Hill & Smith Regulatory News (HILS)

Risk: Reduction in public infrastructure spending

Trend

No change

Description and potential impact

Demand for sustainable infrastructure and transport is underpinned by Government spending plans. Changes to these plans could have a detrimental impact on Group revenues.

The Infrastructure Investment and Jobs Act (‛IIJA'), enacted into law in November 2021, confirmed a substantial increase in US federal government spending across a range of infrastructure areas and is likely to benefit demand for the Group's products and services in the US. Despite the current macro-economic uncertainty and recent delays in strategic road network projects, we are confident the UK Government are committed to the Road Investment Strategy, presenting future opportunity for our UK roads businesses.

Mitigation

· Our existing entity portfolio contains diverse products, markets and territories and we will continue with this approach.

· Market and product development initiatives.

· Co-operation between Group businesses, leveraging the Group's size/international footprint and exploiting synergies.

· Exposure to the benefits from longer term infrastructure investment programmes.

Risk: Changes in global outlook and geopolitical environment

Trend

Slightly higher

Description and potential impact

The Group operates in a range of end-user markets around the world and may be affected by political, economic or regulatory developments in any of these countries.

Material adverse changes in the political and economic environments in the countries in which we operate, have the potential to put at risk our ability to execute our strategy.

As a result of continued global macro-economic uncertainty and the threat of recession, an increase in the risk has been recognised.

Mitigation

· The Group has a diverse portfolio of operating companies with exposure to a range of markets and geographies, limiting exposure to any one country or market sector.

· Current and future financial performance is continuously monitored, facilitating rapid response to changes in market conditions.

· In line with our entrepreneurial model, our decisions are made close to our markets and our businesses are agile and responsive to changes in their competitive landscape.

· Co-operation between Group businesses, leveraging the Group's size/international footprint and exploiting synergies.

Risk: Increase in competitive pressure

Trend

No change

Description and potential impact

Increased volatility, uncertainty and slowdown in our markets could result in increased prices and the emergence of new technologies, leading to a loss of customers and/or pricing pressure and consequently a loss of sales and reduced profits.

 Mitigation

· Holding leading positions in niche markets of sustainable infrastructure and transport safety with high barriers to entry.

· In line with our entrepreneurial model, our decisions are made close to our markets and our businesses are agile and responsive to changes in their competitive landscape.

· Our operating companies aim to provide superior products and high service levels to customers, whilst aiming to ensure there is no dependency on any one customer.

Risk: Product failure

Trend

No change

Description and potential impact

The Group operates in infrastructure markets where it is critical that its products meet customer and legislative requirements and where the consequences of product failure are potentially significant.

Product failure arising from component defects or warranty issues may require remediation including the replacement of defective components or complete products, resulting in direct financial costs to the Group and/or wider reputational risk.

Mitigation

· Products tested, approved and accredited by regulatory bodies.

· Quality control protocols fully implemented and continuously monitored.

· Contractual controls in place to minimise economic impacts.

· Insurance cover maintained globally with insurance partners.

· Litigation supported/managed by external legal specialists.

Risk: Contractual failure

Trend

No change

Description and potential impact

The Group delivers its commitments to its customers through a variety of contractual arrangements of both a short and medium term nature.

Weaknesses in the contract tendering process, inappropriate pricing, misalignment of contract terms, ineffective contract management or failure to comply with contractual conditions could result in loss of revenues, pressure on operating margins and wider reputational damage to the Group.

Mitigation

· Thematic Internal Audit review completed across the Group during 2021 with recommendations implemented during 2022.

· Group material contract review process ensures specialist central oversight of key contractual arrangements.

· Contracts training for key staff.

· Dedicated quantity surveyors and contract managers in operating companies to control contracts and mitigate risk.

· Litigation supported/managed by external legal specialists.

· Insurance cover maintained globally with insurance partners.

Risk: Supply chain failure

Trend

No change

Description and potential impact

The Group's businesses depend on the availability and timely delivery of raw materials and components, which could be affected by disruption in its supply chain. Supply chain failures because of performance, cost inflation, quality and/or insolvency may have an adverse impact on the Group's production capacity and lead to an inability to meet customer requirements, resulting in a reduction in revenues, potential loss of market share and possible reputational damage.

Global warming could place further stress on our supply chain, with extreme weather events impacting supply becoming more likely and chronic changes to heat/ rainfall averages potentially impacting where we source certain materials. Climate change transition costs could also inflate the price of the goods we purchase.

During the year, our operating companies continued to take appropriate action to manage supply chain headwinds. Actions taken included implementing price increases to offset significant input cost inflation, securing supply of raw materials and ensuring the continuity of operations with a backdrop of labour shortages in certain businesses.

Mitigation

· Supply chain resilience has been a focus of the Risk Committee during 2022 with ongoing monitoring of operating companies' ability to respond to the continued challenges.

· Group wide thematic Internal Audit review of Supply Chain completed during 2022 with recommendations to be implemented during 2023.

· Group procurement standards, including robust due diligence of supply chain partners and the requirement for dual sourcing where available.

· Regular interaction and assessment of performance/ financial status of key suppliers.

· Group oversight of material procurement contracts ensuring robust contractual protections.

· Goods inwards and stock management processes in place to reduce the likelihood of defects or a shortage of raw materials.

· Contingency plans in place throughout the supply chain, such as purchasing additional stock of key raw materials and securing additional supply chain capacity.

Risk: IT systems failure

Trend

Slightly higher

Description and potential impact

The Group relies on the information technology systems used in the daily operations of its operating companies. A failure or impairment of those systems or any inability to effectively implement new systems could cause a loss of business and/or damage to the reputation of the Group, together with significant remedial costs.

Poor security controls and procedures could lead to our operating companies being susceptible to cyberattack, potentially resulting in significant IT failure and associated disruption.

During the year the global cyber threat has continued to evolve, with increasing numbers of organised criminal groups undertaking increasingly sophisticated ransomware and other cyber attacks. As a result of the conflict in Ukraine the UK's National Cyber Security Centre (‛NCSC') has warned of heightened cyber risk across UK, US and European businesses.

While there has been a marked enhancement of the Group's IT security controls during 2022, the Board consider the risk to be heightened due to the increasing sophistication and frequency of cyber threats across the world.

Mitigation

· The Board maintains a watching brief on IT and cyber risk, and has overseen significant investment across the Group to enhance IT security controls and maturity covering areas such as identity management, IT asset management, backup, endpoint protection, incident response and vulnerability management.

· Wholesale network security improvements planned for 2023.

· IT controls manual setting out a robust set of information security controls covering basic cyber hygiene, system back-up procedures and hardware/ software protection. Reviews of IT controls compliance were completed by Internal Audit during 2022, with action plans agreed and monitored.

· Quarterly updates established to brief operating company leadership teams on their responsibilities relating to IT management and information security.

· Segregated business processing systems within each operating company means that any disruption due to illegal external activity is unlikely to jeopardise the Group as a whole.

Risk: Portfolio management

Trend

No change

Description and potential impact

The Group's growth strategies include the acquisition of businesses around the world that complement or supplement its existing activities. Failure to execute an effective acquisition and integration programme would have a significant impact on the Group's ability to generate sustainable profitable growth for shareholders.

Mitigation

· All potential acquisitions are tightly evaluated to ensure they fit within our purpose and core strategic goals.

· Due diligence protocols deployed in relation to assessment of target businesses, including financial, commercial, and legal etc.

· Board approval required for Group acquisitions, in line with the Group Board's Schedule of Matters Reserved.

· Contractual protections and assurances sought from sellers to mitigate subsequent identification of risks.

· Post-acquisition integration plans established for all acquisitions with regular performance monitoring and reporting to the Board.

Risk: Lack of investment in product development and innovation

Trend

No change

Description and potential impact

The Group operates in global infrastructure markets where continuous innovation is integral to the Group's product offering and where a failure to innovate could result in product obsolescence, the entry of new competitors and/or loss of market share. The development of new products and technologies carries risk including the failure to develop a commercially viable offering within an acceptable timeframe.

Mitigation

· Group wide Innovation Framework launched during 2021 to encourage and stimulate more innovation across the Group. Workshops were run during 2022 to foster innovation and share best practice and these will continue into 2023.

· Entrepreneurial culture fostered through a decentralised management structure, ensuring that Group businesses are agile and responsive to changes in their competitive environments.

· Acquisitions add innovate products and technology to our portfolio.

· Executive Board approval of product development proposals within the Group's capital spend approval policies.

· Active Intellectual Property management within individual operating companies overseen by Group.

· Dedicated quality compliance resources in place across operating companies, ensuring responsiveness to regulator and/or customer approval requirements.

· Board monitoring of emerging risks alongside external specialist support, where both the risks identified and the potential opportunities arising are considered.

Risk: Talent, development, diversity, recruitment and retention of key employees

Trend

Slightly lower

Description and potential impact

The changing nature of the demographics from which we source our employees and the ways in which they like to work can make it difficult to attract and retain both skilled and unskilled labour. We need to ensure effective recruitment channels and make the necessary investment to develop and retain high quality individuals in key positions to guarantee the long term success of the business. We need to ensure the diversity of our workforce reflects the communities in which we work. Without talented employees we will be unable to deliver our strategic aims.

Competitive labour local markets and the aftermath of COVID-19 led to challenging recruitment conditions for our operating companies in the first half of the year. In the second half of the year these pressures eased due to rising unemployment and a more difficult economic climate, subsequently time to recruit and the number of vacancies across the Group have both reduced. The issue does remain though for certain skillsets that are more challenging to find and retain, e.g., Welders.

Our senior leadership gender diversity has improved in 2022 to 20%, due to both internal promotions and external hires. An increased focus on engagement and corrective actions following the 2021 engagement survey has led to an improved score for the 2022 engagement survey, increasing from 55% to 61%. The process to find a permanent CEO is underway.

Overall, a reduction in the risk has been recognised for the period.

Mitigation

· Two of our ESG focus areas (Talent development and engagement & Diversity, and inclusion) directly address the risk, with improvement initiatives and metrics overseen by the ESG Committee.

· Refreshed People Strategy with a greater focus on internal talent.

· Group Head of Reward and Group Head of Talent roles recruited during 2022.

· Contractual protections and retentions in employment contracts of senior management and other key employees.

· Training and development of employees, which includes a programme of IOD and ILM courses for senior management and identified potential successors, and apprenticeship and other vocational courses for specialist and technical roles.

· Appropriate remuneration and benefits, together with bonus opportunities and incentive plans offered to employees.

· Recruitment process developed to include competency requirements and skills gap analysis.

· Talent review process extended in scope to cover more employees, increasing our visibility of talent.

Risk: Prevention of harm or injury to people

Trend

No change

Description and potential impact

The Group is committed to preventing all health and safety incidents and ensuring the health, safety and wellbeing of all employees and third parties. The Group operates multiple manufacturing facilities around the world, a failure in the Group's health & safety procedures could lead to injury or to the death of employees or third parties.

LTIR has reduced from 1.7 in 2021 to 1.1 in 2022. Further improvement is required to reach the 2030 Health & Safety target of 0.25 and health & safety remains a key focus area for the Group.

Mitigation

· Culture of zero tolerance in respect of health & safety violations promoted by the Board and disseminated throughout Group businesses.

· Reduction of the Group's LTI rates is a key focus for Management and the Board, with improvement metrics now established through the ESG Committee.

· Monthly health & safety reporting for all operating companies via online tools.

· Monitoring and review of LTI rates by Group with all LTI events followed up and investigated thoroughly using the 'five whys' root cause analysis and presented to the Exec Board. Improvement recommendations are implemented to minimise any reoccurrence.

· Development and roll out (Jan 2023) of our 'nine lifesaving rules' and 'non-negotiable safety behaviours'

· Programme to add defibrillators to all sites commenced in 2022.

· Regular health & safety site audits.

· Health & safety forums to monitor performance and share best practice.

· External health & safety accreditations and relationships maintained with regulatory bodies.

· Health & safety is a priority area of focus for new acquisitions.

Risk: Violation of applicable laws and regulations

Trend

No change

Description and potential impact

The Group's global operations must comply with a range of national and international laws and regulations including those related to modern slavery, anti-bribery and corruption, human rights, and employment, GDPR, trade/export compliance and competition/anti-trust.

A failure to comply with any applicable laws and regulations could result in civil or criminal liabilities and/ or individual or corporate fines and could also result in debarment from Government-related contracts, restrictions on ability to trade or rejection by financial counterparties as well as reputational damage.

Our exposure to breaching sanctions placed on Russia is low due to no current direct Russian customers or suppliers. Our export compliance software performs daily screening of our customer and supplier databases against global sanctioned and denied party lists with any changes in status flagged.

Mitigation

· Group Code of Conduct sets out required approach for all staff.

· Staff training provided on Modern Slavery red flags, Anti-Bribery and Corruption and Competition compliance.

· Programme of audits undertaken on a cyclical basis to review operating companies' compliance with regulatory requirements, including for example simulated 'dawn raids'.

· Software solutions implemented globally to ensure compliance with trade and export legislation.

· Externally hosted whistleblowing hotline available to all employees to allow them to raise concerns in confidence or anonymously, if preferred.

· Modern Slavery compliance programme continued through 2022.

· Toolkits issued to all UK operating companies to aid compliance with GDPR.