Commercial Hard Landscaping & Construction Consumer Gardens & Driveways Corporate Home About Us Risk Management and Principle Risk 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 value Sustainable profitability Relationship building Organic expansion Brand development Effective 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 Key risk indicators Mitigating factors Change in risk in the year 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 Key risk indicators Mitigating factors Change in risk in the year 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 Potential impact Key risk indicators Mitigating factors 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 Key risk indicators Mitigating factors Change in risk in the year 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 Key risk indicators Mitigating factors Change in risk in the year 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 Key risk indicators Mitigating factors Change in risk in the year 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 Key risk indicators Mitigating factors Change in risk in the year 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 Key risk indicators Mitigating factors Change in risk in the year 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 Key risk indicators Mitigating factors Change in risk in the year 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 Key risk indicators Mitigating factors Change in risk in the year 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 Key risk indicators Mitigating factors Change in risk in the year 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. 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