Computacenter plc – Annual report – 31 December 2019
Industry: support services
Group Finance Director’s Review (extract)
Planning for the United Kingdom exiting the European Union
Computacenter’s target clients are large corporate customers and large Government departments. We operate in four principal geographies, the UK, Germany, France and the USA. This allows us to manage European Union (EU) requirements from our EU locations and we have a long history of trading with the subsidiaries of large global Western European headquartered organisations, in many diverse locations across the world. Therefore, the concept of exporting to and importing from multiple countries with the related systems requirements is already functioning across the business.
There remains considerable uncertainty around the structure of the future trading relationship between the UK and EU, following the UK’s legal departure from the EU on 31 January 2020, which makes it difficult to develop specific plans for the various potential outcomes. However, we established a Committee for Planning for the United Kingdom exiting the European Union (the ‘Committee’) in 2017, to consider the key risks and changes that may be required.
This Committee is led by the Group Finance Director and includes senior staff from the key areas that may be affected, including:
• Finance, including Group Tax & Treasury and Group Commercial Finance;
• Group Human Resources, for employment and related matters;
• Group Legal & Contracting, including intellectual property, data protection and supplier contracting;
• Group Information Services, including IT systems, location of IT infrastructure and location of data; and
• Group Technology Sourcing, including Export/Import, Supply Chain Services, Commercial Operations, Technology Provider Relations and the potential impact of Waste Electrical and Electronic Equipment (WEEE).
The Committee meets regularly to review papers submitted by the subject matter experts and monitors an action list, to identify ways to minimise the impact of this change. The Committee monitors negotiation developments, actively considers the possible impacts of the United Kingdom’s departure from the EU on our business and plans for changes to our processes and procedures that may be required. The Committee, through its members, liaises with our customers and our Technology Providers, and is supported in its work by specialist external advisors. The Committee has issued a series of briefing notes and FAQs to customer-facing employees, so they can respond to customer queries. The minutes of the meetings and the subject matter papers are reviewed at the Group Risk Committee and updates have been provided to both the Audit Committee and the Board.
Initial position and preparation
We are committed to operating our business and serving our customers in a way that properly manages and mitigates the impact of the UK leaving the EU. We will continue to work with our customers and partners to deliver leading IT infrastructure products and services during and after the UK’s departure from the EU, including any period of transition.
While Computacenter advocates barrier-free trade in products, services and data between the UK and the EU, there remains considerable uncertainty about the changes to trade arrangements that will occur. This makes it difficult to take specific action and communicate specific plans. Computacenter believes, however, that it is well placed to deal effectively with any likely eventuality. The Company, led by the Committee, has taken a number of preparatory steps and assessed what we currently consider could be the main impacts on the Company of exiting the EU and our initial views on managing those impacts, so as to cause minimal disruption to our customers.
Due to the already global nature of Computacenter’s business, its in-house logistics and Service capabilities in the UK, Germany, France, Belgium and the Netherlands, and its placement in the IT infrastructure industry, the Committee does not currently consider that we will be materially impacted by the UK’s departure from the EU. All the same, the Committee is paying particular attention to our Technology Sourcing business, where products routinely cross between continental Europe and the UK, and our IT Services business, where data can flow across borders, especially within the EU. For one large customer, we have already transferred the responsibility for its EU27 shipments from our UK Integration Center to our German Integration Center and can manage similar changes for other customers if required.
Computacenter does not manufacture products, and instead sources and resells products manufactured by leading Technology Providers worldwide. We have over 30 years of Technology Sourcing experience and routinely trade with manufacturers, distributors and customers located both inside and outside the EU.
Any trade barriers created as a result of the UK’s departure from the EU have the potential to increase cross-border supply complexity and cause delivery delays. We have been in regular dialogue with our suppliers to understand their strategies to deal with these, and to put in place appropriate mitigation strategies to reduce the risk to us and our customers. Additionally, we have been closely examining the countries of origin and destination of the deliveries we make to customers from each Integration Center. The vast majority of current customer Technology Sourcing product supply is transacted on a country to country basis. There are some instances where our UK business ships to Germany and our German business ships to the UK. This is primarily due to local customer ordering requirements. We have established a process where EU27 requirements of our UK customers will be shipped from Germany and vice versa.
While the precise outcome of the UK’s departure from the EU is not yet clear, we are confident the imposition of new trade barriers will not require Computacenter to develop fundamentally new Technology Sourcing systems and processes. We are confident that adapting existing systems and processes to cope with an additional non-EU trading country, along with our multinational Integration Centers and our experience of international trade, will mean that we are well positioned in this regard.
Data transfer regulation
By incorporating the EU Commission approved Standard Contractual Clauses, the Group has built data transfer adequacy into its intra-Group agreements, to which all of its relevant UK and EU legal entities are party. In this regard, the Company establishes appropriate safeguards for the purposes of General Data Protection Regulation Article 46, when transferring personal data to third countries not considered adequate by EU data protection standards. Computacenter has a strong desire for both the UK and EU
Governments to agree an adequacy agreement on data protection, to ensure the continued smooth transfer of data post the UK’s departure from the EU.
Whilst we do not employ a significant number of EU27 citizens in the UK or UK citizens in the EU, and all indications suggest that the UK Government and the EU have agreed that EU citizens living and working in the UK will be able to carry on doing so with undiminished rights after the UK’s departure from the EU, there is still uncertainty. We will continue to closely support employees throughout the process of the UK’s departure from the EU, including helping them to be fully aware of the applicable status/registration processes as they become known.
We are not alone in our sector in facing these challenges. A number of our European competitors have strong presences within the EU and sell from this base into the UK. Equally, a number of our global competitors have their European headquarters in the UK and address the EU market from there. Once the details of the trade deal following the UK’s departure from EU are known, we will work with our major Technology Providers to address any concerns they may have about end-customers currently serviced by other resellers with single country operations or those stranded on either side of the UK-EU border.
It is likely that there will be additional investment required in IT systems to manage the transition. Whilst this will be a cost to us, it will also be an opportunity, as our customers, in some cases, may need to increase investment in a similar manner.
Wider economic impact
There is significant uncertainty in relation to the ultimate outcome of the trade negotiations that are expected to be resolved in 2020, to avoid a final ‘no-deal’ type departure from the EU on 31 December 2020, and the impact that this may have on business confidence and investment plans and therefore the marketplaces in which we operate. Whilst the UK’s departure from the EU is frequently seen as only a risk or a negative event, it may also create new opportunities and we remain well positioned to support our customers whatever the outcome.
STRATEGIC REPORT (extract)
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.
The Directors have assessed the Group’s viability over a period of three years from 31 December 2019. 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; and
• the continuing macro-economic and political environment, following the Referendum on leaving the European Union, introduces greater uncertainty into a forecasting period longer than three years.
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 63 to 68, 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 it is the responsibility of the Management to ensure 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 16 to 19.
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.
On a rolling annual basis, the Board considers a three-year business plan consisting of the detailed bottom-up financial target for the following year (2020) and forecast information for two further years (2021 and 2022), 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 2020 was considered and approved by the Board on 17 December 2019, with amendments and enhancements to the target as part of the full three-year plan considered and approved by the Board on 5 March 2020.
Impact of risks and assessment of viability
The three-year business plan is subject to sensitivity analysis which involves flexing a number of the main assumptions underlying the forecast. The forecast cash flows from the three-year 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. In the absence of significant external debt, the analysis also 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 as an instrument of last resort.
The potential impact of the principal risks and uncertainties, as set out on pages 63 to 68, is then applied to the sensitised three-year business 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 three-year plan, to assess whether the business will be able to continue in operation.
For the current period, the risk related to an eventual ‘no-deal’ departure of the UK from the EU on 31 December 2020 has been added to the sensitivity analysis. The analysis now includes assumptions of limited short-term one-off costs required to adapt systems and processes to changes in cross-border selling and customs regimes, in order to avoid Technology Sourcing friction and to remediate any concerns over data storage and transfer. These cost assumptions have been aggregated into existing sensitivities, which already model a general prolonged market downturn scenario that represents the ‘worst-case’ impact from the UK leaving the EU under a ‘no-deal’ basis on 31 December 2020. Whilst the immediate risk of such an exit has receded following the successful passage of the Withdrawal Agreement and the legal departure from the EU on 31 January 2020, the robust sensitivity analysis remains in place throughout the 2020 transition period ahead of the deadline to agree a trade deal by 31 December 2020.
Based on the period and assessment above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meets its liabilities as they fall due over the three-year period to 31 December 2022.