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

Trifast plc – Annual report – 31 March 2018

Industry: manufacturing, distribution

Risk management (extract)

Viability statement

In line with provision C.2.2 of the code, the Directors have assessed the prospects of the Company considering 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 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 debt facilities and associated covenants. These financial projections are based on a bottom-up budgeting exercise for FY2019 and FY2020 which has been approved by the Board and a more top down view aligned to the Group’s strategic objectives for FY2021. The Group’s base projections indicate that debt facilities and projected headroom are adequate to support the Group over the next three years.

In conducting the assessment, the Directors have considered the principal risks outlined on pages 69 to 71 to perform stress testing on the forecast 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 below:

  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 and customs arrangements. 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 in FY2017 and FY2018, although in time there is a risk that this could reverse if the relative value of Sterling were to increase again. We have also started to experience some pricing pressures due to the extended weakness of Sterling against the US Dollar and recent increases in raw material pricing. 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 manufacturing moves out of the UK in the longer term.
  2. 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 these circumstances, our comprehensive global guarantee and recall insurance would be utilised to cover any direct costs incurred, although the ongoing negative impact on the business may still be significant whilst the market builds back up its trust in the Group.
  3. 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 best practice ISO 27001 around the world. However, in this world of heightened cyber risk, it is not impossible that a circumstance could arise where our trading results could be negatively impacted as a result of a cyber threat or data loss.

The scenarios above are hypothetical and purposefully severe for 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. Our planned investment in our digital infrastructure via Project Atlas will complement this. 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 to maintain liquidity 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.

After considering the risks identified and based on 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 table (extract)