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.