Viability statement, facilities and covenants, and rolling scenario modelling, scenarios described with link to principal risks including COVID – 19, climate change and geopolitical developments

RS Group plc – Annual report – 31 March 2022

Industry: distribution

Viability statement

Assessment of prospects

The Group’s strategic priorities are focused on delivering sustainable growth and superior returns for all our stakeholders and include a number of initiatives. They are discussed in more detail on pages 28 to 31.

Our business model, as described on pages 26 and 27, is structured so that the Group is a global omni-channel provider of product and service solutions for designers, builders and maintainers of industrial equipment and operations to a very broad spread of customers both in terms of industry sector and geography. The Group is not reliant on one particular group of customers or suppliers, with its largest customer accounting for under one percent of revenue and its largest supplier less than four percent of revenue. Our business model is differentiated by: our global network of 14 distribution centres; our talented and customer-centric team; our strong supplier relationships; our broad range of products and value-added solutions capabilities; and our strong digital presence. The Group has high inventory availability with products sourced from a large number of suppliers and provides customers with a reliable and fast service.

The Group’s results and financial position are reviewed monthly by both our SMT and the Board. Every day the SMT receives an analysis of the previous day’s revenue and gross margin. The Board receives and reviews monthly management accounts, including cash flows, and also receives regular performance and forecast updates from the CFO and Chief Executive Officer.

We frequently update our detailed rolling 18-month forecast of the Group’s income statement, balance sheet and cash flows which are regularly reviewed, and the assumptions approved, by the Board.

The Group’s long-term prospects are assessed primarily through our strategic and financial planning process. This includes the preparation of a five-year strategic plan and an annual target setting process involving both Group and regional management which are updated annually and reviewed and approved by the Board. The SMT receives and reviews a scorecard each quarter showing progress against the strategic plan objectives. The Board also receives updates and, if appropriate, the strategic plan is updated depending on progress and performance.

The Board also considers the long-term prospects of the Group as part of its regular monitoring and review of risk management and internal control system, as described on page 98.

The detailed rolling 18-month forecast is supplemented by updates during the month of our cash position and latest cash forecasts in order to track closely our net debt position and enable us to take any necessary actions on a timely basis. Our capital position is supported by regular reviews of the Group’s funding facilities and banking covenants’ headroom, through the Board’s Treasury Committee. During the year we moved our £300 million three-year revolving credit facility to a sustainability-linked loan and took up the option to extend the maturity for a year. It has a lender option accordion of up to a further £100 million and the maturity may be extended at the option of the Group for up to one further one-year term subject to individual lender approval. This loan was undrawn at 31 March 2022.

As described throughout this Annual Report and Accounts, the Group’s performance over the past year has been very strong with like-for-like revenue growing by 26% and free cash flow of £160.5 million reducing net debt to £42.1 million (including lease liabilities of £48.7 million) at 31 March 2022 from £122.0 million (including lease liabilities of £61.5 million) at 31 March 2021. We also paid dividends during the year of £76.2 million (2020/21: £71.2 million). We have ended the year with an even stronger balance sheet than with which we started.

Details of our sources of finance are outlined in Note 23 on page 171, with the earliest facility maturing being the sustainability-linked loan in November 2024.

The Group’s debt covenants are EBITA to interest to be greater than 3:1 and net debt to adjusted EBITDA to be less than 3.25:1. At 31 March 2022 EBITA to interest was 44.6x (2020/21: 26.7x) and net debt to adjusted EBITDA was 0.1x (2020/21: 0.5x) (see Note 3 on page 149 for reconciliations) and under our strategic plan these are also comfortably met.

Viability assessment period

In its assessment of the Group’s viability, the Board has reviewed the assessment period and has determined that a three-year period to 31 March 2025 continues to be most appropriate. The robustness of the strategic plan is significantly higher in the first three years with the final two years being a high-level extrapolation. The Group has few contracts with either customers or suppliers extending beyond three years and, in the main, contracts are for one year or less. The business operates with a minimal forward order book, generally taking orders and shipping them on the same day. In addition, as more business continues to move online and we become more agile, speed of change increases and so visibility is relatively short term. Of the Group’s long-term obligations, the UK pension scheme is the largest and its triennial funding valuation forms the basis of our agreeing its funding with its trustee. Our share-based payment schemes are also mainly for three years.

Assessment of viability

Each of the Group’s principal risks and uncertainties on pages 52 to 55 has a potential impact on the Group’s viability and so the Board considered various scenarios and examined a number of factors that could impact each in the future. It decided which scenarios would have the most impact on the viability of the Group and determined an appropriately severe but plausible stress test for each of these scenarios.

The strategic plan approved at the March 2022 Board meeting is currently considered to reflect the Board’s best estimate of the future prospects of the Group. Therefore, in order to assess the viability of the Group, the scenarios and stress tests were modelled by overlaying them onto the strategic plan to quantify the potential impact of one or more of them crystallising over the assessment period.

The scenarios and related stress tests modelled and how they link to the principal risks and uncertainties were:

The scenarios considered and the severe and plausible stress tests for the principal risks and uncertainties 7 ‘UK defined benefit pension scheme cash requirements are more than the cash available’ and 8 ‘People resources unable to support the existing and future growth of the business’ were assessed to have less impact on the Group’s viability.

In performing the above tests it was assumed that no major reorganisations or significant working capital initiatives occur in mitigation, capital expenditure is unchanged from that in the strategic plan, dividends continue to be paid and there are no changes in debt financing.

The results of the above stress tests showed the Group would be able to withstand the impact of these scenarios occurring.

Reverse stress tests were also undertaken to assess the circumstances that would threaten the Group’s current financing arrangements. These included significant declines in like-for-like revenue, significant declines in gross margin and a major deterioration in cash collection and would have to result in adjusted operating profit margin falling to under 2% in at least one of the following three years. These reverse stress tests also assumed that no major reorganisations or significant working capital initiatives occur in mitigation, capital expenditure is unchanged from that in the strategic plan, dividends continue to be paid and there are no changes in debt financing. The Board considers the risk of these circumstances occurring to be remote.

The above scenarios are hypothetical and extremely severe for the purpose of creating outcomes that have the ability to threaten the viability of the Group; however, multiple control measures are in place to prevent and mitigate any such occurrences from taking place. If any of these scenarios actually happened, various options are available to the Group to maintain liquidity so as to continue in operation.

Confirmation of viability

Based on the assessment outlined above, the Board 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 years to 31 March 2025.

Going concern

The going concern period is defined as a period of at least 12 months from 24 May 2022.

Based on the assessment outline above, the Board also believes that it is appropriate to continue to adopt the going concern basis in preparing the Group’s accounts.