UK Withdrawal from the EU
The UK’s withdrawal from the EU has the
potential to significantly change the terms of
trade which currently exist between the EU and
the United Kingdom. The Group will continue
to monitor the ongoing political situation
and upcoming trade negotiations. While the
outcome of these talks is difficult to predict, the
Group has considered a number of different
scenarios and appropriate mitigation plans
have been developed.
Our fundamental objective is to ensure that
we offer continuity of service and supply to
our customers, wherever they are, and the
purpose of this statement is to provide further
information on how we plan to achieve this
objective.
Background
Although we are a UK based business
we purchase a meaningful amount of our
commodities from the EU, which leaves us
exposed to movements in Sterling and Euro
quoted commodities. Our supply chain is also
primarily UK based although we do have a
seasonal labour workforce from EU countries in
our Sweet Treats business.
Focus areas
Our initial risk assessment identified a number
of key areas that may potentially be impacted.
If a UK-EU Free Trade Agreement (FTA) is
not agreed by the end of the 2020 transition
period, and no extension of talks is agreed, the
default trading scenario implies the application
of tariffs in line with World Trade Organisation
(WTO) rules. This may have implications for the
Group which will need to be managed through
its sourcing policy and pricing model and by
utilising operational flexibility to realign supply
chains as appropriate. Reduced access to EU
labour supply and a more restrictive migration
policy may result in a tighter or more expensive
UK labour market.
We recognise that the current climate makes
the final outcome of the negotiations between
the UK and the EU more uncertain. While we
would prefer a negotiated trade deal, we are
prepared for any potential outcome, including
trading on WTO terms. Our established Brexit
Committee has fully assessed each area and
the likely impacts have been evaluated. The
Group has taken reasonable steps to mitigate
the potential risks. The key risks identified, and
the actions taken are as follows:
Trading model
We made minor amendments to our internal
trading model within Europe (principally the
Republic of Ireland (ROI)) to ensure that our
ability to move UK manufactured product into
the EU and vice-versa is not at risk. These
amendments include reviewing which ports
and airports are best placed to offer the
appropriate service levels as well as ensuring
that we have the right Group companies (i.e.
those with full EU recognition) looking after
our imports and exports. We do not expect
customers or suppliers to be significantly
affected by our changes.
Customer service and supply chain
We worked with our customers and supply
chain partners to prepare for a WTO trading
arrangement. We developed contingency plans
to ensure supply continuity and the effective
operation of our manufacturing sites and the
likely resulting confusion and delays at borders.
These included a programme of building our
inventory of finished goods and critical raw
materials for our key products, which we
are able to execute while closely monitoring
political developments. We also secured
additional warehousing capacity in ROI to
ensure continuity of supply.
Tariffs
We have researched the implications of
potential tariffs and considered the potential
impact on our cost base and explored
strategies to mitigate them, should the UK
be required to trade on WTO terms. The
actions we have undertaken include a review
of our supply chain for components and raw
materials, a plan to build stocks in-country,
i.e. ROI, prior to the date the UK leaves the
EU and changes to systems and processes to
capture and report on the new tariffs under any
new trading arrangement.
Regulatory
The Brexit Committee has reviewed the
potential regulatory impact of moving to WTO
terms on our products, which are produced
and packaged in the UK. We have put in place
measures to ensure our products remain
compliant so as to protect customer service
levels.
Viability statement
The Board has determined that the most
appropriate period over which to assess the
Company’s viability, in accordance with the UK
Corporate Governance Code, is three years.
This is consistent with the Group’s business
model which devolves operational decisionmaking
to the businesses, each of which sets
a strategic planning time horizon appropriate
to its activities which are typically of three
years duration. The Board also considered the nature of the Group’s activities and the
degree to which the businesses change and
evolve in the relatively short-term. The Board
considered the Group’s profitability, cash flows
and key financial ratios over this period and
the potential impact that the principal risks and
uncertainties set out in this risk management report could
have on the solvency or liquidity of the Group.
Sensitivity analysis was applied to these
metrics and the projected cash flows were
stress tested against a number of severe but
plausible scenarios. As of 28 March 2020,
£92m of committed borrowing facilities
available to the Group were undrawn. The
Board considered the level of performance
that would cause the Group to breach its
debt covenants (see note 2 of the financial
statements in the 2019/20 Annual Report) and a variety of factors that
have the potential to reduce trading profit
substantially. These included the rate and
success of the Group’s strategy; and macroeconomic
influences such as fluctuations in
world currency, commodity markets, climate
change, COVID-19 and the implications of the
UK’s withdrawal from the EU.
The Board has considered the principal risks
or uncertainties and the potential impact of
these on the Group’s profitability or available
cash resources. In assessing the Group’s
viability, the Board also considered all the
severe but plausible scenarios simultaneous
materialising and for a sustained period, in
conjunction with mitigating actions such as
reducing discretionary costs. The likelihood of
the Group having insufficient resources to meet
its financial obligations and remain within its
covenants is unlikely under this analysis.
Based on this assessment, the Board confirms
that it has a reasonable expectation that the
Group will be able to continue in operation
and meet its liabilities as they fall due over the
three-year period to 1 April 2023.