Strategic Report - Management of Risks and Uncertainties
The Board has overall responsibility for the Group’s system of internal control, for reviewing its effectiveness and for confirming that there is a process for identifying, evaluating and managing the principal risks affecting the achievement of the Group’s strategic objectives. This system of internal control can only provide reasonable and not absolute, assurance against material misstatement or loss.
The Group has established a risk management process to ensure effective and timely identification, reporting and management of risk events that could materially impact upon the achievement of the Company’s strategic objectives and financial targets. This involves the Board considering the following:
- the nature and extent of the principal risks facing the Group;
- the likelihood of these risks occurring;
- the impact on the Group should these risks occur; and
- the actions being taken to manage these risks to the desired level.
The Audit Committee oversees the effectiveness of the risk management procedures in place and the steps being taken to mitigate the Group’s risks.
A process for identifying, evaluating and managing significant risks faced by the Group, in accordance with the Corporate Governance Code 2018 and the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, has been in place for the entire period and up to the date the financial statements were approved. These risks are reviewed by the Audit Committee and the Board, who will also consider any emerging risks for inclusion in the Group Risk Register.
The risks facing the Group are reviewed regularly by the Audit Committee with the executive management team. Specific annual reviews of the risks and fundamental controls of each business unit are undertaken on an ongoing basis, the results and recommendations of which are reported to and analysed by the Audit Committee with a programme for action agreed by the business units.
Internal Controls and Risk Management
The key features of the Group’s system of internal control and risk management include:
- review, discussion and approval of the Group’s strategy by the Board;
- clearly defined organisation structures and authority limits for the operational and financial management of the Group and its businesses;
- corporate policies for financial reporting, treasury and financial risk management, information technology and security, project appraisal and corporate governance;
- review and approval by the Board of annual budgets for all business units, identifying key risks and opportunities;
- monitoring of performance against budgets on a weekly basis and reporting thereon to the Board on a periodic basis;
- an internal audit function which reviews key business processes and controls; and
- review by senior management and the Audit Committee of Internal Audit findings, recommendations and follow up actions.
The preparation and issue of financial reports, including consolidated annual financial statements is managed by the Group Finance function with oversight from the Audit Committee. The key features of the Group’s internal control procedures with regard to the preparation of consolidated financial statements are as follows:
- the review of each operating division’s period end reporting package by the Group Finance function;
- the challenge and review of the financial results of each operating division with the management of that division by the Group Chief Financial Officer;
- the review of any internal control weaknesses highlighted by the external auditor, the Group Chief Financial Officer, Head of Internal Audit and the Audit Committee; and
- the follow up of any critical weaknesses to ensure issues highlighted are addressed.
The Directors confirm that, in addition to the monitoring carried out by the Audit Committee under its terms of reference, they have reviewed the effectiveness of the Group’s risk management and internal control systems up to and including the date of approval of the financial statements. This review had regard to all material controls, including financial, operational and compliance controls that could affect the Group’s business. The Directors considered the outcome of this review and found the systems satisfactory.
Principal Risks and Uncertainties
During the year, the Audit Committee and the Board carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The principal risks and uncertainties set out on pages 14 to 20 represent the principal uncertainties that the Board believes may impact the Group’s ability to effectively deliver its strategy and future performance. The register of risks includes the potential impact of COVID-19 which is addressed in greater detail below. The list does not include all risks that the Group faces and it does not list the risks in any order of priority. The actions taken to mitigate the risks cannot provide assurance that other risks will not materialise and adversely affect the operating results and financial position of the Group. These principal risks are incorporated into the modelling activity performed to assess the ability of the Group to continue in operation and meet its liabilities as they fall due for the purposes of the Viability Statement on pages 20 to 21.
Prior to the year-end, the emergence of COVID-19 began to have an impact on global economies and on businesses generally. This impact has increased significantly since the end of the 2020 financial year on 29 February. Similar to businesses across many sectors and specifically the drinks industry, Government imposed restrictions, while necessary to slow the spread of COVID-19, have had a significant impact on many of the Group’s outcomes, principally the on-trade, as well as the Group’s employees, many of whom have been furloughed. Our primary concern is for the welfare of our people, their families and the communities in which we operate. To that end, we have followed the advice from the respective governments at all times and will continue to do so to protect our people and our operations.
The Audit Committee and the Board have assessed the potential impact of COVID-19 on the business and worked closely with the executive team to put in place near-term measures to protect the business and its prospects, in the best interests of all stakeholders. The Board has added COVID-19 to the register of principal risks and uncertainties; is closely monitoring the development of COVID-19 and the guidance of Governments and health authorities; and is overseeing all business continuity actions being undertaken by the Group’s management team.
The Group is exposed to the impact of the recent COVID-19 virus pandemic and the measures taken by governments to minimise the spread and immediate impact of Coronavirus.
With the Irish and UK governments passing legislation to close pubs, bars, restaurants and clubs, there is a significant risk to our on-trade business and the overall viability of the hospitality industry.
Operations may be impacted as staff self-isolate if they or anyone within their homes develop symptoms. In addition, employees may be required to be temporarily or permanently furloughed during the period.
The Group has acted quickly to respond to the emergence of the COVID-19 virus to protect the health and wellbeing of employees and the interests of all stakeholders; and ensure it is in compliance with local Government and health authority guidelines.
The Group has implemented its business continuity planning and restricted all unnecessary access to its operations in line with government and health service guidelines and consistent with industry best-practice. All travel has been suspended unless business critical, gatherings (such as customer tastings) are suspended and visitors are no longer allowed on site. Staff are also not allowed to move between production facilities to minimise exposure risk.
The Group is ensuring that all employees who can work from home are doing so. The Group is also offering support to employees who have children in school and has put in place additional measures to aid personal wellbeing.
The Group has strengthened its financial position through the drawdown of additional financial resources; and through the diversification of its funding sources.
The Group has suspended all unnecessary capital expenditure, reduced marketing spend, reduced other operating costs and implemented a range of working capital controls to protect liquidity including furloughing all non-essential employees.
The Group has put in place measures to help affected customers including a three month holiday on capital and interest repayments to loan customers, full credit or “new for old” on un-broached kegs, together with a dedicated helpline to offer advice and guidance around government support initiatives that have been introduced and how to access them.
The Group will continue to monitor guidance from governments and health authorities and implement measures in line with best practice.
Regulatory and social attitude changes to alcohol
The Group may be adversely affected by changes in government regulations affecting alcohol pricing (including duty), sponsorship or advertising.
The Group and Business Units continue to engage with trade bodies to ensure any proposed changes to legislation and restrictions are appropriate within the industry.
The Group is actively involved in BBPA and also complies with all Portman Group guidance.
Within the context of supporting responsible drinking initiatives, the Group supports the work of its trade associations to present the industry’s case to government.
The Group is currently developing low alcohol options for brands in order to address legislation and possible duty increases as well as appeal to those consumers looking for a healthier choice.
Economic, political and environmental
Our business, financial results and operations may be adversely affected by economic or political instability and/or uncertainty, in particular relating to the impact of the COVID-19 pandemic.
The Group may also be impacted by the UK’s exit from the European Union.
The Group’s performance is also impacted by potential recessions, inflation, exchange rates, taxation rates and social unrest.
The Board and management will continue to consider the impact on the Group’s businesses, monitor developments and engage with the UK, Irish and Scottish Governments to help ensure a manageable outcome for our businesses.
The Group has taken a number of immediate measures to respond to the impact of the emergence of COVID-19.
Group businesses are active members in respected industry trade bodies including being a steering committee member of the all-party UK Parliamentary Beer Group and the United States Association of Cider Makers.
On an ongoing basis, the Group seeks, where appropriate, to mitigate currency risk through hedging and structured financial contracts and take appropriate action to help mitigate the consequences of any decline in demand within its markets.
Failure to implement policies and meet required sustainability and ethical standards and social perceptions could significantly impact C&C’s reputation as well as potentially impact future growth.
The Group seeks to operate as efficiently and sustainably as possible. There are objectives in place to continually reduce emissions and become a carbon neutral company by 2025.
The Group is seeking to continually reduce waste levels and also the use of single use plastics. The Group continues to be proactive in conserving water usage and minimising energy usage.
Both Clonmel and Wellpark sites continue to be ISO14001 accredited for an effective environmental management system.
The Group ensures strong overall corporate social responsibility of suppliers is reviewed and assessed both on an ongoing basis and as part of new tenders to ensure sustainability and ethical practices are a fundamental part of the supply chain.
Change in customer and consumer dynamics and Group performance
Consumer preference may change, new competing brands may be launched and competitors may increase their marketing or change their pricing policies. Failure to respond to competition and/or changes in customer preferences could have an adverse impact on sales, profits and cash flow within the Group.
COVID-19 may have an impact on the viability of a certain cohort of the Group’s customers and on underlying consumer behaviour and preferences.
Through diversification, innovation and strategic partnerships, we are developing our product portfolio to enhance our offering of niche and premium products to satisfy changing consumer requirements including the production of low and non-alcoholic variants of our brands.
The Group has a programme of brand investment, innovation and product diversification to maintain and enhance the relevance of its products in the market.
The Group also operates a brand‐led model in our core geographies with a comprehensive range to meet consumer needs.
In order to specifically assist customers manage the impact of COVID-19, the Group has introduced a three month holiday on capital and interest repayments to loan customers, full credit or “new for old” on un-broached kegs, together with a dedicated helpline to offer advice and guidance around government support initiatives that have been introduced and how to access them.
People and culture
The Group’s performance is dependent on the skills and experience of its high-performing colleagues throughout the business, which could be affected by their loss or the inability to recruit or retain them.
Failure to continue to evolve our culture, diversity and inclusion could impact our reputation and delivery of our strategy.
The Group seeks to mitigate this risk through appropriate remuneration policies and succession planning.
The Group also seeks to ensure good employee relations through engagement and dialogue.
In respect of the impact of COVID-19 on employees, the Group has implemented an extensive range of measures to provide the safest working environment possible for our people.
These measures include reducing all unnecessary access to the Group’s operating facilities and ensuring that all employees who can work from home are doing so. The Group is also offering support to employees who have children in school and has put in place additional measured to aid personal wellbeing.
Health and Safety
A health and safety related incident could result in serious injury to the Group’s employees, contractors, customers and visitors, which could adversely affect our operations and result in reputational damage, criminal prosecution, civil litigation and damage to the reputation of the Group and its brands.
The emergence of COVID-19 presents a new and specific risk to the health and welfare of the Group’s employees.
The Group has a Safety, Health and Environmental (HSE) team who are responsible for ensuring that the Group complies with all environmental, health and safety laws and regulations with ongoing monitoring, reporting and training.
The Group has established protocols and procedures for incident management and product recall and mitigates the financial impact by appropriate insurance cover.
The Group has enacted specific business continuity plans and a range of measures to protect the business and the health and wellbeing of employees including strict safety, hygiene and two metre social distancing measures. The safety and well-being of our employees has been and continues to be our overriding priority. Executive management are monitoring events closely with regular Board oversight evaluating the impact and designing appropriate response strategies.
Product Quality and Safety
The quality and safety of our products is of critical importance and any failure in this regard could result in a recall of the Group’s products, damage to brand image and civil or criminal liability.
The COVID-19 virus presents additional risk to the safe production of the Group’s products.
The Group has implemented quality control and technical guidelines which are adhered to across all sites. Group Technical continually monitor quality standards and compliance with technical guidelines.
The Group also has quality agreements with all raw material suppliers, setting out our minimum acceptable standards. Any supplies which do not meet the defined standards are rejected and returned.
The Group has enacted specific business continuity plans and a range of measures to protect the business in line with the advice of governments and local health authorities; and ensure the safe production and distribution of the Group’s products.
Supply Chain Operations and Costs
Circumstances such as the prolonged loss of a production or storage facility, disruptions to its supply chains or critical IT systems and reduced supply of raw materials may interrupt the supply of the Group’s products, adversely impacting results and reputation.
COVID-19 also poses the risk of an interruption to the supply of raw materials or to the effective operation of the Group’s manufacturing facilities.
Also, there is a risk of increased input costs due to poor harvest and price of inputs.
The Group seeks to mitigate the operational impact of such an event through business continuity plans, which are tested regularly to ensure that interruptions to the business are prevented or minimised and that data is protected from unauthorised access, contingency planning, including involving the utilisation of third party sites and the adoption of fire safety standards and disaster recovery protocols. The Group seeks to mitigate the financial impact of such an event through business interruption and other insurance covers.
The Group has enacted specific business continuity plans including a range of measures to protect the integrity of production and distribution facilities and increased packaging capacity to meet increased take home demand. To date we have maintained strong levels of service into our customer base. We have taken action to ensure our facilities are staffed sufficiently, that our production plans optimise the capacity available at each of our sites and that we prioritise the SKUs that current consumer demand requires. The Group is also working closely with its suppliers to protect the integrity and consistency of supply of raw materials.
The Group seeks to minimise input risks through long‐term or fixed price supply agreements. The Group does not seek to hedge its exposure to commodity prices by entering into derivative financial instruments.
Information Systems and Data Security
Failure of our IT infrastructure or key IT systems may result in loss of information, inability to operate effectively, financial or regulatory penalties, loss of financial control and negatively impact our reputation. Failure to comply with legal or regulatory requirements relating to data security (including cyber security) or data privacy in the course of our business activities, may result in reputational damage, fines or other adverse consequences, including criminal penalties and consequential litigation, adverse impact on our financial results or unfavourable effects on our ability to do business.
COVID-19 also poses specific IT risks including the potential for key personnel to contract the virus, the Group’s IT support services being unable to discharge their obligations due to the impact of the virus on their own operations or an increase in the number of malicious emails sent to colleagues working from home.
The Group has a number of IT security controls in place including gateway firewalls, intrusion prevention systems, security incident monitoring and virus scanning. Regular communications are sent out to colleagues containing advice on IT security particularly in relation to home working.
The Group’s approach is one of ongoing enhancement of controls as threats evolve with the target being to align controls, and in particular to implement any new services or changes to the environment, with reference to the ISO 27001 international standard.
The Group also has a suite of information security policies in place including Data Protection (GDPR) and Electronic Information and Communications.
The Group has enacted specific business continuity plans including co-ordination with key third party IT suppliers and consideration of keyman risk for the Group’s IT personnel.
Business growth, integration and change management
As the Group grows through acquisition, it is necessary to adjust to change and assimilate new business cultures. The breadth and pace of change can present strategic and operational challenges.
Business integration and change that are not managed effectively could result in unrealised synergies, poor project governance, poor project delivery, increased staff turnover, erosion of value and failure to deliver growth.
Significant acquisitions have formal leadership and project management teams to deliver integration.
Regular Group communications ensure effective information, engagement and feedback flow to support cultural change.
The Executive Management Team oversees change management and integration risks through regular people, planning and products meetings.
Compliance with laws and regulations
The Group operates in an environment governed by strict and extensive regulations to ensure the safety and protection of customers, shareholders, employees and other stakeholders. These regulations include hygiene, health and safety, the rules of the London Stock Exchange and competition law. Changing laws and regulation may impact our ability to market or sell certain products or could cause the Group to incur additional costs or liabilities that could adversely affect its business. Moreover, breach of our internal global policies and standards could result in severe damage to our corporate reputation and/or significant financial penalty.
The Group has in place permanent Legal and Compliance functions that ensure the Group is aware of all new regulations and legislation, providing updated documentation, training and communication across the Group.
The Group has a Code of Conduct, which is approved by the Board and supported by a wide range of policies, including Modern Slavery, Anti-Bribery and Corruption and Diversity.
The Group maintains appropriate internal controls and procedures to guard against economic crime and imposes appropriate monitoring and controls on subsidiary management.
Brand and Reputation
The Group faces considerable risk if we are unable to uphold high levels of consumer awareness, retain, attract key associates and sponsorships for our brands and inadequate marketing investment to support our brands.
Maintaining and enhancing brand image and reputation through the creation of strong brand identities is crucial for sustaining and driving revenue and profit growth.
The closure of on-trade outlets and a reduction in the Group’s marketing and brand advertising due to COVID-19 may impact the Group’s brand health scores.
To mitigate this risk, C&C has defined values and goals for all our brands. These form the foundation of our product and brand communication strategies.
Central to all our brand image initiatives is ensuring clear and consistent messaging to our targeted consumer audience.
Executive Management, Group Legal and internal/external PR consultants work together to ensure that all sponsorship and affiliations are appropriate and protect the position of our brands.
The Group is monitoring the impact of the rapidly changing trading environment on the Group’s brands and will make necessary investment decisions to protect the Group’s brand health scores and reputation.
Financial and Credit Risks
The Group is subject to a number of financial and credit risks such as adverse exchange and interest rate fluctuations, availability of supplier credit, credit management of customers and possible increase to pension funds deficits and cash contributions.
Non-conformities of accounting and financial controls could impair the accuracy of the data used for internal reporting, decision-making and external communication.
COVID-19 may have an impact on the Group’s customers’ ability to honour their obligations. COVID-19 may also impact the Group’s ability to access supplier credit.
The Group seeks to mitigate currency risks, where appropriate, through hedging and structured financial contracts to hedge a portion of its foreign currency transaction exposure. It has not entered into structured financial contracts to hedge its translation exposure on its foreign acquisitions.
In relation to pensions, continuous monitoring, taking professional advice on the optimisation of asset returns within agreed acceptable risk tolerances and implementing liability‐management initiatives.
A range of credit management controls are in place and regularly monitored by management to minimise the risk and exposure.
A range of key internal financial controls, such as segregation of duties, authorisations and detailed reviews are in place with regular monitoring by management to ensure the accuracy of the data for reporting purposes.
The Group is working with all customers and suppliers to minimise the adverse impact of COVID-19 on the business.
Assessment of the Group’s Prospects
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of this report. That expectation factors in the current and expected impact of COVID-19. Please refer to the “Going Concern” section of the Audit Committee Report on Page 69 of this Annual Report for further detail. The going concern assessment indicated that even if a return of on-trade business was extended beyond the Group’s estimate of summer 2020, to the end of the going concern assessment period, that the Group has sufficient access to liquidity to operate over this assessment period.
Accordingly, we continue to adopt the going concern basis in preparing the Group’s and Company’s financial statements.
As set out in Provision 31 of the UK Corporate Governance Code, the Directors have assessed the prospects of the Group and its ability to meet its liabilities as they fall due over the medium-term. Specifically, the Directors have assessed the viability of the business over a three year period to February 2023, taking account of the Group’s current position and prospects, the Group’s strategy, the Board’s risk appetite and the Group’s Principal Risks and Uncertainties as set out above and how these are identified, managed and mitigated. Key metrics such as cash flow, including working capital and the restoration of working capital improvements following the expected outflows in FY2021, interest cover, liquidity, covenant compliance and headroom in covenants, were subject to sensitivity testing by flexing a number of the key financial assumptions in order to assess the impact of the Group’s Principal Risks, particularly in respect of the extent and timing of the recovery in the on-trade business from the impact of the COVID-19 pandemic.
The scenarios, which have been modelled encompass the Group’s Principal Risks. The hypothetical impacts are deliberately severe in terms of timing and extent and designed to test the viability of the Group and to understand the level of performance decline that the Group could withstand. In the case of these impacts, various options are available to the Group in order to maintain liquidity. These include reducing non-essential capital expenditure, short term cost reductions, further simplification of and focus on the core business, or the continuation in reducing returns to shareholders.
Based on this assessment, which includes a robust assessment of the potential impact that these risks would have on the Group’s business model, future performance, solvency and liquidity 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 year period to February 2023.
In making this statement, the Directors have considered the resilience of the Group, taking account of its current position and the Group’s Principal Risks and Uncertainties and the Group’s ability to manage those risks. The risks have been identified using a top down and bottom up approach, and their potential impact was assessed having regard to the effectiveness of controls in place to manage each risk. At the time of reporting in June 2020, the situation around the COVID-19 pandemic is still evolving. Whilst the current situation is unprecedented, the Directors have considered the potential impacts of the pandemic and the various options available to maintain liquidity and meet future covenant requirements beyond those currently waived, and the inherent uncertainty that this entails. The considerations included the key assumption of a return of on-trade business in summer 2020 and the impacts of delays in the timing and extent of that return. Based on the facts available at the time of reporting, the Directors believe the conclusions reached in the viability testing remain appropriate.
The Directors have determined that the three year period to February 2023 is an appropriate period over which to provide its viability statement. This period has been considered for the following reasons:
- The business model can be evolved for significant changes in market structure or government policy over the three year period;
- For major investment projects three years is considered by the Board to be a reasonable time horizon for an assessment of the outcome; and
- The Group’s strategic planning cycle covers a three year period.
In reaching its conclusion as to Group’s viability over a three year period to February 2023, the Directors have reviewed the strategic plan against the impacts which assess the potential risk to the viability of the Group in the context of COVID-19. These impacts included, but were not limited to, a substantial reduction in sales; significant deterioration in consumer confidence and timing and extent of recovery from the pandemic. In assessing the risks to the business and the outcomes which might present, the Directors’ noted the actions already taken to mitigate the potential impact of COVID-19 on the business including:
- Drawing down the Group’s revolving credit facility, the tenure of which had already been extended during the period in review;
- Significantly reducing capital expenditure;
- Reducing marketing spend and other costs;
- Prudent and vigilant working capital management;
- Reduction of Executive leadership team and Board remuneration by 30% and 40% respectively for an initial three month term;
- Engagement with the Irish and UK tax authorities regarding deferrals of tax;
- The waiver of certain financial covenants for August 2020 and February 2021 in respect of a significant portion of the Group’s debt;
- Agreement to certain monthly liquidity and gross debt tests for the period until the next financial covenant tests in August 2021;
- Post-year end, successfully issuing the equivalent of approximately €140m in Euro and Sterling of new US Private Placement notes which were unsecured and have maturities of 10 and 12 years;
- Receiving confirmation from the Bank of England of eligibility to issue commercial paper under the Covid Corporate Financing facility (CCFF) Scheme.
The Directors will continue to monitor risks to the Group and its prospects, particularly those related to COVID-19. The Directors have concluded that, in conjunction with the management team, the appropriate short term measures have been implemented to protect the business and, as of the date of this report, the Board does not expect any reasonably anticipated COVID-19 outcomes to impact the Group’s long-term viability or ability to continue as a going concern.
Strategic Report Approval
The Strategic Report, outlined on pages 2 to 49, (including the assessment of the Group’s prospects as set out above) incorporates the Highlights, the Business Profile and Key Performance Indicators, the Interim Executive Chairman’s Statement, the Group Chief Financial Officer’s report, the Sustainability Report and the Management of Risks and Uncertainties section of this document.
This report was approved by the Board of Directors on 3 June 2020.