Principal risks in viability statement , COVID – 19, Brexit, foreign exchange, quality, cyber security, covenants and headroom

Trifast plc – Annual report – 31 March 2020

Industry: manufacturing, distribution

Risk management (extract 1)

Viability statement

In line with provision 31 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 forecasts. 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 including, the successful c.£16m equity raise in June 2020, as well as its financial projections in the context of the Group’s cash and debt facilities and associated covenants. These financial projections are based on a bottom-up budgeting exercise for FY2021 and FY2022 which has been approved by the Board and a more top down view aligned to the Group’s strategic objectives for FY2023. Due to the current high degree of macroeconomic uncertainty, three year projections have been performed to reflect both a most likely scenario outcome and an extreme but plausible one, both of which are being updated daily and reported to the board on a weekly basis (for further details see our specific COVID-19 discussions on pages 10 to 13). Under both of these scenarios the Group’s projections indicate that cash and debt facilities and projected headroom are more than adequate to support the Group over the next three years.

In conducting the assessment, the Directors have considered the principal risks outlined 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 below:

  1. COVID-19 has had and is expected to have a significant impact on the operations and trading performance of the business in the short term and longer term. A full discussion of how the business is dealing with the risks associated with COVID-19 is included on pages 10 to 13.
  2. A protracted global economic downturn (such as may be the case following COVID-19) would impact negatively on our ability to continue to grow and invest as a business. 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 expect to have the opportunity to secure growth via customer specific 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 automotive 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 these uncertain times.
  3. 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, as the weakness of sterling has increased our Group results at AER over the last three years. In time there is a risk that this could reverse if the relative value of Sterling were to increase again. Such a reversal would reduce absolute consolidated profits in sterling, however as it is unlikely to have a significant impact on the underlying margins that the overall business can secure, it would not raise a significant viability risk. If we do end up in a hard Brexit scenario, with increased tariffs and administration costs on the UK/EU border, this will have a short-term impact most specifically on a percentage of the UK’s distribution business. However, 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 contract customer base overseas if UK manufacturing moves in the longer term.
  4. 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.
  5. 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 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 around the world. However, in this world of heightened cyber risk, it is not impossible that a circumstance could arise where our trading results have been negatively impacted as a result of a cyber threat or data loss.

The scenarios 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. As discussed on pages 10 to 13, certain actions have already been taken in reaction to the current COVID-19 situation. However notwithstanding this, we retain a comprehensive and evolving list of cash and profit levers that we can draw on as required to continue to safe guard the short and long-term future of the business.

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.

COVID-19 and the business

Risk management (extract 2)

Business review (extract)

The Group’s banking facilities include covenants to maintain an adjusted leverage ratio of below 3.0x and an interest cover ratio above 4.0x on a rolling 12-month basis. At 31 March 2020, the Group’s covenants are well within these limits with an adjusted leverage ratio of 0.80x and interest cover of 30x.

27 Financial instruments (extract)

Covenant headroom – at 31 March 2020

The RCF facility in place as at 31 March 2020 are subject to quarterly covenant testing as follows:

Interest cover: Underlying EBITDA to net interest to exceed a ratio of four.

Adjusted leverage: Total net debt to underlying EBITDA not to exceed a ratio of three.

These covenants currently provide significant headroom and forecasts (taking into account COVID-19 scenario planning and the equity raise (see note 30)) indicate no breach is anticipated.

34 Alternative Performance Measures (extract)