Annual Financial Report

RNS Number : 7180T

Bakkavor Group PLC

29 March 2021

 

29 March 2021

Bakkavor Group plc
  ("Bakkavor", "the Group" or "the Company")

2020 Annual Financial Report

Bakkavor announces that it has today published its 2020 Annual Financial Report ("Annual Financial Report") on the Company's website at www.bakkavor.com

The Annual Financial Report will be posted to shareholders on 29 March 2021, or otherwise made available to shareholders, as required under DTR 6.3.5R(3).

As required under Listing Rule 9.6.1, a copy of the Annual Financial Report will be submitted to the Financial Conduct Authority's National Storage Mechanism (NSM) and will shortly become available for inspection at   https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The Company's 2020 Final Results announcement in respect of the 52-week period ended 26 December 2020, including audited financial statements prepared in accordance with the applicable accounting standards, was released on 16 March 2021 (RNS Number 3302S), and can be viewed   at www.bakkavor.com

The appendix to this announcement contains additional information which has been extracted from the Annual Financial Report for the purposes of compliance with the Financial Conduct Authority's Disclosure Guidance & Transparency Rules and should be read together with the 2020 Final Results announcement.

Together, these constitute the information required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This information is not a substitute for reading the full Annual Financial Report. 

 LEI number: 213800COL7AD54YU9949 

ENQUIRIES

Institutional investors and analysts:

Ben Waldron, Chief Financial Officer

Sally Barrett-Jolley, Head of Corporate Affairs  [phone]

Media:

Will Palfreyman, Tulchan Communications  [phone]

Appendix: additional information required by DTR 6.3.5

Page and note references in this Appendix refer to page numbers and notes in the Annual Financial Report.

Directors' Responsibilities and Statements

The following responsibility statement is extracted from the Statement of Directors' Responsibilities on page 143 of the Annual Financial Report and is repeated here solely for the purpose of complying with DTR 6.3.5.

The statement relates to the full Annual Financial Report and not the extracted information presented in this announcement or the 2020 Final Results announcement:

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulation.

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have prepared the Group Financial Statements in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006. Additionally, the Financial Conduct Authority's Disclosure Guidance and Transparency Rules require the Directors to prepare the Group financial statements in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. The Directors have prepared the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law).

Under Company law, Directors must not approve the Financial Statements 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 for that period. In preparing the Financial Statements, the Directors are required to:

· Select suitable accounting policies and then apply them consistently;

· State whether, for the Group, international accounting standards in conformity with the requirements of the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union have been followed, and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the Company Financial Statements, subject to any material departures disclosed and explained in the Financial Statements;

· Make judgements and accounting estimates that are reasonable and prudent; and

· Prepare the Financial Statements on the going concern basis, unless it is inappropriate to presume that the Group and Company will continue in business.

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 keeping adequate accounting records that are sufficient to show and explain the Group's 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 financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.

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 Financial Statements may differ from legislation in other jurisdictions.

Directors' confirmations

The Directors consider that the Annual Report & Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's and Company's position and performance, business model and strategy.

Each of the Directors, whose names and functions are listed in the Group Board section, confirm that, to the best of their knowledge:

· The Group Financial Statements, which have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and additionally, in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group;

· The Company Financial Statements, which have been prepared in accordance with United Kingdom Accounting Standards, comprising FRS 101, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

· The 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. 

Approved on behalf of the Board by:  

A Gudmundsson  B Waldron

Chief Executive Officer  Chief Financial Officer

15 March 2021

Principal Risks and Uncertainties 

The risks and uncertainties set out below are extracted from pages 74 to 83 of the Annual Financial Report and are repeated here solely for the purpose of complying with DTR 6.3.5.

COVID-19 - Risk Summary

COVID-19 emerged as a major risk to companies in China in January and since then has spread to impact companies all around the world. During the year, as the situation has continued to evolve, the Group has put in place a number of actions to mitigate the potential impacts to the business in the three regions in which we operate and across our supply chain. Details of these mitigating actions were explained in the 2019 Annual Financial Report, published in May 2020, and are explained in further detail here to reflect additional actions taken during the remainder of the year.

Unlike many other industries which have been severely impacted by COVID-19, such as travel and hospitality, the food manufacturing industry and provision of food remain fundamental to consumers. Fresh food and the convenience of FPF supports the health and wellbeing of consumers and maintaining the continuity and availability of our products is a key priority for both our industry and government. For this reason, our Group was defined as providing a 'key' or 'essential' service and received protection and, in some cases, exemption from many of the restrictions placed on individuals and companies in these difficult times.

Given that we manufacture and distribute most of our products every day, the Group is used to accommodating volatile and sometimes unpredictable ordering patterns. With a short shelf-life on most of our raw materials and finished goods, we can only hold limited stocks at any time. We therefore have sophisticated supply chains, with robust planning and scheduling procedures and a range of contingency plans are in place in line with our normal operating plans. This gives us a relatively high degree of flexibility and agility in our operations and has served us well in adapting to the challenges presented by the pandemic throughout the year.

This section addresses the key risks to each of the Group's three markets: the UK, US and China. We have assessed these risks under three general headings: People management, Supply chain and logistics and Consumer demand. We also list the specific mitigating actions and consider the potential impact of the ongoing COVID-19 pandemic on both our financial performance and the Group's liquidity position and our ability to meet our financial obligations as they fall due.

United Kingdom

In the UK, we have a mature business employing almost 16,500 people across 23 sites, providing short shelf-life chilled convenience products to a range of major supermarket retailers. The business operates in four key categories: meals, salads, desserts and pizza & bread.

1. People management

The presence of COVID-19 in the local communities in which we operate has the potential to impact the health and safety of our colleagues and can lead to a shortage of core staff in our factories. Our business is a mix of both highly automated and labour-intensive production, and most sites operate 24/7 and 364 days a year. Should a large number of employees be off work, it is possible that we might have to reduce our output to match labour availability. During the first lockdown in 2020, some of our sites experienced high levels of staff absence due to illness, self-isolation and shielding. Weak consumer demand during this period offset much of the impact of staff shortages.

Mitigating action

As a business, we are fully committed to ensuring we safeguard the health, safety and wellbeing of all our colleagues in carrying out their work. As a large FPF manufacturer, our established controls for managing both people and food safety within our operations are industry-leading. While our regular handwashing procedures and high levels of good manufacturing practice ("GMP") and hygiene ensure a safe working environment, we have also implemented a number of additional controls and enhanced safety measures following the virus outbreak. This has included restricted visitor access, suspending all travel unless deemed business critical, a more rigorous return to work procedure, more frequent cleaning regimes at touchpoints, additional handwashing protocols, adhering to Public Health England ("PHE") guidelines for social distancing in our offices, rest changing and ancillary areas, thermal imaging for temperature checks, safety screens for factory workers on the line, mandatory visors, mandatory masks for office-based staff, as well as following specific PHE guidance for distancing in food manufacturing businesses. We are taking measures to ensure that these operating procedures are fully understood, including the launch of the Bakkavor Coronavirus Management System ("BCMS") portal on our intranet that provides managers and colleagues with a 'one-stop shop' of all the latest information, and are rigorously complied with so that we maintain the highest standards. We continue to audit ourselves against both our standard controls and our enhanced COVID-19 protocols on both an announced and unannounced basis.

We have also actioned and continue to take advice from many sources, including HM Government, Public Health England and the NHS. In addition to this, we maintain regular dialogue with all employees by asking them to engage in surveys for feedback on our health & safety protocols. We therefore believe that the current practices and the additional new measures recently introduced should lower the risk of outbreaks at our sites. Where we have experienced an outbreak, for example at our Newark and Tilmanstone sites, we have worked very closely with PHE and the relevant local authorities to put in place a full testing programme to prioritise the health and safety of our colleagues on site.

The financial and emotional wellbeing of our colleagues during the pandemic is just as important as physical wellbeing. To support this, in April we launched a UK-wide Bakkavor Wellbeing Toolkit to offer colleagues emotional, physical and financial support. The Toolkit includes a variety of well-established resources, links and support mechanisms such as our Employee Assistance Programme, Grocery Aid helpline and Neyber - a financial wellbeing hub provided as a benefit for colleagues. We cascaded the Toolkit in physical as well as virtual form by promoting the resources during Mental Health Awareness Week and on pull-up banners and extra printed materials for colleagues at site level.

Labour shortage has become a problem at a small number of sites, within certain times of the year, which we have mitigated by agreeing to reduce ranges with our customers and/or transferring production to other sites with spare capacity. Overall, this has not had a material impact on UK sales. Our business is classified as critical to the COVID-19 response. This means that all Bakkavor employees are classified as key workers and are therefore entitled to support with childcare and continued education.

Taken together, these factors mean we consider that our employee attendance will continue at an appropriate level such that we can maintain production.

2. Supply chain and logistics

A second risk to our business could be an interruption to our raw material supply chain. Due to the short shelf-life of a number of raw materials that we hold in stock, we are used to operating a sophisticated supply chain that ensures we can procure, manufacture and distribute product every day. Our raw materials are sourced from across the world, with approximately 37% from the EU and 16% from other parts of the world. With low stocks held at site, any disruption in the supply of our raw materials could mean we are unable to meet orders for particular products. Furthermore, in the event of broader economic stress in the regions in which our suppliers operate, we could find availability and cost of our key raw materials under pressure.

Mitigating action

As a business, we are highly experienced in problem-solving issues regarding supply chain and logistics. Our procurement function is largely centralised at our Head Office in Spalding, Lincolnshire, with commodity focused specialists. This expertise gives us a deep knowledge of the supply chain, including well-established relationships with individual farmers, growers and suppliers. In addition, we have 'on the ground' presence with colleagues based in China, Spain, Italy and South America, which is a key strength in understanding what is happening within the supply base and within the local area. This includes a dedicated team based in Spain who co-ordinate the buying of fresh produce globally and the transportation of raw materials from southern Europe to the UK, and a team in China who co-ordinate the purchase and shipping of raw materials from Chinese suppliers back to the UK. We make limited use of forwarding agents, preferring to rely on our own professionals to ensure the smooth running of what is in effect a just-in-time operating model. This ensures that in the case of difficulties with product availability or transport we are best placed to seek alternative sources or routes.

We also make full use of UK raw materials wherever possible, with approximately 47% of raw materials purchased from the UK, and have a flexible model which allows us to switch suppliers to match seasonal availability, particularly in the spring and summer when UK crops are more readily available. Robust dual-sourcing procedures ensure that we are never completely reliant on one particular supplier and potentially left with no alternatives. With the changing product requirements of our customers, we already have a robust and well established process in place to approve new raw materials and suppliers, and, should we need to accelerate this, we can work effectively with our customers to ensure the appropriate approvals are obtained.

Our commercial teams have worked with our customers to create practical solutions, changing the specification of products and shifting production to sites that can meet changing demand. This includes the introduction of pizza manufacturing into Spalding Deli within five days to meet growing orders during the first UK-wide lockdown.

Following the virus outbreak, we have taken a number of mitigating actions throughout 2020. This has included increasing stock holding across the supply chain, review of alternative and additional suppliers for critical raw materials, implementation of alternative supply options and daily Procurement Leadership Team reviews during the early stages of the pandemic. We have also maintained very close day-to-day contact with our suppliers and been able to respond with appropriate support for those under financial pressures.

During 2020 we have experienced few material supply chain interruptions because of these mitigating actions. Due to the success in managing supply chain complexity throughout the year, we are confident in our ability to ensure continuity of supply in 2021 and this view is further reinforced by the signing of the free trade agreement between the EU and UK.

3. Consumer demand

Finally, demand for our products has been affected by consumers changing their buying preferences. There is uncertainty for us around how long this will impact our business volumes.

Mitigating action

Demand throughout the year remained volatile, particularly during periods of lockdown or heightened restrictions, as consumers cut back on the number of store visits they made, reverting to 'one-big shop' and consequently switched away from short shelf-life products. In order to mitigate this, in H1, we began to make use of the Government's Job Retention Scheme to 'furlough' workers, cut costs through a reduction of agency staff, made changes to shift patterns, delayed new product launches, temporarily closed a factory in Bo'ness to realign our capacity with a rapid drop in demand of food-to-go products, and identified new and more efficient ways of working with our customers, which has led to the restructuring of several office-based functions.

In H2 we experienced an encouraging recovery in sales as the first COVID-19 lockdown was lifted, however, volumes were adversely affected in the final quarter by further restrictions. Most furloughed staff returned to work with only vulnerable staff remaining on furlough. Whilst our Bo'ness factory reopened in H2, two other sites were closed to 'right size' our production facilities to match ongoing demand. Investment in our sites continued throughout 2020, though at lower levels than originally planned. Our teams have concentrated on driving growth back into category as we enjoyed a stronger Christmas period and have confidence in our ability to handle extra volume increases during 2021.

US

In the US, our business employs over 800 people and operates from five sites, producing chilled convenience food for US grocery retailers.

1. People management

The risks to our US business of the impact of a shortage of core staff and / or management are the same as the UK business, and described above.

Mitigating action

The mitigating actions outlined for the UK business can equally apply to the US, with the following additional points of note.

We have also actioned and continue to take advice from many sources including state, federal and county bodies, the US Food and Drug Administration, the US Department of Agriculture and public health organisations.

The food manufacturing sector is classified as a critical infrastructure industry, which means our business is required to continue to operate as usual and our staff are exempt from any 'Stay at Home' orders that were in place in the states in which we operate.

In the event of an acute shortage of labour, our ability to transfer employees between sites is limited due to the geographical spread of our sites and current guidance against domestic travel. However, following the temporary closure of our Breadeli site, we moved colleagues over to our nearby meals production facility in Charlotte, North Carolina. The site has since reopened. There are also actions we could take to reduce the complexity in our product ranges, thereby reducing the reliance on labour.

We are also considering a move to mandatory vaccination in 2021 once supplies become available.

2. Supply chain and logistics

A second risk to our business could be an interruption to our raw material supply chain. Due to the short shelf-life of a number of raw materials that we hold in stock, we are used to operating a sophisticated supply chain that ensures we can manufacture and distribute product every day. Our raw materials are primarily sourced locally in the US, with a small number of products sourced from other parts of the world including Mexico, Chile, Argentina and China. With low stocks held at site, any disruption in the supply of our raw materials could mean we were unable to meet orders for particular products.

Mitigating action

The mitigating actions outlined for the UK business can equally apply to the US, with the following additional points of note.

Our procurement function in the US primarily operates from individual sites, although overall management rests centrally. We source most of our raw materials locally, minimising the risk of disruption through restrictions imposed as a consequence of the outbreak, especially as the food manufacturing sector is classified as a critical infrastructure industry and therefore ensuring it is fully operational is a key priority for authorities.

We have experienced occasional disruption from supplier factories being affected by COVID-19, notably from one of our chicken suppliers who was forced to temporarily close one of their factories due to high levels of staff absence. With that said, this did not lead to any material interruption to our service levels as we were able to secure alternative supplies from another source.

3. Consumer demand

As outlined in the UK section, there was a risk that consumer demand for our products could fall over the long term if consumers were to change their buying preferences and / or our customers were to limit or change the range of products that they offered. In the first half it was true that volumes were adversely affected, but in H2 volumes have picked up and FPF is increasing strongly with fresh prepared meals in particular growing in penetration.

Mitigating action

The mitigating actions outlined for our UK business apply to the US, with the following additional points of note.

Consistent with our UK business, in the US we adjust volumes to match demand on a daily basis. We operate from five sites in the US and our products are supplied to both local and national grocery retailers. While each site is generally dedicated to a particular key food category, all are multiproduct, most are multi-customer and are geared to production of the full range of their products every day. This means they are operationally flexible and used to accommodating changing priorities.

In some instances, we can also supply the same product from two different sites should it become necessary, because of supplying both East and West Coast retail stores, as well as particularly high short-term promotional volumes for example. This applies to all key food categories, except for bread, which is only produced at our Breadeli site in Charlotte, North Carolina.

China

In China, our business employs approximately 2,100 people and operates from nine sites, including one in Hong Kong, and one

farm. It supplies fresh prepared foods and vegetables, mainly to western foodservice customers.

1. People management

The risks to our business in China of the impact of a shortage of core staff and / or management are the same as the UK business.

Mitigating action

The mitigating actions outlined for the UK business apply to China, with the following additional points of note.

We have also actioned and continue to take advice from all relevant Chinese Government authorities, including the Food Safety Administration, Department of Labour and the Tax bureau. In addition to this, we maintain regular dialogue with all employees, many of whom live on-site in company dormitories making it easier for us to ensure that they are maintaining the highest hygiene standards.

Due to our customer base, we are not considered 'critical' to the COVID-19 response but are permitted to continue production.

Compared to the UK, the incidence of COVID-19 has been much lower in China generally with no recorded cases in our factories on mainland China. Early in the year our Wuhan factory was closed for several weeks, but all other factories remained open and were used by the local government as examples of how companies should respond to the pandemic. During H2 operations have been more or less back to normal as temperature checks and face coverings were in use pre-COVID-19.

Hong Kong continues to experience more disruption with repeated lockdown periods and continuing COVID-19 cases in the general public that are leading to local lockdowns, which can in turn affect staff availability.

2. Supply chain and logistics

A second risk to our business could be an interruption to our raw material supply chain. As we hold limited stocks of short shelf-life products, we are used to operating a sophisticated supply chain that ensures we can manufacture and distribute product every day. Our raw materials are almost exclusively sourced locally, with very little imported from outside China. With low stocks held at site, any disruption in the supply of our raw materials could mean we were unable to meet orders for particular products.

Mitigating action

The mitigating actions outlined for the UK business apply to China, with the following additional points of note.

As a business, we are extremely experienced in problem-solving issues regarding supply chain and logistics. Our procurement function in China is largely operated out of individual sites, although overall management rests centrally. We source most of our products locally, minimising the risk of disruption through restrictions imposed as a consequence of the outbreak, especially since maintaining a fully operational food industry is a key priority for authorities.

We have not experienced any material supply shortages, in part due to lower demand levels at the peak of the crisis.

3. Consumer demand

As outlined in the UK section, there is a risk that demand for our products could continue to fall if consumers were to change their buying preferences over the long term or our customers were to limit or change the range of products that they offered. Our customer base in China is primarily with western foodservice players and therefore they may be unable to keep stores open due to any further local and / or central government restrictions put in place.

Mitigating action

As a large food manufacturing business, we adjust volumes to match demand daily. We operate through nine sites in China and across a number of categories. All our sites are multi-product, multi-customer and are geared to production of the full range of their products every day. This means they are all extremely flexible and used to changing priorities. In February, when it became necessary to temporarily close a number of our factories, we maintained customer service levels by transferring production across our remaining locations, including our new site at Haimen. Given the challenging nature of the operating environment, we also took a number of necessary actions to control costs. As in other parts of the Group, these included temporary salary cuts and recruitment freezes and in Hong Kong we have streamlined our operating structure.

We also continued to offer our customers innovative products by developing in-home meal solutions that meet the needs of foodservice providers as they adjust to the fact that consumers are spending more time at home.

Demand was badly affected in the first half of the year but by the last quarter customer demand on mainland China was only slightly below pre-COVID-19 levels. This being said, it continues to be occasionally disrupted at individual factories by local lockdowns. In Hong Kong, demand continues to be depressed by the ongoing COVID-19 cases and lockdowns.

Brexit - Risk Summary

Overall risk

At the end of the transition period, the introduction of EU and UK border controls will increase administrative costs and may lead to food inflation and disruption at ports of entry. In addition to this, new immigration controls could affect labour availability.

Mitigating action

The Brexit Working Group, a multidiscipline team, established in 2018, on behalf of the Group Board have kept Brexit mitigations under review, including organisational changes, systems development, customer plans, stock levels and staff retention.

1. Disruption at ports of entry

The new administrative procedures required at the ports of entry into the UK, notwithstanding the transitional arrangements that the UK Government have introduced, are likely to result in delays that could lead to a shortage of supplies and disruption to the manufacturing and delivery process.

Mitigating action

Where possible, Bakkavor increased stocks of longer-life raw materials and packaging in advance of the year-end and will hold these levels during the first quarter of 2021.

In conjunction with Bakkavor's customers, the Group has sought to reduce dependence on EU imports where equivalent raw material is available from UK sources. Notable examples are the increase in the proportion of both raw chicken and liquid egg that are now sourced from within the UK.

Bakkavor has secured permission to use Customs Simplified Freight Procedures ("CFSP") from the beginning of 2021 to simplify and speed up border arrangements.

2. Shortage of customs clearance services

The customs clearance industry will have to expand massively to cope with the new customs declarations at the UK ports of entry and there is a risk that there will not be enough qualified staff.

Mitigating action

The Bakkavor Inbound Logistics team ("BIL"), based in Southern Spain and Lincolnshire, have been responsible for the importing of salad items from Southern Europe for many years. As part of the Group's Brexit preparations at the beginning of 2020, they successfully took on responsibility for the importation and customs clearance of all imports from outside of the EU. BIL trained some of its existing staff as clearance agents, recruited and trained additional customs clerks, and implemented software which connects the ERP system with the customs computer systems. At the end of the transition period they took responsibility for imports from the EU and the rest of world and have recruited and trained additional staff as clearance agents. With this experience, Bakkavor is in a strong position to take on the clearance of EU imports.

3. Accurate customs declarations and security controls for imports

With many UK factories there was a risk that importing from the EU would not be carried out consistently.

Mitigating action

In early 2019 Bakkavor was accredited with AEO status in the UK, for both security and customs clearance. This accreditation established a relationship with the customs authorities and should facilitate border crossings in the future.

Ordering from EU suppliers has been centralised by expanding the BIL team responsibilities to give them ownership over order placement with EU suppliers on behalf of all of our Bakkavor UK factories. In order to ensure this process happens, the IS team has developed a portal to allow EU suppliers to provide the information required for UK clearance.

BIL is also responsible for controlling transport into the UK. They have added a clear service level agreement with all major hauliers to confirm them as trusted traders, which will allow them to deliver direct to Bakkavor sites in the UK. BIL has arranged for hauliers without the Trusted Trader Status to report to a third-party site in Kent in order to carry out the security checks required.

To facilitate exports from small suppliers in Southern Spain, BIL has established a LAME facility in Northern Spain which has been approved by the Spanish customs authorities as a consolidation facility for the export of produce from the region. In addition to this, Bakkavor's Spanish office has gained European AEO status.

4. New border controls for exports to Ireland

Beginning in 2021, exports to the Republic of Ireland and Northern Ireland will be subject to new border control arrangements.

Mitigating action

Bakkavor has been liaising with customers to prepare for the new border procedures required when exporting to the Republic of Ireland and Northern Ireland, including possible duty payments.

All of Bakkavor's packaging has already been modified to include both Irish and UK addresses. Bakkavor has registered for the UK Government Trader Support Scheme, which provides guidance on the implementation of the Northern Ireland Protocol.

Export Health Certs ("EHC") are required for exports to the EU containing products of animal origin ("POAO") to confirm that the product meets the health requirements of the EU. Bakkavor supplies many composite products to the stores of its retail customers in Ireland. From the beginning of 2021, because a number of these products include POAO, they will require export health certification. For composite products of the sort that Bakkavor exports, the UK Government has introduced a groupage system which Bakkavor is adopting.

We have appointed vets to attest production at each of our UK sites every 30 days and have appointed vets to authorise EHCs at point of departure from Bakkavor's premises. All Bakkavor UK sites have collected the information they need to provide evidence of the safety of their products and the Group IS team has developed software to make this information available to our vets and/or our customers.

5. Brexit impact on currency movements

Following the transition period it is also possible that Sterling will fall in value, increasing the cost of imports. The additional costs of raw materials will need to be passed on to consumers via higher prices in stores and may reduce consumer demand.

Mitigating action

Bakkavor will be forced to pass on raw material inflation and clearance costs to its customers.

In the event of Sterling weakness Bakkavor will seek to increase the proportion of its raw materials purchased from UK sources.

It is Bakkavor Group Policy to mitigate exposure to movements in the Sterling-Euro exchange rate by purchasing forward currency contracts, in order to reduce the risk of currency fluctuation. The proportion covered in 2021 has been increased beyond the normal policy levels in light of potential Brexit disruption.

6. Immigration law changes

The new immigration law, post-Brexit, will restrict our ability to recruit EU staff as the majority of our workforce are paid below the new minimum levels for work visas.

Mitigating action

To mitigate this, the Group has regularly encouraged existing EU staff to obtain settled or pre-settled status. This includes holding workshops and providing internet access to help assist with these applications. During 2020 our staff turnover level fell during the COVID-19 lockdown period as EU staff remained in the UK. We're expecting it to increase once lockdown measures are fully released and will likely be further exacerbated after January 2021 when the new immigration law is introduced. There is a need to concentrate recruitment in the UK, which includes looking at different shift patterns such as more family-friendly shift patterns to encourage local recruitment. Bakkavor is also seeking to further reduce its reliance on agency labour, which has a high proportion of EU nationals.

Link to Our Strategic Priorities

1:  LEVERAGING NUMBER ONE POSITION IN THE UK

2:  ACCELERATING GROWTH IN HIGH-POTENTIAL INTERNATIONAL MARKETS

3:  IMPROVING OPERATIONAL EFFICIENCY

Food safety and integrity
Description Millions of people eat our products every day. We have a duty to make food that is safe and that is clearly and correctly labelled. Consumer safety and confidence are vital to our business; any issue that breaches that trust could result in loss or reduction of customer business and also impact our credibility and reputation. Link to strategy 1, 2, 3	Mitigating controls Stringent food safety policies in place throughout the organisation and use of Hazard Analysis Critical Control Point principles to identify and control food safety risks. Employees trained against documented procedures. Supply chain food safety and integrity is understood and managed through robust risk assessment and management process. Food safety audits conducted for new suppliers with regular audits of existing suppliers. Regular reporting of food safety performance to the Board and immediate reporting of significant issues.	Risk Trend 2020 NO CHANGE The risk has stayed the same.
Raw material and input cost inflation
Description The Group's cost base and margin are vulnerable to fluctuations in the price and availability of raw materials, packaging materials and freight. Ability to pass on any increases in these costs to customers within a reasonable timeframe is a challenge and failure to do so could impact the Group's profitability and hence its ability to continue to invest in the business. Link to strategy   1, 3	Mitigating controls Central procurement team focused on achieving a balance between price, quality, availability and service levels. Forward purchasing agreed and price variations passed on where possible. Agreements in place with some customers on recovery of raw material cost impacts. Continued focus on cost reduction and productivity enhancements.	Risk Trend 2020 NO CHANGE The risk has remained the same with COVID-19 and Brexit having the potential to disrupt supply chains leading to higher costs and/or shortages.
Reliance on a small number of key customers
Description We work with four of the largest food retailers in the UK and a significant proportion of our revenue is from these customers. In the US we work with a small number of large retailers and in China a small number of large food service customers. Any major customer loss would have a significant negative impact on our business. Link to strategy 1, 3	Mitigating controls Close partnership model in place with customers. In the UK, customer-specific champions and teams manage strategic customer relationships. Relationships with all grocery retailers beyond the four largest gives breadth of cover. Strong reputation for food safety and quality. Reputation amongst customers for strong insights and innovation capabilities. Significant investment in manufacturing facilities and highly complex 'just in time' manufacturing process.	Risk Trend 2020 NO CHANGE Customer concentration has remained unchanged.

Labour Availability and Costs
Description Manpower scarcity and higher labour costs could affect the Group's business and future profitability. The Group competes with other manufacturers for good and reliable employees. The supply of such employees is limited and competition to hire and retain them may result in higher labour costs. Additionally, in the UK, Brexit presents a risk as historically the Group has employed a material number of people who are citizens of EU countries. Link to strategy 1, 2, 3	Mitigating controls Specific campaigns and focus groups in place targeting recruitment of future employees and building attractiveness of careers in the food industry. Initiatives in place to enhance and upgrade factory site facilities to help attract and retain employees. Central staff dedicated to recruitment and management of staff costs. Initiatives in place to support employees with Brexit-related concerns.	Risk Trend 2020 UP The potential medium-term impact from reduced immigration and the retention of existing EU colleagues following Brexit has increased the risk of labour availability in the UK.
IT systems and cyber risk
Description Unauthorised access of the Company's Information Technology ("IT") systems could lead to breaches of data protection and release of market sensitive information. Any breakdown or failure in the Group's IT infrastructure or the Group's communication networks, including malicious cyber-attacks by third parties, could delay or otherwise impact the Group's day-to-day business. Link to strategy 1, 2	Mitigating controls Group Information Systems ("IS") manage access to business data in the UK through strong password protection, role-based access to business systems and policies to ensure appropriate use. The risk associated with high levels of home working have been addressed with enhanced processes and the introduction of two factor authentication. Group IS has strict policies and actively ensures that the IS infrastructure and equipment in the UK in particular, are sufficiently protected against malicious cyber-attacks. We work closely with our cyber security partner and continue to enhance our controls. In addition, we have cyber insurance and therefore some of the risk of a cyber-attack is passed onto our insurers. Local teams in the US and China are developing our IS infrastructure capabilities.	Risk Trend 2020 UP The risk has increased as cyber threats have become more common during the COVID-19 pandemic.
Health and safety
Description We understand our duty of care to secure and protect the health and safety ("H&S") of our employees and to reduce the environmental impact of our operations. Failure to maintain the H&S of employees could have a significant reputational impact and also have serious legal consequences. Link to strategy 1, 2	Mitigating controls H&S and environmental impacts are managed locally by our teams and by the Group's in-house experts who embed and monitor practices. Stringent processes are implemented for identifying and managing H&S and environmental risks. Regular reporting of H&S Key Performance Indicators to the Group Board and immediate reporting of significant issues. An established culture of employee engagement around accident prevention across the Group.	Risk Trend 2020 UP The level of risk has remained unchanged in terms of accidents at work, however COVID-19 has provided an additional risk to the health of our colleagues.
Recruitment and retention of key employees
Description We have a highly experienced management team who are passionate about our business and who are integral to our continued growth and success as a market leader. The loss of any of these personnel, or the Group's inability to recruit new personnel, would have an adverse impact on the Group. We risk being unable to achieve our strategic growth objectives without the recruitment, development and retention of talented and committed people who understand and respect our values. Link to strategy 1, 2, 3	Mitigating controls Company values used to recruit, appraise, reward and develop employees. Ongoing succession planning, commitment to training and bonus schemes in place to retain key personnel and manage staff turnover. Graduate recruitment and apprenticeship schemes have been expanded. Training and career development opportunities have been enhanced.	Risk Trend 2020 NO CHANGE The level of risk has remained unchanged.

Strategic Growth and Change programmes
Description Much of our future growth will be delivered from new factory builds and acquisitions. This adds a level of execution risk to continuing operations. Link to strategy 1, 2, 3	Mitigating controls All capital investment and organisational change projects are subject to detailed review by the Board and Senior Management considering the risks and opportunities of each proposal. Detailed planning and sharing of best practice within the Group minimises risk.	Risk Trend 2020 DOWN The risk has decreased in the short term as we have reduced capital expenditure on new factory builds, while new ventures have become more mature.
Treasury and Pensions
Description To achieve our growth objectives, we require a strong financial platform. The Group has significant facilities governed by financing agreements under which we are subject to various financial covenants and undertakings. Breaching any covenant would impair our ability to maintain existing financing and secure future financing, thereby destabilising the business. The Group has a closed defined benefit pension plan which is exposed to interest and inflation rates, values of assets and increased life expectancy. Link to strategy 3	Mitigating controls Financial results, projections and covenant performance reviewed regularly. Open and regular dialogue with our lenders and an active investor engagement programme. Treasury function operates within framework of strict Group Board-approved policies and procedures. Active policy of hedging known non-Sterling denominated expenditure both for specific projects and on a rolling basis for material purchases. The pension scheme has hedges in place for a large portion, but not all, of its risks.	Risk Trend 2020 NO CHANGE The Group has proved resilient over the last 12 months and has good levels of headroom on its facilities.
Brexit disruption
Description Read more about our Brexit risk summary above and on pages 78-79. Link to strategy 1	Mitigating controls Learn more about our mitigating actions above and on pages 78-79 of the Brexit risk summary.	Risk Trend 2020 DOWN Disruption at ports of entry is possible in the first quarter of 2021 whilst new Administrative procedures bed in. However, overall, the risks have been reduced significantly following the signing of the free trade deal.
Disruption to Group operations
Description Catastrophic damage to one of our factories by fire, flood or mechanical breakdown as well as disruption due to information systems failure or pandemics. Link to strategy 1, 2	Mitigating controls Building and property management protocols are employed and audited in conjunction with our property insurers. Business continuity plans are in place for each factory site and for many products alternative Bakkavor factories could supply in the event of a major issue.	Risk Trend 2020 DOWN COVID-19 mitigations are now well established and resulting disruption has reduced over time.

Sustainability
Description To continue with our growth agenda we must ensure that the business is developing in a sustainable way. Link to strategy 1, 2, 3	Mitigating controls Under our Corporate Responsibility strategy, Trusted Partner, we are scaling up our focus and performance monitoring in relation to a number of key areas including carbon, waste, packaging and responsible sourcing.	Risk Trend 2020 UP COVID-19 and Brexit have both introduced an increased level of uncertainty.
Consumer behaviour and demand
Description Changes in consumer demand due to a serious change in the economy or other consumption factors could impact our plans. Link to strategy 1	Mitigating controls We work closely with our customers to adapt to changing consumer trends such as dietary changes, sustainability concerns and the impact of COVID-19 on shopping habits.	Risk Trend 2020 UP COVID-19 restrictions have temporarily reduced demand for fresh prepared foods.
Competitors
Description The Group operates in a highly competitive market. Link to strategy 1, 2	Mitigating controls Developing and maintaining strong working relationships with our customers underpinned by high service levels and constant product development and innovation.	Risk Trend 2020 NO CHANGE The level of risk has remained unchanged.
Legal and Regulatory
Description Bakkavor is subject to a wide range of legislation, regulations and codes of practice covering many aspects of our business including food safety, health & safety, data privacy, competition, ethical business, tax and financial reporting. Failure to comply could impact our reputation and lead to financial penalties. Link to strategy 1, 2	Mitigating controls Our legal, financial, tax, and environmental teams monitor relevant laws and regulations to ensure compliance. Our outsourced internal audit team provides assurance on key risks. In 2020 we introduced e-learning training for key global policies, including anti-bribery & corruption and cyber security.	Risk Trend 2020 NO CHANGE The level of risk has remained unchanged.
COVID-19 Pandemic
Description Read more about our COVID-19 risk summary above and on pages 74-77. Link to strategy 1, 2, 3	Mitigating controls Learn more about our mitigating actions above and on pages 74-77 of the COVID-19 risk summary.	Risk Trend 2020 NEW UP The impact of COVID-19, raising costs and affecting consumer demand, is expected to continue but for an unknown amount of time.

 

END

 

 

ACSUBSNRAVUOUAR