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

Electrocomponents plc – Annual report – 31 March 2021

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 20 to 23.

Our business model, as described on pages 24 and 25, 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 product and service solutions; 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 Chief Financial Officer and Chief Executive Officer.

As described in last year’s Annual Report and Accounts, given the unprecedented level of uncertainty surrounding the COVID-19 pandemic, towards the end of March 2020 we modelled a range of potential scenarios for different durations and severities of the pandemic for each month of the year ended 31 March 2021 and during this year added each month of the year ending 31 March 2022. These have continued to be regularly updated to reflect latest trading trends and changes to our expectations. These have been regularly reviewed, and the assumptions approved, by the Board. The Board also discusses and approves the various mitigating actions the Group should take for each scenario. We have recently implemented a rolling 18-month planning process and tool which will replace these models and provide detailed bi-monthly forecasts of the Group’s income statement, balance sheet and cash flows to enhance our forecasting and scenario modelling.

The Group’s long-term prospects are assessed primarily through its 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 83.

As described throughout this Annual Report and Accounts, the Group’s performance over the past year has remained resilient despite the impacts of COVID-19 and Brexit, with like-for-like revenue growing by 1.4%. Trading momentum improved during the second half of the year and we have comfortably outperformed all the various scenarios we had modelled and described in last year’s Annual Report and Accounts.

During the year we have continued to produce and review weekly cash forecasts to closely track our net debt position, so we can take any necessary actions on a timely basis. Our capital position is supported by the Board’s Treasury Committee regularly reviewing the Group’s funding facilities and banking covenants’ headroom. In November 2020, we completed the refinancing of our bank facilities with a group of eight existing and new relationship banks. The previous syndicated multi-currency facility was for US$75 million, £85 million and €50 million and would have matured in August 2022.

The new increased facilities comprise a three-year revolving credit facility of £300 million, with an accordion of up to a further £100 million. The maturity of this facility may be extended at the option of the Group for up to two further one-year terms subject to individual lender approval. These new facilities were undrawn at 31 March 2021. In December 2020, we successfully completed an equity placing of ordinary shares to fund acquisitions and retain financial flexibility which raised £176.1 million, net of costs.

The Group’s strong cash generation during the year, with free cash flow of £132.9 million, reduced net debt to £122.0 million (including lease liabilities of £61.5 million) at 31 March 2021 from £189.8 million (including lease liabilities of £56.3 million) at 31 March 2020. We also paid an additional interim dividend in lieu of the deferred final dividend for the year ended 31 March 2020 and paid, as normal, an interim dividend for the year ended 31 March 2021, resulting in total dividends paid during the year of £71.2 million (2019/20: £68.5 million). We have ended the year with a stronger balance sheet than with which we started.

The Group’s debt covenants are EBITA to interest to be greater than 3 times and net debt to adjusted EBITDA to be less than 3.25 times. At 31 March 2021 EBITA to interest was 26.7x (2019/20: 33.6x) and net debt to adjusted EBITDA was 0.5x (2019/20: 0.7x) (see Note 3 on page 134 for reconciliations) and under our strategic plan these are also comfortably met.

Viability assessment period

In their assessment of viability, the Directors have reviewed the assessment period and have determined that a three-year period to 31 March 2024 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 moves 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.

Assessment of viability

Each of the Group’s principal risks and uncertainties on pages 47 to 49 has a potential impact on the Group’s viability and so the Directors determined an appropriately severe but plausible stress test for each. They decided which stress tests would have the most impact on the viability of the Group and developed appropriate scenarios to model for these.

The recently updated strategic plan is currently considered to reflect the Directors’ best estimate of the future prospects of the Group. Therefore, in order to assess the viability of the Group, the scenarios were modelled by overlaying them onto this updated strategic plan to quantify the potential impact of one or more of them crystallising over the assessment period.

The scenarios modelled and how they link to the principal risks and uncertainties are summarised in the table below.

The severe and plausible stress tests for the principal risks and uncertainties 8 ‘UK defined benefit pension scheme cash requirements are in excess of the cash available’ and 9 ‘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 updated 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 and all 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 updated strategic plan, dividends continue to be paid and there are no changes in debt financing. The Directors consider 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 against any such occurrences. 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 Directors have 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 2024.

Going concern

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