Marshalls : Annual Financial Report

Nature of risk

Potential impact

Mitigating factors

Change

Macro-economic and political

The Group is dependent on the level of activity in its UK and international end markets. Accordingly, it is susceptible to economic downturn and the impact of Government policy.

The lower activity levels could reduce sales and production volumes and therefore could have an adverse effect on the Group's financial results.

The Group closely monitors trends and lead indicators, invests in market research and is an active member of the CPA.

The Group benefits from the diversity of its business and end markets.

The Group focuses on sales opportunities and strategic growth initiatives, together with quality, service and its supply chain.

Economic risk has reduced as economic and sector outlook and growth rates have improved.

Government expenditure is not likely to be near the cyclical low and there is not upside potential in certain focus areas, e.g. rail.

The economic outlook for the Eurozone continues to be difficult.

Weather

The Group is exposed to the impact of prolonged periods of bad weather.

The lower activity levels could reduce sales and production volumes and therefore could have an adverse effect on the Group's financial results.

The Group has a continuing focus on new product development including landscape water management.

The Group is developing its internal flooring offer and developing its International strategy in order to diversify its activities.

Weather conditions are totally beyond the Group's control. 2014 has been a relatively benign weather year.

Customers

The UK business has a number of key customers, in particular the national merchants. This is partly as a result of the consolidated nature of the market.

The loss of a significant customer may give rise to a significant adverse effect on the Group's financial results.

The Group focuses on brand and new product development, quality and customer service improvement.

The Group maintains a national network of manufacturing and distribution sites.

The Group undertakes ongoing reviews of trading policies and relationships and maintains constant communication with customers.

The risk continues and is largely a consequence of the way the market is structured.

Competitor activity

The Group has a number of existing competitors who compete on range, price, quality and service.

Potential new low cost competitors may be attracted into the market through increased demand for imported natural stone products.

The increased competition could reduce volumes and margins on manufactured and traded products.

The Group has unique selling points that differentiate the Marshalls branded offer.

The Group focuses on quality, service, reliability and ethical standards that differentiate Marshalls from competitor products.

The Group continues to have the lowest cost to market.

The Group has a continuing focus on new product development.

The improved market outlook has increased demand (relative to available supply) and this has led to a reduction in such competitive pressure.

Continuing demand for imported natural stone potentially serves to maintain this risk.

Cost and availability of raw materials

The Group is susceptible to significant increases in the price of raw materials, utilities, fuel oil, haulage costs and vehicle availability.

As demand increases, the Group is potentially more exposed to the risk of temporary raw material shortages.

The increased costs could reduce margins and may be further impacted in the event of imbalances in the mix of regional activity.

The risk of market demand exceeding raw material supply could lead to inefficient production which could reduce margins.

The Group benefits from the diversity of its business and end markets.

The Group focuses on its supplier relationships, flexible contracts and the use of hedging instruments.

The Group utilises sales pricing and purchasing policies designed to mitigate the risks.

The Group has its own fleet of specialist delivery vehicles.

Cost inflation remains a risk as demand for raw materials increases.

The improved market outlook has increased demand (relative to available supply) and there is an increased risk of temporary shortages.

Pension

The Defined Benefit Pension Scheme may be impacted by volatility in financial markets and the longevity of members.

These risks could increase pension scheme liabilities or reduce assets, putting pressure on accounting notional interest and therefore downward pressure on PBT and EPS. This could also result in the need for additional cash contributions.

The defined benefit section of the Pension Scheme is closed to new members and future service accrual.

The Group uses liability driven investments to hedge interest rate and inflation risks.

De-risking strategies continue to be pursued and risk management is a key control used by the Trustee.

Professional advisers are consulted to minimise risk.

The risks surrounding the continuing funding of the past service liability remain unchanged as many of these are driven by financial markets and factors outside the Group's control.

Environmental

An environmental contamination event may lead to a prosecution and to reputational loss.

An incident could lead to disruption to production and to financial penalties as well as a potential negative impact on the Group's reputation.

The Group uses professional specialists covering carbon reduction, water management and biodiversity.

The Group focuses on the implementation of ISO standards.

The Group has a formal Group sustainability strategy focusing on impact reduction.

The Group is unable to predict future changes in environmental laws or policies or the ultimate cost of compliance with such laws or policies.

Corporate, Legal and Regulatory

The Group may be adversely affected by an unexpected reputational event, for example, in its ethical supply chain.

An incident could lead to a disruption to the supply of products for customers and to increased costs as well as a potential negative impact on the Group's reputation.

Group employs compliance procedures, policies and independent audit processes which seek to ensure that local, national and international regulatory and compliance procedures are fully complied with.

The extension of the Group's activities into new international markets causes this risk to continue, notwithstanding the additional compliance procedures within the supply chain.

Access to Funding

The Group continues to require debt funding in order to meet its trading obligations and to grow the business.

Insufficient access to funding could limit the Group's ability to achieve the desired levels of growth.

The Group has significant committed facilities in place with a good spread of medium term maturities and significant headroom.

The Group's policy continues to be to arrange funding ahead of requirements and to maintain sufficient undrawn committed bank facilities.

The improved economic outlook and the Group's reduced gearing has served to reduce this risk. There is also improved liquidity and increased competition within the banking sector.

IT Infrastructure

Disruption to the IT environment could affect the Group's ability to conduct its ongoing operations.

Ineffective procedures could lead to an adverse effect on the Group's financial results.

All IT system development projects are actively and carefully planned with defined governance and control procedures.

To support and enable future growth the Group has upgraded its IT systems to ensure a common platform across all business units.

Regular independent risk and project management audits are undertaken.

The Group ensures that industry standards are adopted and disaster recovery plans and procedures exist and are regularly tested.

The continued investment in and maintenance of IT systems across the Group gives rise to good control of this risk.