk

The more uncertain market environment has not led to any significant changes in competitive pressure.

Our Customers

Nature of risk

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.

Potential impact

The loss of a significant customer may give rise to a significant adverse effect on the Group’s financial results.

Key risk indicators
  • Changes to market structure or trading relationships.
  • New customer strategies.
  • Customer feedback and changing expectations
Mitigating factors

• 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
• We invest in market research to ensure that we have a strong understanding of end user requirements and the quality of our distribution network

Change in risk in the year

Although the underlying risk continues, the effective management of key relationships and the ongoing diversification of the business continue to mitigate the risk.

Health and safety

Nature of risk

Unexpected health and safety incident, possibly caused by human error or the actions of a subcontractor.
Ongoing risks in relation to COVID-19 and the need to maintain safe working environments.
Ongoing welfare and mental health of employees.

Potential impact
  • Risk of harm to all stakeholders, including on-site employees and subcontractors.
  • Negative impact of working from home for certain employees.
  • 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.
Key risk indicators
  • Integration requirements for new acquisitions.
  • Significant increases in the penalty regime.
Mitigating factors
• Centralised specialist functions.
• Regular communication and support for employees, including those working from home. Mental health first aiders. “Return to work” strategy and policies in place.
• 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.
Change in risk in the year
No change in risk
  • Health and safety continues to be a high profile risk area. Increased risks arising from COVID-19, including mental health and employee welfare.

People Risks

Nature of risk
Ongoing risks and requirements concerned with training, development and succession planning.
Implications of technological change and automation. Welfare and mental health related risks associated with the COVID-19 pandemic.

 
Potential impact
• Risk of reduced skills and inadequate training potentially leading to reduced productivity and efficiency.
• Implications for employee health and wellbeing and overall workforce morale.
• Potential risk to the Marshalls brand.
Key risk indicators
• Skill shortages and lack of diversity within the workforce.
• Increased stress levels within workforce leading employee absenteeism.
• Increased levels of staff turnover.
Mitigating factors
• Focused Human Resources department with experienced staff and specialist skills.
• Strong employee and trade union relationships.
• Strong communication channels and employee feedback through the Employee Voice Group.
• Regular feedback questionnaires supported by a third party provider.
• Independent “Safecall” employee helpline.
• Focus on training, apprenticeships and ongoing staff development and leadership potential.
Change in risk in the year
No change in risk
The impact of COVID-19 has created new challenges for employees with changed 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.