Associated British Foods plc – Annual report – 14 September 2019
Industry: food and drink, retail
Chief Executive’s statement (extract)
The group’s business model, wherever possible, aligns food production with the end market for the product while Primark operates largely discrete supply chains for its stores in each of the UK, US and EU27. The group therefore undertakes relatively little cross-border trading between the UK and the rest of the EU and consequently we do not expect Brexit to have a significant effect on the group’s results. Nevertheless, we have evaluated the forms that Brexit could take and our businesses have completed all practical preparations and have contingency plans in place should they experience some disruption at the time of exit.
Principal risks and uncertainties (extract)
Following the referendum decision in 2016, the group established an EU Exit Steering Committee which consists of a small dedicated team which worked with all the businesses to assess the risks and opportunities arising from the UK’s decision to leave the EU. The group’s business model, under which Primark operates largely discrete supply chains for its stores in each of the UK, US and EU27 and food production is, wherever possible, aligned with the end market, means that the group undertakes relatively little cross-border trading between the UK and the rest of the EU. We therefore quickly came to the conclusion that the overall impact of Brexit on the group was relatively minor.
We recognise that the current political situation makes the final outcome of the negotiations between the UK and the EU uncertain. While we would prefer a negotiated exit, we are prepared for any of the potential outcomes.
In particular, over the last year the group and the individual businesses have taken reasonable steps to mitigate where possible the impacts of leaving the EU without a transitional agreement. The key risks identified, and the actions taken are as follows:
• Imports to the UK. The UK government has indicated the tariffs that will be applied to imports in the absence of a transitional agreement and we expect these to have a net positive impact on the group. All necessary registrations have been completed. Where goods are imported into the UK by third parties on behalf of the businesses, assurances have been sought that these will be available when required.
• Disruption to EU-UK logistics. In the absence of a withdrawal agreement, there is a risk of delays and disruption to the flow of goods between the UK and the EU in both directions. The businesses that could potentially be impacted by this have reviewed their exposure and where appropriate have increased inventory levels to partially mitigate the risk. The ability to do this is constrained by warehouse availability and the shelf life of the goods.
• Data. Where necessary, the businesses have agreed Standard Contractual Terms to enable certain personal data to be transferred from the EU to the UK.
• People. The businesses have publicised the UK government’s Settled Status Scheme and where appropriate have assisted employees with the application process.
The directors have determined that the most appropriate period over which to assess the Company’s viability, in accordance with the UK Corporate Governance Code, is three years. This is consistent with the group’s business model which devolves operational decision making to the businesses, each of which sets a strategic planning time horizon appropriate to its activities which are typically of three years duration. The directors also considered the diverse nature of the group’s activities and the degree to which the businesses change and evolve in the relatively short term.
The directors considered the group’s profitability, cash flows and key financial ratios over this period and the potential impact that the Principal Risks and Uncertainties set out on pages 62 to 66 could have on the solvency or liquidity of the group. Sensitivity analysis was applied to these metrics and the projected cash flows were stress tested against a range of scenarios.
The directors considered the level of performance that would cause the group to breach its debt covenants, the financial implications of making any strategic acquisitions and a variety of factors that have the potential to reduce profit substantially. These included the rate and success of Primark’s expansion; actions which could damage the group’s reputation for the long term; and macro-economic influences such as fluctuations in commodity markets and the possible implications of a no-deal Brexit.
Such is the diversity of the group, with operations across 52 countries and sales in more than 100, that none of the principal risks or uncertainties individually is considered likely to have a material impact on the group’s profitability or extensive cash resources. Furthermore, the group’s business model means that no significant reliance is placed on any one group of customers or suppliers and its diversity reduces the risk that issues affecting a particular sector will have a material impact on the group as a whole.
At 14 September 2019, £1.2bn of committed borrowing facilities available to the group were undrawn and the directors are of the opinion that substantial further funding could be secured, at relatively short notice, should the need arise. The revolving credit facility is not due for renewal until July 2021 and £80m of the private placement funding matures beyond the period under consideration.
The group has a sound track record of delivering strong cash flows, with well in excess of £1bn of operating cash being generated in each of the last eight years. This has been more than sufficient to fund expansionary capital investment and, specifically, has enabled the development of Primark in continental Europe and the US. The group’s cash flows have supported 8% compound annual growth in the dividend over the last ten years.
Even in a worst-case scenario, with risks modelled to materialise simultaneously and for a sustained period, the likelihood of the group having insufficient resources to meet its financial obligations is remote. Based on this assessment, the directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period to 17 September 2022.