16 Jun 2020 12:59
ELECTROCOMPONENTS PLC
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MARCH 2020
NOTICE OF ANNUAL GENERAL MEETING 2020
Pursuant to Listing Rule 9.6.1R copies of the documents listed below have been submitted to the Financial Services Authority National Storage Mechanism and will shortly be available for viewing at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
· Annual Report and Accounts for the year ended 31 March 2020 (2020 Annual Report and Accounts)
· Circular and Notice of Annual General Meeting (Notice of AGM) to be held on 16 July 2020
· Form of proxy for the Annual General Meeting (AGM) to be held on 16 July 2020
The 2020 Annual Report and Accounts and Notice of AGM, which includes explanatory notes on proposed resolutions, are also available in the Investor Relations section of the Electrocomponents plc website at: www.electrocomponents.com
IMPORTANT: EXPLANATORY NOTE AND WARNING
The primary purpose of this announcement is to inform the market about the publication of Electrocomponents plc's 2020 Annual Report and Accounts and Notice of AGM.
The information below, which is extracted from the 2020 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5R and the requirements it imposes on issuers as to how to make public annual financial reports. It should be read in conjunction with Electrocomponents' Preliminary Results announcement issued on 2 June 2020. Together these constitute the material required by DTR 6.3.5R to be communicated in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2020 Annual Report and Accounts. Statutory accounts for 2020 are included in the 2020 Annual Report and Accounts, which will be delivered to the Registrar of Companies in due course. Page and note references in the text below relate to pages and notes in the 2020 Annual Report and Accounts. The preliminary announcement can be viewed or downloaded from the Investor Relation section of the Company's website www.electrocomponents.com.
Ian Haslegrave
Company Secretary
16 June 2020
LEI: 549300KVXDURRKVW7R37
Enquiries:
Ian Haslegrave, Company Secretary
| Electrocomponents plc | 020 7239 8520 |
Polly Elvin, Head of Investor Relations & Corporate PR
| Electrocomponents plc | 020 7239 8427 |
David Allchurch / Martin Robinson | Tulchan Communications | 020 7353 4200 |
APPENDIX
Pages and note references in the text below relate to pages and notes in the 2020 Annual Report and Accounts.
Managing our risks effectively (pages 36 to 44)
The Group has risk management and internal control processes to identify, assess and manage
the risks likely to affect the achievement of its strategic priorities and business performance.
The risk management process
The Board has overall accountability for the Group's risk management, which is managed by the Senior Management Team (SMT) and co-ordinated by the Group's risk team. The principal elements of the process are:
Identification
Risks are identified through a variety of sources, both external, to ensure that developing risk themes (emerging risks) are considered, and from within the Group, including the Board, senior, regional and country management teams. The sharing of identified risks is a two-way process: both from the local country teams to more senior management and also from the Board to the broader management. The focus of the risk identification is on those risks which, if they occurred and became issues, would have a material quantitative or reputational impact on the Group.
While the business specifically identifies emerging risks, the spread of the COVID-19 pandemic across the world has highlighted both the wide scope of risks that all organisations face and the speed with which risks can develop. The business's mitigation actions worked well and further improvements to risk identification will be captured as part of the business's ongoing review of its risk process.
Assessment
Management identifies the controls for each risk and assesses (using consistent measures) the impact and likelihood of the risk occurring, taking into account the effects of the existing controls (the resulting net or residual risk). This assessment is compared with the Group's risk appetite to determine whether further mitigating actions are required. This process is supplemented by an annual risk and controls assessment, which all operating locations and the Group-wide functions are required to complete.
Ownership
The Group's principal risks are owned by the SMT with specific mitigating actions / controls owned by individual members of the team. The SMT collectively reviews the risk register, the controls and mitigating actions at specific Group risk review meetings.
The Board
The Board confirms it has undertaken a robust review of the Group's principal and emerging risks (including those that could threaten its business model, future performance, solvency or liquidity) and assessed them against the Group's risk appetite. For a number of the principal risks, members of the SMT will, as part of their ongoing activities, update the Board on these risks and their mitigation. This allows the Board to determine whether the actions being taken by management are sufficient.
How the process works
Accountable and responsible teams | |||
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Board Overall accountability for the Group's approach to risk management and internal control including approving the Group's risk appetite and the principal risks. | SMT Risk Committee Responsible for owning and reviewing the Group's risk management process, risks and mitigating internal controls and making recommendations to the Board. | Markets, regions and Group functions Identifying, reviewing and communicating local risks using risk registers where applicable. | |
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Supporting Teams | |||
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Audit Committee Responsible for supporting the Board to ensure effective internal control and risk management systems and to measure the Group's effectiveness in managing risk. | Operational Audit and Group Risk Supports the business to identify, assess, manage and report risks. This includes providing a consistent measurement process for risks and helping identify risks that should be reported at a Group level. | ||
Risk appetite
In accordance with the 2018 UK Corporate Governance Code, the Board has defined its risk appetite. This spans three risk categories: strategic, regulatory / compliance and operational. These three categories use both quantitative and qualitative criteria. Owing to the types of risks and the associated reputational, financial and other possible consequences, the business's risk appetite is lowest for regulatory risks. The business's risk appetite is greater for operational and strategic risks. During the year ended 31 March 2020, the Board again reviewed its risk appetite across the three categories and made no significant changes.
Principal risks and uncertainties
The Group has identified 11 principal risks: 10 similar to those disclosed last year, with only minor changes; and one additional risk being the uncertainty relating to the duration and effects of the COVID-19 pandemic.
Categories | Risks | Characteristics |
Strategic | · Consequences of the COVID-19 pandemic · Consequences of the UK exit from the EU · Failure to respond to strategic market shifts e.g. changes in customer demands / competitor activity and related stakeholder requirements · The Group's revenue and profit growth initiatives are not successfully implemented | These risks are often caused by external developments. Mitigation is generally directed at a strategic level and supported by local activities. |
Regulatory / compliance | · Failure to comply with international and local legal / regulatory requirements | This risk is caused by external regulations and requirements which can be very localised. Mitigations are often specific actions to ensure compliance. |
Operational | · Failure in the business's critical infrastructure · Prolonged system outage · Information loss / cyber breach · UK defined benefit pension scheme cash requirements are in excess of cash available · People resources unable to support the existing and future growth of the business · Impact on the business if the macroeconomic environment deteriorates | These risks are generally related to internal factors e.g. the business's infrastructure, ways of working and people. Mitigating actions are often processes and direct controls. |
Emerging risks | Risks |
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Climate change | · Effects of climate change on the business's operations and its customers and supply chain |
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Principal risks in focus
Two of the Group's principal risks require further explanation: the consequences of the COVID-19 pandemic and the UK's exit from the EU.
1. COVID-19 pandemic
The COVID-19 pandemic is having far-reaching, and still-developing, impacts across the world. These effects are both on our personal ways of life and on business activities.
The Group has responded well and implemented its crisis management and business continuity processes quickly. At present all our distribution centres (DCs) around the world are open and operating effectively. Our online business model continues to differentiate us and has helped us to continue to serve our customers.
The pandemic is affecting some of our other, already identified, principal risks and these effects are explained in the relevant principal risk narratives, e.g. employee physical and mental health
and information loss / cyber breach.
New principal risk
The pandemic has its own specific uncertainties therefore we have disclosed it as a separate principal risk. These uncertainties include:
Reductions in demand across our diverse customer base, some of which may take time to become completely apparent across different sectors.The risk of a deterioration in cash flow, specifically the recoverability of trade receivables, which is a key liquidity sensitivity.Delays and difficulties sourcing inventory as suppliers' production capabilities are affected by the pandemic and demand for certain product types exceeds the available capacity.Significant transport constraints and resulting increased costs, in particular for air freight, with the substantial reduction in passenger flights which carry around half of all air cargo. This has impacted the Group's activities for transporting inventory across its supply chain.The uncertainty about the duration of the worldwide disease control activities, principally the significant people lockdowns, and the consequences on demand levels. This extends to the risk of further outbreaks of the virus (or a "W" scenario).The difficulties managing the business's return to partial office-based working as respective governments' restrictions on people movement are eased.When the pandemic passes, the speed and extent to which industries can recover from the effects is unclear.The longer-term effects of the pandemic both on business activity and government finances and related levels of public expenditure.
Mitigating actions
There are some structural factors including the diverse nature of our customer base and our strong online capabilities, that have helped protect the business from some effects of the pandemic and enabled us to continue to support customers during the pandemic.
The business has taken a number of mitigating actions including:
A rapid implementation of the Group's crisis management and business continuity plans with most of our office-based staff working from home, and protection for our DC employees.Swift cost actions taken to protect profit including controls on procurement and discretionary spend (see page 12).A focus on maintaining cash flow. Tight working capital management including controls over customer credit and conversion of trade receivables and actions to lower capital expenditure.Actions to improve balance sheet flexibility including securing additional funding facilities (see page 12).Supporting employees' physical safety in our DCs and mental wellbeing for those during extended periods of home working.Refocused cyber monitoring and training reflecting the changed business working environment and increased external threats.
Other activities include business planning for the trading environment following the passing of the pandemic to ensure that the Group can provide the necessary levels of customer service to meet customer demands and quickly identify and develop opportunities. The effectiveness of the business's operational controls in the current COVID-19 environment are being reviewed by the Group's internal audit team on a risk-based approach (see page 81).
2. The UK's exit from the EU
The principal risk which has been subject to ongoing focus and activity in the Group during the financial year has been that associated with the UK's exit from the EU. The Group has undertaken a number of significant activities across many business areas to mitigate, insofar as is possible, any potential and negative future effects of the UK leaving the EU. The planning and actions involved considering various scenarios for the UK's exit. These scenarios looked beyond the current transition period and the potential relationship between the UK and the EU. These included a more significant and immediate UK exit from the EU without agreed trading arrangements. In such a case the UK trading relationship with the EU would be governed by World Trade Organisation (WTO) rules (this is often termed as Hard Brexit).
We judge the key risk to our business from the UK exiting the EU without agreed trading agreements to be across four key areas. In each of these four areas we have undertaken mitigating actions to attempt to reduce the impact of these risks on the business.
i. Reduced free movement
A restriction on the smooth passage of goods across the UK / EU border leading to disruption to customer service is a key risk.
In anticipation of a UK exit from the EU without a withdrawal agreement earlier in calendar year 2019 and potential delays at the UK / EU border, we invested in additional fast-moving inventory across our European network to lessen any customer service impact. This investment would be reinstated if there was a risk of such delays following the UK's exit in December 2020.We have established combined contingency plans with our freight forwarders to protect service levels in the event of a hard Brexit.In the medium term, the expansion of our DC in Germany will provide increased capacity in Continental Europe and reduce the impacts on the business of reduced free movement of goods across the UK / EU border.
ii. Increased tariff and duty costs
Following the UK's exit from the EU, goods moving between the UK and EU member states and potentially other areas of the world may be subject to additional tariff and duty costs. At this stage, before we know the detail of any exit deal and any reciprocal agreements, the exact impact of tariffs is difficult to assess. However, we believe the more notable area of risk is for goods sourced from the EU into the UK or where products are shipped from the UK to the EU.
We have reviewed our current transport routes against individual product demand and will use our international distribution network to mitigate this risk, as best we can, to continue to offer our customers the market-leading service they expect.We have reviewed the potential tariff impacts on our top-selling product lines to optimise product sourcing to mitigate any incremental duty impact. Where this is not possible we will look to pass on tariffs and duties in the form of price increases.
iii. Increased administration
We anticipate increased requirements for data collection as shipments move across the UK / EU border. More information may be required for customs declarations and import / export forms for each consignment shipped into the EU. We could also be required to make additional payments for customs clearance charges for goods moving across the UK / EU border.
We have invested in IT systems to automate the customs declaration process.We have reviewed our current people resources to support our existing skilled export teams as required.
iv. Sterling depreciation
Sterling could depreciate materially in the event of the UK leaving the EU on 31 December 2020 with no agreed trading arrangements in place.
To hedge against transactional foreign exchange risk, we currently maintain three to seven months of cover against freely tradeable currencies to smooth the impact of fluctuations in currency. We will maintain our existing hedging strategy to mitigate against any immediate devaluation in sterlingOur global trading mix and product sourcing arrangements mean that historically we have had a natural gross margin hedge against a depreciation in sterling at a Group level.
Emerging risks
Climate change
During the Board's Group risk reviews, we also consider developing risk themes and emerging risks.
One important such risk is climate change. Work continues to investigate the potential implications of an increase in global temperatures upon the Group. This includes the impact on the Group's operations, customers and supply chain. These span physical, regulatory, market,
technology and reputation risks.
The countries that signed the 2015 Paris Agreement committed to aim to keep increases in global average temperature to 'well below 2ºC above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5ºC'. The October 2018 special report by the Intergovernmental Panel on Climate Change (IPCC) said that to achieve no or limited overshoot of 1.5ºC, global net human activity-related CO2 emissions must decline by 45% from 2010 levels by 2030 and must reach net zero by 2050.
Accordingly, a number of countries where the Group has operations have committed to net zero carbon emissions, including the UK, France and Japan. Other countries and regions are considering adopting net zero targets, including the EU.
In this environment, there are several specific risks, and opportunities, that the Group, as a global distributor, faces due to climate change. These include physical risks with increased likelihood of more extreme events such as storms, significant rainfall episodes, droughts and heatwaves which could affect the business's physical sites or its distribution process. A further risk is regulatory change, often by governments, designed to reduce greenhouse gas (GHG) emissions. These may render certain products obsolete whilst increasing demand for others. Other potential impacts include increases, for example, in the costs of air transport of inventory to meet customer demands. There is also reputation risk if the business is not seen to be taking deliberate and tangible actions to reduce its GHG emissions.
Corporate responsibility (CR) plan
The business has, under the leadership of a member of the SMT, developed and approved a CR plan (see pages 45 and 46). One of the main elements of the plan is environmental matters
with actions to proactively reduce environmental impacts across our business and to offer more sustainable customer solutions. In this year's Annual Report we have established non-financial key performance indicators (KPIs) including environmental KPIs with targets to significantly reduce environmental impacts. In the coming year we will be working to further develop this
plan to address climate-related risks and opportunities.
Task Force on Climate-related Financial Disclosures (TCFD)
We endorse the TCFD recommendations and are a recognised 'supporting organisation'. We are continuing to work on the recommendations and our reporting in this regard is included in this Annual Report, our submission to the Carbon Disclosure Project (CPD) and on our corporate website.
Summary of the Group's principal risks
The Group's principal risks are categorised under one of three categories: strategic (see the Group's strategic priorities on pages 13 to 15); regulatory / compliance (see the business model on pages 8 and 9); and operational risks. These categories mirror those used by the Group to assess its risk appetite.
Risk direction definition
↑ The risk is likely to increase within the next 12 months
↔ The risk is likely to remain stable within the next 12 months
↓ The risk is likely to reduce within the next 12 months
What is the risk and how could it affect our business? | Risk direction | What are we doing to manage the risk? |
Strategic risk category | ||
1 Consequences of the COVID-19 pandemic This includes the specific uncertainties associated with this pandemic including: reduced customer demand, lower recovery of receivables and associated liquidity risk, and delays and difficulties sourcing inventory. This extends to the uncertainty of its duration, the risk of further outbreaks and, when the pandemic passes, the speed and extent confidence recovers from its effects.
COVID-19 may also affect other already identified principal risks; these are covered in more detail for each specific risk below. | ↑ The scale, duration and extent of the effects of the pandemic are still developing and hence the risk is increasing. | Mitigating actions include: · A rapid implementation of the Group's crisis management and business continuity plans. · Swift action on cost to protect profit. · A focus on maintaining cash flow. · Actions to improve balance sheet flexibility. · Supporting employees' health, safety and wellbeing.
Other actions include planning for opportunities following the passing of the pandemic. |
2 Consequences of the UK exit from the EU This includes the risk to the Group's supply chain activities across the UK and the EU including possible changes to customs duties and tariffs (a significant proportion of our Group cost of goods flows through the UK to serve our global customer base).
Other related risks include migration of employees and potential impact due to changes to existing legislation. | ↔ Future implications are unclear and dependent on UK / EU trade negotiations during the UK's transition period through to 31 December 2020. Possible effects from early 2021 if trade negotiations have not completed and the UK reverts to WTO arrangements. | · A Group risk assessment before the UK referendum led to reviews across business areas that would be affected by a UK withdrawal. These reviews included: understanding the potential impacts on the Group's global supply chain infrastructure, including the transport of products between the UK and EU; and Group purchasing arrangements both within and outside the EU. Other notable areas include: employee mobility, effects on the Group's transactional IT systems, treasury management and indirect taxation. · A specific team headed by the Chief Financial Officer (CFO) with senior representatives from across the business, have met regularly throughout the year. These meetings involve the team being updated on the possible effects given the UK's negotiations with the EU, current progress on mitigating activities and to decide and agree on further actions (see pages 38 and 39). |
3 Failure to respond to strategic market shifts e.g. changes in customer demands / competitor activity and related stakeholder requirements Unforeseen changes in customer and market assumptions that the Group performance plans are based upon. Such market changes could be accelerated by the current COVID-19 pandemic. Reduced stakeholder support for the business in the absence of an adequate CR plan. | ↑ Ongoing market developments and increasing stakeholder requirements in areas such as CR. | · Monitoring of market developments, including the competitive environment. · Ongoing strategic and market reviews by the Board and the SMT. · Investment in digital platforms. · Annual strategic planning process including the assessment of external market changes. · Mergers and acquisitions (M&A) governance structure with internal and external capability and support. · Development of a Group CR plan and supporting action plan. · Specific planning for the business environment after the COVID-19 pandemic passes. |
4 The Group's revenue and profit growth initiatives are not successfully implemented This risk could lead to lower than forecast financial performance both in terms of revenue growth and cost savings with changes required to Group plans and any post-acquisition integration activities. These plans may be delayed by business decisions in light of the COVID-19 pandemic. | ↑ The Destination 2025 strategy uses similar Group and regional governance processes as were successfully used in previous recent strategic change processes. However, the business actions to manage the short-term effects of the COVID-19 pandemic will delay the implementation of some growth initiatives. | · Prioritised set of proposals and projects, including revenue growth initiatives and supporting activities across shared business services and supply chain infrastructure, focused on getting the basics right for customers. · Governance structure with accountabilities designed to support delivery on time and to cost, within resources and capabilities. · Identification, assessment and management of the consequences of changes arising from plan initiatives. · Specific and tailored post-acquisition integration plans. |
Regulatory / compliance risk category | ||
5 Failure to comply with international and local legal / regulatory requirements Failure to manage these collective risks adequately could lead to: · Death or serious injury of an employee or third party, and / or · Penalties for non-compliance in health and safety or other compliance areas | ↑ The current COVID-19 pandemic has increased health and safety risks to our employees in the short term for both physical and mental wellbeing. Some regulations, notably regarding movements of certain types of inventory, e.g. personal protective equipment, are currently subject to rapid changes in light of the COVID-19 pandemic with increased risk of unintended breaches. | · Specific COVID-19 health and safety initiatives (see page 50). · Employment of internal specialist expertise, supported, where needed, by suitably qualified / experienced external partners, for example to provide relevant EU General Data Protection Regulation (GDPR) guidance. · Ongoing reviews of relevant national and international compliance requirements. · Training and awareness programmes in place focusing on anti-bribery, competition and data protection legislation. · Global whistleblowing hotline managed by an independent third party providing employees with a process to raise non-compliance issues. · Global health and safety policy, Target Zero accidents initiative. · Local health and safety forums in place with the VP of Global Environment, Health and Safety. · Real-time monitoring of customer orders to ensure compliance with international trade control regulations. |
Operating risk category | ||
6 Failure in the business's critical infrastructure An unplanned event disrupting the Group's critical infrastructure, including key locations and third-party suppliers. | ↑ The current COVID-19 pandemic has, in the short term, reduced office site reliance due to home working. However, the risk of DCs being unable to operate due to employee sickness has increased. | · Business continuity plans at operating locations. · Regular tests at key DCs, sales and back office locations. · Plant switching process whereby the activity of a DC unable to operate can be switched to another to meet a proportion of its customer demand. · Assessments of critical third-party suppliers. |
7 Prolonged system outage The loss of a core transactional system resulting in the business being unable to serve customers.
| ↔ No significant changes to the Group's IT infrastructure | · Resilient IT systems infrastructure featuring operating redundancies and off-site disaster recovery. · Regular testing of the IT disaster recovery plans across the Group. · Strict control over upgrades to core transaction systems and other applications. · Core transaction systems managed from a data centre. |
8 Information loss / cyber breach An attack on the Group's systems / data could lead to potential loss of confidential information and disrupt the Group's transactions with customers (including the transactional website) and transactions with suppliers. | ↑ Increasing frequency and sophistication of cyber attacks on businesses. This is of particular note during the current COVID-19 pandemic with increased and well-publicised malicious cyber activity aimed at individuals and corporates. | · The Chief Information Security Officer manages the Group's information security requirements. · Employee training and messaging on cyber risk awareness has been prioritised during the COVID-19 crisis. · Anti-virus software to protect business PCs and laptops. · Procedures to update supplier security patches to servers and clients. · External emails identified as such to all business recipients. · Software scanning of incoming emails for known viruses. · Firewalls to protect against malicious attempts to penetrate the business IT environment. · IT control reviews to consider the security implications of IT changes. · Security reviews with selected third-party suppliers. · Computer emergency readiness team (CERT) to track software vulnerabilities. · A specific assessment of increased risk areas in the COVID-19 environment. · Refocused cyber monitoring reflecting the changed business working environment and increased external threats. |
9 UK defined benefit pension scheme cash requirements are in excess of cash available The Company is required to contribute increased cash sums to the UK defined benefit pension scheme due to the trustee exercising its power to close the scheme if in a deficit, as it is currently (the trustee has confirmed that it has no current intention to exercise this power to wind up the scheme). | ↔ No significant changes to related financial and other assumptions anticipated | · Quarterly reviews of the pension scheme funding position. · Regular interaction with the pension scheme trustees. · Joint trustee / Company working group to review investment strategy. · Consultation with scheme members on future individual funding options for defined benefit scheme. |
10 People resources unable to support the existing and future growth of the business The business is not able to attract and retain the necessary high-performing employees to ensure that the business achieves its targeted performance. | ↔ No significant changes to the supply and retention of quality employees | · Development of existing employee competencies and the introduction of external expertise where appropriate. · Annual employee appraisal processes to align personal objectives with the Group's strategy. · COVID-19 people related support activities across the regions. |
11 Impact on the business if the macroeconomic environment deteriorates The Group's revenue, and hence profit, are adversely affected by a decline in the global macroeconomic environment with other associated effects such as foreign exchange volatility. | ↑ The macroeconomic environment has deteriorated significantly with the effects of COVID-19 related lockdowns across our markets. The longevity, frequency and extent of this deterioration and the speed of any subsequent recovery are unclear. | · Strong cash generative business. · Strong balance sheet. · Significant headroom maintained on debt covenants and banking facilities. · Relevant foreign exchange cash flow hedging for business trading purposes. · Cost management and control of inventory. |
Viability statement
Assessment of prospects
The Group's strategic priorities are focused on delivering sustainable growth and superior returns for all our stakeholders and includes a number of initiatives. They are discussed in more detail on pages 13 to 15.
Our business model, as described on pages 8 and 9, is structured so that the Group is a global omni-channel provider of industrial and electronic products and solutions to a very broad spread of customers both in terms of industry sector and geography. The Group is not reliant on one particular group of customers or suppliers, with its largest customer accounting for under one percent of revenue and its largest supplier less than four percent of revenue. Our business
model is differentiated by: our global network of 12 DCs; our talented and customer-centric team; our strong supplier relationships; our broad range of products and value-added solutions capabilities; and our strong digital presence. The Group has high inventory availability with
products sourced from a large number of suppliers and provides customers with a reliable and fast service.
The Group's results and financial position are reviewed monthly by both our SMT and the Board. Every day the SMT receives an analysis of the previous day's revenue and gross margin. The Board receives and reviews monthly management accounts, including cash flows, and also receives regular performance and forecast updates from the CFO and Chief Executive Officer.
The Group's long-term prospects are assessed primarily through its strategic and financial planning process. This includes the preparation of a five-year strategic plan and, in normal years, a detailed annual target setting process involving both Group and regional management which are updated annually and reviewed and approved by the Board. The SMT receives and reviews a scorecard each quarter showing progress against the strategic plan objectives. The Board also receives updates and, if appropriate, the strategic plan is updated depending on progress and performance.
However, this year, given the unprecedented level of uncertainty surrounding the COVID-19 pandemic, we have taken a more dynamic approach to financial planning and so have not
followed a detailed annual target setting process. Instead, we have modelled a range of potential scenarios for different durations and severities of the pandemic. These have been regularly updated to reflect latest trading trends and changes to our expectations. These are reviewed, and the assumptions approved, at the additional regular Board meeting calls that
started on 21 March 2020. On these calls the Board also discusses and approves the various mitigating actions the Group should take for each scenario.
Our five-year strategic plan has been updated for a "U" shaped scenario. This scenario assumes the Group continues to see a like-for-like decline in revenue for June and July 2020, in line with what was seen during the first eight weeks of the year ending 31 March 2021 of 14%, before modest recovery commences reducing the like-for-like decline in revenue for the
rest of the year. It assumes no further pandemics or recurrences of COVID-19 and a return to like-for-like revenue growth in the years ending 31 March 2022 and 2023. It assumes various cost mitigations are taken to protect profit, an additional impairment allowance against 2021 trade receivables, dividends continue to be paid and capital expenditure is reduced by approximately £20 million to around £60 million to conserve our liquidity.
Our capital position is supported by regular reviews of the Group's funding facilities and banking covenants' headroom, through the Board's Treasury Committee. A weekly cash forecasting process and review covering the following two to three months has been recently instigated to
closely track our net debt position during the COVID-19 pandemic, so we can take any necessary actions on a timely basis. Details of the Group's sources of finance are outlined on page 142 with the earliest facility expiring being the Group's syndicated multi-currency facility for US$75 million, £85 million and €50 million in August 2022. During the year, new private placement loan notes of €31 million and US$165 million with maturities from 2026 to 2031 were taken out and the old private placement loan notes of US$100 million and the £75 million term
loan prepaid. Since the year end we have secured eligibility to participate in the Bank of England Covid Corporate Financing Facility (CCFF) and are negotiating an additional £100 million bank
facility for a 12-month term plus six months as safety nets in case the macroeconomic environment deteriorates more than our worst case modelling assumes. We have no current intention to draw on the CCFF or additional bank facility and so have excluded these from all our modelling.
The Group's debt covenants are EBITA to interest to be greater than 3 times and net debt to adjusted EBITDA to be less than 3.25 times. At 31 March 2020, EBITA to interest was 33.6x (2019: 37.7x) and net debt to adjusted EBITDA was 0.7x (2019: 0.5x) (see Note 3 on page 122
for reconciliations and the impact of IFRS 16 on these ratios) and under our updated strategic plan these are also comfortably met.
The Board also considers the long-term prospects of the Group as part of its regular monitoring and review of risk management and internal control system, as described on page 75.
Viability assessment period
In their assessment of viability, the Directors have reviewed the assessment period and have determined that a three-year period to 31 March 2023 continues to be most appropriate. The robustness of the strategic plan is significantly higher in the first three years with the final two years being a high-level extrapolation. The Group has few contracts with either customers or suppliers extending beyond three years and, in the main, contracts are for one year or less. The business operates with a minimal forward order book, generally taking orders and shipping them on the same day. In addition, as more business moves online and we become more agile,
speed of change increases and so visibility is relatively short term. Of the Group's long-term obligations, the UK pension scheme is the largest and its triennial funding valuation forms the basis of our agreeing its funding with its trustee.
Assessment of viability
The impact of the COVID-19 pandemic has crystallised elements, or raised the inherent likelihood, of some of our other principal risks. Consequently, the updated strategic plan is currently considered to reflect the Directors' best estimate of the future prospects of the Group. Therefore stress tests were performed on this updated strategic plan to assess the Group's viability on different durations and severities of the pandemic.
These severe but plausible stress tests included:
A recurrence of COVID-19 during the second half of our year ending 31 March 2021, a "W" shape, leading to a decline in like-for-like revenue during the assumed winter lockdown period in line with what was seen in our first eight weeks of 2021 and higher impairment allowances against 2021 trade receivables. This assumes further reductions in discretionary spend in 2021 and that other interventions and mitigations will be taken as and when we see fit, including no dividends paid in 2021. Recovery is assumed to start towards the end of the year with no further pandemics or recurrences of COVID-19 in the following two years, leading to double digit like-for-like revenue growth in 2022 and more normal growth levels in 2023. Dividends are assumed to be paid in 2022 and 2023.A like-for-like revenue decline in our first four months of 2021 double that assumed in our "U" shaped scenario.Gross margin declining in 2021 by 4 percentage points.Cash collection from trade receivables deteriorates a further 5% during the downturn in 2021.
These stress tests assume our banking facilities are refinanced before they expire in August 2022 but no additional facilities are taken out and we do not access the CCFF. They result in the Group meeting its debt covenants and having sufficient liquidity.
Each of the Group's other principal risks on pages 40 to 42 also has a potential impact on the Group's viability, although the followings risks are believed to be adequately covered by the above COVID-19 stress tests:
2 Consequences of the UK exit from the EU
3 Failure to respond to strategic market shifts e.g. changes in customer demands / competitor activity and related stakeholder requirements
4 The Group's revenue and profit growth initiatives are not successfully implemented
5 Failure to comply with international and local legal / regulatory requirements
11 Impact on the business if the macroeconomic environment deteriorates
For the remaining principal risks, the Directors determined an appropriately severe but plausible stress test for each. They decided which stress tests would have the most impact on the viability of the Group and developed appropriate scenarios to model for these. These scenarios were then modelled by overlaying them onto the updated strategic plan to quantify the potential impact of one or more of them crystallising over the assessment period.
The scenarios modelled and the principal risks to which they relate were:
A major incident at the largest DC destroying the building and its contents - tests principal risk 6 'Failure in the business's critical infrastructure'.A major system failure (possibly caused by a cyber attack) leading to a serious loss of service, fines for data breach and loss of reputation leading to halving of sales growth - tests principal risks 7 'Prolonged system outage' and 8 'Information loss / cyber breach'. The severe and plausible stress tests for the principal risks 9 'UK defined benefit pension scheme cash requirements are in excess of cash available' and 10 'People resources unable to support the existing and future growth of the business' were assessed to have less impact on the Group's viability.
In performing the above tests on the remaining principal risks it was assumed that our debt facilities were refinanced before they expire although the CCFF was not accessed and no additional facilities were taken out, dividends were unchanged and no further mitigating actions were taken, including no further reduction to capital expenditure.
Reverse stress tests were also undertaken to assess the circumstances that would threaten the Group's current financing arrangements and the Directors consider the risk of these circumstances occurring to be remote.
The results of the above stress tests for the remaining principal risks showed the Group would be able to withstand the impact of these scenarios occurring.
Confirmation of viability
Based on the assessment outlined 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 years to 31 March 2023.
Going concern
Based on the assessment outlined above, the Directors also believe that it is appropriate to continue to adopt the going concern basis in preparing the Group's accounts.
Related Parties (Note 27 - page 147)
The Group's joint venture (Note 17) is a related party and during the year, the Group made sales of £2.3 million (2019: £2.2 million) to the joint venture, and a balance of £0.9 million (2019: £0.7 million) was outstanding at the year end.
The Group's pension schemes are related parties and the Group's transactions with them are disclosed in Note 10.
The key management personnel of the Group are the Directors and the Senior Management Team, whose compensation was:
| 2020 £m | 2019 £m |
Short-term employee benefits | 5.8 | 10.4 |
Post-employment benefits | 0.1 | 0.2 |
Termination benefits | 0.5 | 1.1 |
Share-based payments | 1.1 | 1.9 |
| 7.5 | 13.6 |
Transactions and balances between the Company and its subsidiaries have been eliminated on consolidation.
Statement of Directors' responsibilities (page 104)
The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulation.
Company law requires the Directors to prepare accounts for each financial year. Under that law the Directors have prepared the Group accounts in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and Company accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', and applicable law). Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company for that period. In preparing the accounts, the Directors are required to:
Select suitable accounting policies and then apply them consistentlyState whether applicable IFRS as adopted by the European Union have been followed for the Group accounts and United Kingdom Accounting Standards, comprising FRS 102, have been followed for the Company accounts, subject to any material departures disclosed and explained in the accountsMake judgements and accounting estimates that are reasonable and prudent andPrepare the accounts on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the accounts and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group accounts, Article 4 of the IAS Regulation.
The Directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and Company's position and performance, business model and strategy.
Each of the Directors, whose names and functions are listed on pages 56 and 57 confirm that, to the best of their knowledge:
The Company accounts, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit / loss of the Company;The Group accounts, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; andThe Strategic Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces.
In the case of each Director in office at the date the Directors' Report is approved:
So far as the Director is aware, there is no relevant audit information of which the Group and Company's Auditors are unaware; andThey have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Group and Company's Auditors are aware of that information.
By order of the Board
Lindsley Ruth David Egan
Chief Executive Officer Chief Financial Officer
SAFE HARBOUR
This financial report contains certain statements, statistics and projections that are or may be forward-looking. The accuracy and completeness of all such statements, including, without limitation, statements regarding the future financial position, strategy, projected costs, plans and objectives for the management of future operations of Electrocomponents plc and its subsidiaries is not warranted or guaranteed. These statements typically contain words such as 'intends', 'expects', 'anticipates', 'estimates' and words of similar import. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Although Electrocomponents plc believes that the expectations reflected in such statements are reasonable, no assurance can be given that such expectations will prove to be correct. There are a number of factors, which may be beyond the control of Electrocomponents plc, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. Other than as required by applicable law or the applicable rules of any exchange on which our securities may be listed, Electrocomponents plc has no intention or obligation to update forward-looking statements contained herein.