Principal risks and commentary, Brexit, currency, costs, tariffs, purchases, sales manufacturing and logistics, viability statement

Trifast plc – Annual report – 31 March 2019

Industry: manufacturing, distribution

Risk management (extract 1)
Viability statement
In line with provision C.2.2 of the code, the Directors have assessed the prospects of the Company taking into account the current position and principal risks to determine whether there is a reasonable expectation that the Group will be able to meet its liabilities as they fall due over a specified period of time.

The Directors have carried out this longer term viability assessment over a period of three years as this aligns with the Group’s detailed forecast which is approved at Board level. Three years is considered an appropriate period of time for the Group as it strikes the right balance between the need to plan for the long term whilst considering the uncertainty that arises in relation to assumptions the further you look ahead.

In assessing the prospects of the Group over the three year period, the Directors have also considered the Group’s current financial position as well as its financial projections in the context of the Group’s re-financed debt facilities and associated covenants. These financial projections are based on a bottom-up budgeting exercise for FY2020 and FY2021 which has been approved by the Board and a more top down view aligned to the Group’s strategic objectives for FY2022. The Group’s base projections indicate that the re-financed debt facilities and increased projected headroom provide appropriate flexibility of funding to support the Group’s trading and strategic investment plans over the next three years.

In conducting the assessment, the Directors have considered the principal risks outlined on pages 73 to 76 to perform stress testing on the forecast so as to determine the impact on the financial position and performance of the Group. These risks have been identified by the Board, and are actively monitored on an ongoing basis, the most significant of which are considered in more detail on the right:

  1. Potential impact that Brexit could have on the business due to foreign exchange movements, the possibility of a general downturn in the UK economy and/or the future impact of WTO tariffs. To date, the impact has largely been in the form of foreign exchange translation tail winds, which have significantly increased our Group results at AER over the last three years. In time there is a risk that this could significantly reverse if the relative value of Sterling were to increase again, although such a reversal will only bring our results back to where we were in FY2016, which was itself a year of strong profitable growth for the Group. We have also experienced some pricing pressures due to the extended weakness of Sterling against the US Dollar and recent increases in raw material pricing. However, in the longer term, as a global business with worldwide logistics and over 70% of our revenue generated outside of the UK, we consider we have the flexibility to withstand any UK specific challenges by either adjusting our supply routes in the medium term, or even potentially following our customer base overseas if UK manufacturing moves in the longer term.

  2. A protracted global economic downturn would impact negatively on our ability to continue to grow at current rates. However, as for the majority of customers we still only represent a relatively small proportion of their global fastening spend, even in a time of volume reduction, we would continue to have the opportunity to secure growth via market share increases. As a business, we operate in a very broad and balanced range of sectors and geographies. In addition to which, we have no one customer that represents more than 7% of our Group revenue, and no one end OEM that represents more than 5%. This means that we are not overly dependent on any one customer, market or sector for our ongoing success, which greatly increases our business sustainability even in less certain times.

  3. A serious quality issue occurring, both in terms of an immediate reduction in revenue, and possible penalties incurred, and longer term, considering the impact to our reputation, including the possible risk that this could lead to the loss of one or more of our key multinational OEM customers. We have robust quality processes in place around the world, both in terms of our own manufacturing processes and our vendor assessment and sourcing policies. In addition, our established global quality team and issue resolution procedures ensure that any supply problems that do arise are dealt with and resolved as soon as possible for our customers, ensuring that the costs incurred by us and the end customer are minimised as far as possible. However, although this has not happened in our 45+ year history, it is possible to imagine a more significant quality issue arising with a customer which could result in substantial recall costs and penalties. In case of these circumstances, we carry an annually renewable Product Guarantee/Recall insurance policy which is underwritten with first class security in the London insurance market. Although, the ongoing negative impact on the business may still be significant whilst the market builds back up its trust in the Group.

  4. The risk of a significant cyberattack, or data security breach could incur penalties and have a serious impact on the Group’s ability to trade in the short term, with longer term negative implications to our reputation in the marketplace and therefore our ability to meet our growth targets in the medium term. We have made substantial additional investments in to our cyber security, including our back-up data storage and power systems in recent years and have global IT policies in place that are managed by a dedicated in-house team. We continue to invest in IT security and are rolling out ISO 27001 processes around the world. However, in this world of heightened cyber risk, it is not impossible that a circumstance could arise where our trading results are negatively impacted as a result of a cyber threat or data loss.

The scenarios above are hypothetical and purposefully severe for the purpose of creating outcomes that have the ability to threaten the viability of the Group. It is considered unlikely, but not impossible, that the crystallisation of a single risk would test the future viability of the Group. However, as with many companies, it is possible to construct scenarios where either multiple occurrences of the same risk, or single occurrences of different risks could put pressure on the Group’s ability to meet its financial covenants. In the case of these scenarios arising, various options are available to the Group in order to maintain liquidity so as to continue in operation such as: accessing new external funding early; more radical short-term cost reduction actions; and reducing capital expenditure. None of these actions are assumed in our current scenario modelling. Although, we note, the additional headroom from the re-finance on 16 April 2019 both supports our strategic investment aims and provides greater security of funds to the Group.

After considering the risks identified and on the basis of the assessments completed, the Directors believe that there is a reasonable expectation that the Company will be able to continue to operate and meet its liabilities as they fall due over the next three years.

Risk management (extract 2)