Brexit risks, convenience food, volume, material sourcing, labour availability, viability statement

Greencore Group plc – Annual report – 27 September 2019

Industry: food and drink

Chairman’s Statement (extract)
Brexit
As I write, the nature of the UK’s exit from the EU remains unresolved. As a Board, we continue to monitor closely its potential implications on the business, including, in particular, any potential changes to costs in the supply chain and the availability and cost of labour. It remains true that there will be Brexit related challenges for everyone involved in the UK food industry, however we are confident that we are well positioned to manage any prospective challenges and to work with our customers to exploit the opportunities that may arise.

Operating and Financial Review (extract)
Brexit
The Group has been engaged in Brexit planning since the result of the referendum was first announced and monitors closely the potential implications of Brexit on its business, particularly in the areas of volume, material sourcing and labour availability. A multi-functional team meets on an ongoing basis to assess Brexit-related risks, build mitigation plans, test alternative scenarios and support dialogue with our customers, government, the wider industry and other stakeholders.

The Group continues to believe that the risks from Brexit are manageable in the medium-term, while acknowledging potential near-term challenges associated with a disorderly exit.

The direct financial impact associated with preparation for Brexit was modest in the period. Some incremental working capital outflows in H1 19 unwound as the financial year progressed.

Risks and Risk Management (extract)
Brexit
Since the UK referendum result on membership of the EU in June 2016 we have been engaged, via a well-established Brexit taskforce, in planning for the UK’s exit from the EU. Our Brexit taskforce brings together a multi-functional team on an ongoing basis to assess Brexit-related risks, build mitigation plans, test alternative scenarios and support dialogue with our customers, the government, the wider industry and other stakeholders.

In recent months we have focused on the areas that could have the most direct impact on our ability to service customers at the time the UK leaves the EU. These areas include maintaining effective customer service, efficient movement of goods, managing the impact of potential tariffs and quota restrictions and ensuring compliance with regulatory frameworks.

Longer term, we have identified three primary areas of potential risk:

Volume
We are largely a ‘domestic UK’ business from a production and commercial standpoint, as the vast majority of the consumer products we produce in the UK are sold in the UK. We also believe, based on our experience from the last UK recession, that volumes in the categories in which we operate would be relatively resilient to any headwinds to the UK economy following Brexit. We therefore anticipate limited risk to our volumes post Brexit.

Material sourcing
We estimate that we source approximately 80% of our raw materials from UK based suppliers. Even taking account of raw materials which are in turn sourced from outside the UK by our suppliers, we estimate that less than one third of our raw materials are imported from EU-27 countries. For these materials, we have made alternative sourcing arrangements and have a well-developed contingency plan, which includes forward buying, qualification of alternative suppliers, storage of raw materials, and flexibility in recipes. We are also confident in our ability to largely pass through any associated cost increases, given our track record of inflation management with our customers, and the heightened attention on continuity of supply during any transition period.

Labour availability
We note the increased pressure on the availability of lower skilled labour in recent years and the reduction in migration from EU-27 countries since the Brexit referendum. While we anticipate that these trends will continue, we expect this to play out over a period of years and are adapting our labour model accordingly.

Consideration of these risks has been incorporated into the Group’s principal risks as appropriate.

Viability statement
In line with the Provision C.2.2. of the 2016 Code, the Directors have carried out a rigorous review of the prospects of the current business and its ability to meet its liabilities as they fall due over the medium term. In undertaking this review, the Directors have concluded that a three year timeframe continues to be an appropriate period for this assessment given that this is the typical period for visibility of commercial arrangements with the Group’s customers in the Group’s strategic planning process. The objectives of the annual strategic planning process are to consider the key strategic choices facing the Group and to build a consolidated financial model with various scenarios, taking into account the principal risks and uncertainties facing the Company, including Brexit, which may threaten the Company’s solvency, liquidity, cash flow and business model.

Assumptions are built for the Group Income Statement, Balance Sheet and cash flow. These are rigorously tested by management and the Directors. Sensitivity analysis has been applied to reflect the potential impact of some of the principal strategic and commercial risks of the Company as described on pages 40 and 41. These risks could affect the level of sales and profitability of the Company and the amount of capital required to deliver them. A model of financing requirements is also built for the same
time period taking into account the base plan and sensitivities against this, together with the likelihood of being able to refinance maturing committed facilities. Based on the results of this analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period of their assessment.