Brexit risks and mitigation update, trade barriers, sourcing, data transfer, people, reference in viability statement

Computacenter plc – Annual report – 31 December 2020

Industry: support services

Group Finance Director’s Review (extract)

Brexit update

In the 2019 Annual Report and Accounts and the 2020 Interim Report and Accounts, we provided a detailed update on our positioning from a Brexit risk and preparation perspective. In summary, we explained that we were in a low-risk category and that we had made considerable efforts to reduce the risk to our business as much as possible.

Since 1 January 2021, we believe that our risk position and preparation has served us well. The Brexit deal announced on 24 December 2020 was helpful for the UK generally and removed the cliff edge risk position, especially the avoidance of customs tariffs on most goods shipped to and from the EU, depending on the country of origin. We have not yet seen, since 1 January 2021, very long queues of lorries at UK or French ports. There clearly have been some issues arising on customs tariffs on UK exports to the EU generally, where the goods are not of British origin. However, this issue has little impact on Computacenter as most of the products that we sell are zero rated under WTO terms.

There are still issues unresolved from a UK perspective, such as services and euro denominated trading which negatively impacts the City of London. However, we operate in all major cities in the principal EU countries that will benefit from this and should be able to offset any impact.

Imports into the UK

We have seen short delays arising from issues relating to customs checks and customs documentation for goods coming from the EU, which are typically one or two days and a week with one large supplier. These have not materially impacted our business to date.

A small number of our suppliers operate under International Commercial Terms similar to Carriage and Insurance Paid, which requires Computacenter to operate as the importer of record when they export from the EU. This has increased the administrative burden for us on these deliveries, although this has limited financial impact on the UK business as a whole.

Exports from the UK to the EU

A major part of our Brexit preparation was to move circa 90 per cent of the business for UK customers requiring deliveries in the EU from Computacenter UK to Computacenter Germany, thereby avoiding the need for export documentation and potential border delays. This has been very successful. We have also implanted some export-specific software on our Group ERP system, to ease the administration of exports, production of customs invoices etc. Despite this, there have been some challenges on the remaining 10 per cent of this business in terms of service level achievement, problems with documentation and couriers for EU countries. Some courier operations are not as well prepared as they should be, which has caused some confusion and delay. However, we are addressing these issues and do not expect any material impact.

Whilst Northern Ireland is part of the UK, the invisible border in the Irish Sea, and initial lack of clarity on how to export there, has resulted in some issues on shipments from Great Britain to Northern Ireland. These issues are quite small and have largely been resolved.

People

As noted in the 2019 Annual Report and Accounts, we do not have many EU nationals working in our UK business or UK nationals in our EU businesses. We were well prepared for this and have had no material issues.

Whilst there is limited travel expected in 2021, we are aware that UK nationals who need to visit EU countries to work on specific projects will require a work visa. We will be able to make arrangements to minimise the impact of this issue.

Data transfer regulation

As noted in our 2019 Annual Report and Accounts we are well prepared to meet data transfer regulations, having adopted EU-approved standard contractual clauses concerning data adequacy into our intra-Group agreements in 2018 and 2019. The Brexit deal included a form of data adequacy clause for four months, which can be extended by a further two months, whilst negotiations take place on longer-term arrangements.

STRATEGIC REPORT (extract)

Viability Statement

In accordance with provision 31 of the UK Corporate Governance Code, the Directors have assessed the Group’s prospects over a longer period than the 12 months required by the Going Concern Statement.

Viability timeframe

The Directors have assessed the Group’s viability over a period of three years from 31 December 2020. This period was selected as an appropriate timeframe for the following reasons:

  • the Group’s rolling strategic review, as considered by the Board, covers a three-year period;
  • the period is aligned to the length of the Group’s Managed Services contracts, which are typically three to five years long;
  • the short lifecycle and constantly evolving nature of the technology industry lends itself to a period not materially longer than three years;
  • Technology Sourcing has seen greater recent growth than the Group’s Services business, increasing the revenue mix towards the part of the business that has less medium-term visibility and is therefore more difficult to forecast;
  • the continuing macro-economic, diplomatic and trade environment, following the departure of the UK from the European Union, introduces greater uncertainty into a forecasting period longer than three years; and
  • the prolonged impact of COVID-19, and in particular the effect on certain of our customers from the worsening global economic outlook, and the current increasing pace of change of technology adoption as a result.

Whilst the Directors have no reason to believe the Group will not be viable over a longer period than three years, we believe that a three-year period presents shareholders with a reasonable degree of confidence, while providing a longer-term perspective.

With regard to the principal risks set out on pages 71 to 76, the Directors remain assured that the business model will be valid beyond the period of this Viability Statement. There will continue to be demand for both our Professional Services and Managed Services businesses, and Management is responsible for ensuring that the Group remains able to meet that demand at an appropriate cost to our customers. The Group’s value-added product reselling Technology Sourcing business only appears vulnerable to disintermediation at the low end of the product range, as the Group continues to provide a valuable service to customers and vendors alike, as described on pages 18 to 21. The Group has seen significant business growth in the UK throughout the COVID-19 pandemic, due to the end-to-end Technology Sourcing capability that it can deliver from its UK Integration Center, which is a significant differentiating factor in this market.

Prospects of the Group assessment process and key assumptions

The assessment of the Group’s prospects derives from the annual strategic planning and review process. This begins with an annual away day for the Board, where Management presents the strategic review for discussion against the Group’s current and future operating environments.

High-level expectations for the following year are set with the Board’s full involvement and are delivered to Management, who prepare the detailed bottom-up financial target for the following year. This financial target is reviewed and agreed by Management before presentation to the Board for approval at the December Board meeting.

On a rolling annual basis, the Board considers a three-year business plan (the ‘Plan’) consisting of the detailed bottom-up financial target for the following year (2021) and forecast information for two further years (2022 and 2023), which is driven by top-down assumptions overlaid on the detailed target year. Key assumptions used in formulating the forecast information include organic revenue growth, margin improvement and cost control, continued strategic investments through the Consolidated Income Statement, and forecast Group effective tax rates, with no changes to dividend policy or capital structure beyond what is known at the time of the forecast. The financial target for 2021 was considered and approved by the Board on 10 December 2020, with amendments and enhancements to the target as part of the full Plan considered and approved by the Board on 9 March 2021.

Impact of risks and assessment of viability

The Plan is subject to rigorous downside sensitivity analysis, which involves flexing a number of the main assumptions underlying the forecasts within the Plan. The forecast cash flows from the Plan are aggregated with the current position, to provide a total three-year cash position against which the impact of potential risks and uncertainties can be assessed. The analysis considers access to available committed and uncommitted finance facilities, the ability to raise new finance in most foreseeable market conditions and the ability to restrict dividend payments.

The potential impact of the principal risks and uncertainties, as set out on pages 71 to 76, is then applied to the Plan. This assessment includes only those risks and uncertainties that, individually or in plausible combination, would threaten the Group’s business model, future performance, solvency or liquidity over the assessment period and which are considered to be severe but reasonable scenarios. It also takes into account an assessment of how the risks are managed and the effectiveness of any mitigating actions.

The combined effect of the potential occurrence of several of the most impactful risks and uncertainties is then compared to the cash position generated throughout the sensitised Plan, to assess whether the business will be able to continue in operation.

For the current period, the primary downside sensitivity relates to a modelled, but not predicted, severe downturn in Group revenues, beginning in 2021, due to a worsening impact on our customers from the COVID-19 crisis. This sensitivity analysis models a continued market downturn scenario for some of our customers whose businesses have been affected by COVID-19 and a similar downturn occurring for the remainder of our customer base.

Additionally, the risks related to continued disruption from the departure of the UK from the EU on 31 December 2020 have been reflected within our underlying business plans.

Conclusion

Based on the period and assessment 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-year period to 31 December 2023.