Annual Report nd Accounts

RNS Number : 3336K

Barr(A.G.) PLC

21 April 2020

 

A.G. BARR p.l.c. (the "Company")

21 April 2020

Annual Report and Accounts

Following the release on 8 April 2020 of the Company's financial results for the year ended 25 January 2020 (the "Final Results Announcement"), the Company announces it has today published its annual report and accounts for the year ended 25 January 2020 (the "Annual Report and Accounts").

A copy of the Annual Report and Accounts is available to view on the Company's website: www.agbarr.co.uk

In accordance with Disclosure and Transparency Rule 6.3.5(2)(b), additional information is set out in the appendices to this announcement.

The Final Results Announcement included a set of condensed financial statements and a fair view of the development and performance of the business and the position of the Company.

A copy of the Annual Report and Accounts will be submitted to the National Storage Mechanism and will shortly be available for inspection at  https://data.fca.org.uk/#/nsm/nationalstoragemechanism

Appendices

Where used in the following appendices, the term "Group" means the Company together with its subsidiaries.

Appendix A: Directors' responsibility statement

The following directors' responsibility statement is extracted from the Annual Report and Accounts (page 101):

Directors' statement pursuant to the disclosure and transparency rules

Each of the directors, whose names and functions are set out on pages 48 to 49 of this report, confirm that, to the best of their knowledge:

· the financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true  and fair view of the assets, liabilities and financial position of the Group and parent Company and of the consolidated profit;

· the Annual Report and Accounts includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties faced by the Group; and

· they consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Appendix B: A description of the principal risks and uncertainties that the Company faces

The following description of the principal risks and uncertainties that the Company faces is extracted from the Annual Report and Accounts (pages 42 - 47):

Risk management approach

The Board is responsible for the Group's risk management and internal control systems and for reviewing their effectiveness, supported by the Audit and Risk Committee (the "ARC") and the Risk Committee.  A risk management framework is in place which sets out the ongoing processes for the identification, assessment and management of risks, and for their ongoing monitoring and review. The Board has defined its risk appetite in a number of key areas for the business - this sets out the relative level of risk that the Group is prepared to seek or accept in the pursuit of its long-term strategic objectives. The aim is to ensure that the risks taken by the Group fall within its defined risk appetite.

Effective risk management is essential to enable us to achieve our operational and strategic objectives and deliver long-term value creation. During the reporting period we have continued to focus on embedding a culture of risk management throughout the organisation which will contribute towards the successful execution of the Group's long-term strategy.

Robust risk assessment

The risk management framework sets out a systematic approach to risk management which is designed to identify risks to the business, regardless of source. Once identified, risks are assessed according to the likelihood and impact of the risk occurring and an appropriate risk response is determined in line with the Group's risk appetite. Risks are re-assessed based on the strength of the mitigating controls implemented. The implementation of risk mitigation plans is subject to ongoing monitoring and review. A risk scoring matrix is used to ensure that a consistent approach is taken across the business at both a corporate and functional level. This risk assessment and review process is documented in the appropriate risk register. Risks are reviewed on an ongoing basis; the Group's risk register is formally reviewed by the Risk Committee every two months and by the Board and the ARC twice each year.

The Board and the ARC carry out a robust assessment of the Group's emerging risks twice each year using a horizon scanning approach together with internal and external insights. The purpose of these assessments is to identify key emerging risks for further evaluation, monitoring and action planning. Emerging risks are captured on the Group's emerging risk register and are subject to ongoing review. Emerging risks are also assessed at a functional level and captured on the relevant function's risk register, and are also subject to ongoing review. The Risk Committee assesses emerging risks at a Group level and reviews the Group's emerging risk register on a bi-monthly basis. The Risk Committee has annual oversight of emerging risks at a functional level. Emerging risks remain on the relevant emerging risk register until they are captured on an appropriate risk register or are no longer deemed to be an emerging risk. The Board has completed a robust assessment of the Group's emerging risks, including those related to climate change and technology, during the period.

Risk control assurance

Internal audit work is undertaken by an independent organisation which develops an annual internal audit plan having reviewed the Group's risk register and following discussions with the external auditors, management and members of the ARC.

During the year the ARC has reviewed reports covering the internal audit work. This has included assessment of the general control environment, identification of any control weaknesses and quantification of any associated risk, together with a review of the status of mitigating actions. The ARC has also received reports from management in relation to specific risk items, together with reports from the external auditors, who consider controls to the extent necessary to form an opinion as to the truth and fairness of the financial statements.

The Group's internal control and risk management systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable but not absolute assurance against material misstatement or loss.

The report of the ARC can be found on pages 62 to 65.

Principal risks and uncertainties

The Board has carried out a robust, systematic assessment of the principal risks facing the Group during the period, including those which would threaten its business model, future performance, solvency or liquidity. The table below sets out the Group's principal risks as determined by the Board, the gross risk movement from the prior year and examples of corresponding controls and mitigating actions. This represents the Group's current risk profile and is not intended to be an exhaustive list of all risks and uncertainties that may arise.

The volatile and uncertain economic environment created by the UK's decision to leave the European Union ("EU") has continued over the past twelve months. Like many other businesses, we have continued to monitor developments in this area. Overseen by the Risk Committee, the Company's Brexit Steering Group has continued to monitor the potential impact of Brexit on the Group and to take appropriate actions to ensure that the business is as well prepared as possible for Brexit on 31 December 2020. The Brexit Steering Group has continued to prepare for a range of Brexit outcomes, including "no deal". Given the continuing uncertainty regarding the final outcome of Brexit, it is challenging to quantify or determine the impact of Brexit on the Group. However, given that the Group is a UK-based Group whose sales are predominantly made in the UK, our ongoing assessment continues to be that Brexit will not have a significant impact on the Group. We do not therefore consider Brexit to be a principal risk. Key potential Brexit-related impacts on the business and mitigating actions taken are as follows:

· Brexit's impact on foreign exchange rates to which the Group is exposed through the purchase of certain commodities - this risk is closely monitored and managed by the Treasury and Commodity Committee, which has a hedging strategy in place to manage the Group's exposure to foreign currency fluctuations.

· Border disruption, which could impact the supply of certain raw materials and finished products - we continue to work closely with relevant suppliers to understand their Brexit plans and will ensure that we have appropriate stock levels of key raw materials and finished products in place in preparation for Brexit.

· The introduction of trade tariffs for imports to the UK from the EU could impact the Group - we have assessed the Group's potential exposure to trade tariffs and expect this impact to be manageable.

· Brexit's impact on the free movement of people - working with our key third party logistics supplier we have undertaken a detailed risk assessment of EU nationals at our key sites and do not expect this impact to be significant.

· Brexit's impact on regulation - the extent to which the UK may diverge from EU regulations post-Brexit remains unclear. We will monitor the situation ongoing and determine the likely impact on the Group in the event of specific regulatory divergence.

We will continue to monitor developments and adapt our strategy as the impact of Brexit becomes clear.

Coronavirus

As the situation around the COVID-19 virus outbreak continues to evolve, our primary concern is for the welfare of our people, their families and the communities in which we operate. Since the news of the virus broke in February, we have followed the advice from the Government and the NHS at all times and will continue to do so. We have taken action as appropriate to protect our people and our operations. We are following the situation closely, however at this time it is unclear how the outbreak will develop and it is therefore difficult to fully assess the potential impact on our business. The impact on our business will depend on the severity and duration of the COVID-19 pandemic. There is the potential for an adverse impact on our operations and on the demand for our products and we are taking action to mitigate possible consequences. We will continue to follow developments closely and will take further action to protect our people and business as appropriate.

For more details on the Board's consideration of the impact of COVID-19, please refer to the Chief Executive's statement on page 15, and the viability disclosures on page 47.

The gross risk movement from the prior year for each principal risk is presented as follows:

Movement
	No change	Increased	Decreased	New risk

Principal risks and uncertainties

Risks relating to the Group

Risk	Impact	Controls and mitigating actions	Movement
Changes in consumer preferences, perception or purchasing behaviour	Consumers may decide to purchase and consume alternative brands or spend less on soft drinks.	The Group offers a broad range of branded products across a range of flavours, subcategories and markets which offer choice to the end consumer. Changing consumer attitudes and behaviours are monitored on an ongoing basis and inform our brand plans and new product development. Through investment in both reformulation and innovation across the year we have adapted our portfolio to align with these changing consumer needs.	No Change
Consumer rejection of reformulated products	Consumers may decide to purchase and consume alternative brands or spend less on soft drinks.	Over a number of years we have implemented our extensive innovation and reformulation programme, which was completed prior to the introduction of the Soft Drinks Industry Levy in April 2018. We reached the position of 99% of our Barr Soft Drinks portfolio produced by volume containing less than 5g of total sugars per 100ml. As disclosed last year, we recognised the risk of consumer rejection of our reformulated products. We continue to closely monitor consumer acceptance levels and brand performance across our total portfolio and take appropriate action, and consumer rejection of our reformulated products therefore remains a principal risk. The risk of further government intervention on sugar remains, however we do not currently consider this to be a principal risk.	No Change
Loss of product integrity	A loss of product integrity in the manufacturing supply chain could lead to a product withdrawal or recall.	Appropriate risk assessments are carried out on a regular basis and robust quality controls and processes are in place to maintain the high quality of our products. Product recall procedures are tested regularly.	No Change
Loss of continuity of supply of major raw materials	The loss of continuity of supply of major raw material ingredients and/or packaging materials could impact our ability to manufacture, with an adverse impact on the Group's sales and operating profits.	There is a robust supplier selection process in place. Supplier performance is monitored on an ongoing basis and audits are undertaken for major suppliers. Multiple sources of supply are sourced wherever possible. Commodity risks are managed by the procurement team and reviewed by the Treasury and Commodity Committee. Contingency measures are in place and are tested regularly. Brexit's potential impact on the supply of certain raw materials is referred to above.	No Change
Adverse publicity in relation to the soft drinks industry, the Group or its brands	Adverse publicity in relation to the soft drinks industry, the Group or its brands could have an adverse impact on the Group's reputation, consumer consumption patterns, sales and operating profits.	Our risk management process is designed to identify and monitor events that may impact the Group as a result of adverse publicity and to ensure that controls are in place to manage these risks. Processes are in place to ensure compliance with health and safety legislation and ethical working standards and these are regularly reviewed by the Board and Executive Committee. Quality standards are well defined, implemented and monitored. Corporate Social Responsibility champions are in place and we have clearly defined sustainability commitments. The Group maintains and develops ISO 9001 and 14001 systems and BRC standards which are subject to annual external audits, with any non-conformances addressed in a timely manner. Nutritional information is shown on all of our products and we have signed up to the UK Government's voluntary front-of-pack nutritional labelling scheme.	No Change
Government intervention on climate change and environmental issues, e.g. packaging waste	Government  intervention on climate change and environmental issues, e.g. the introduction of a Deposit Return Scheme or a plastics tax, could have an adverse impact on consumer consumption patterns, sales and operating profits	The increased pace of change and level of environmental campaigning in relation to climate change and areas such as packaging reported last year has continued during the year, particularly in relation to single use plastic bottles. We have clearly defined responsibility commitments with regard to waste, water, energy and packaging. We are working constructively with the British Soft Drinks Association, the UK and Scottish governments, and other key stakeholders in relation to potential interventions, such as the planned introduction of a Deposit Return Scheme ("DRS") in Scotland, the possible introduction of a DRS in England, and the possible introduction of a single use plastics tax. During the year we have completed consultations on a range of environmental proposals, including DRS, plastics tax and extended producer responsibility. We have created a working group to proactively manage packaging related risks in a holistic manner ongoing, overseen by the Risk Committee. Internally, various projects and environmental initiatives are being progressed to mitigate the potential impact of government intervention on packaging.	Increased
Failure to maintain customer relationships or take account of changing market dynamics	Failure to maintain appropriate customer relationships or a reduction in the customer base could have an adverse impact on the Group's sales and operating profits.	The Group offers a broad range of brands that it manufactures and distributes through a variety of trade channels and customers. Performance is monitored closely by the Board and Executive Committee by trade channel and customer as appropriate. This includes monitoring of metrics which review brand equity strength, financial and operational performance. The Group focuses on delivering high quality products and invests heavily in building brand equity. We work closely in partnership with our customers on an ongoing basis. Members of the senior management team meet with key customers throughout the year. The ongoing consolidation in channels and route to market has increased the level of gross risk in this area. A project commenced in 2018 to determine the potential impact of this consolidation in the retail grocery market on the Group and to take appropriate actions; this has continued to be a focus area during the year.	No Change
Inability to protect the Group's intellectual property rights	Failure to protect the Group's intellectual property rights could result in a loss of brand value.	The Group invests considerable effort in proactively protecting its intellectual property rights, for example through trademark and design registrations and vigorous legal enforcement as and when required.	No Change
Failure of the Group's operational infrastructure	A catastrophic failure of the Group's major production or distribution facilities could lead to a sustained loss in capacity or capability.	Assets within the Group are proactively managed and maintained. Risk assessments are carried out on a regular basis and appropriate actions taken. Robust business continuity plans are in place and are regularly tested.	No Change
Failure of critical IT systems or a breach of cyber security	A failure of critical IT systems could result in a loss of key systems, business interruption, lost sales or lost production. A cyber security breach could lead to operational disruption, financial loss and reputational damage.	IT assets within the Group are proactively managed and procedures exist that support rapid and clean recovery. Robust business continuity plans and contingency measures are in place and are regularly tested. The risk of cyber attacks increases on an ongoing basis. An assessment of our cyber security maturity against the UK Government's "10 Steps to Cyber Security" was completed during the year by our internal auditor, which showed improvement in our cyber security controls since the previous maturity assessment carried out in 2018 and concluded that our approach is generally in line with industry practice. Employee awareness campaigns and training continued during the year to increase employee cyber risk awareness. A Digital Governance Group is in place, overseen by the Risk Committee, the purpose of which is to manage the risks related to the Group's externally facing digital properties	No Change
Financial risks	The Group's activities expose it to a variety of financial risks which include market risk (including medium term movements in exchange rates, interest rate risk and commodity price risk), credit risk and liquidity risk.	Our underlying objective is to reduce foreign currency related volatility through our cost of goods. Financial risks are reviewed and managed by the Treasury and Commodity Committee, which seeks to minimise adverse effects on the Group's financial performance through hedging known currency exposures throughout the year. Brexit's potential impact on foreign exchange rates to which the Group is exposed through the purchase of certain commodities is referred to above. The Group's finance team reviews cash flow forecasts throughout the year, with headroom against banking covenants assessed regularly. The finance team uses external tools to assess credit limits offered to customers, manages trade receivable balances vigilantly and takes prompt action on overdue accounts. The Group's financial control environment is subject to review by both internal and external audit. Internal audit's focus is to work with and challenge management to ensure an appropriate control environment is maintained	No Change
Third party relationships	Termination of existing partnerships or renewal on less favourable terms could result in lost brand contribution and under-recovery of supply chain infrastructure costs.	We have robust strong relationships with our various partners and proactively manage the effective building of our partners' brands.	No Change

Viability statement

In accordance with provision 31 of the UK Corporate Governance Code 2018, the directors have assessed the viability of the Company over a three year period to January 2023, taking account of the Group's current financial and market position, future prospects and the Group's principal risks, as detailed in the Strategic Report.

The directors have determined that a three year period is an appropriate time frame given the dynamic nature of the FMCG sector and given that this is in line with the Group's strategic planning period. The starting point for the viability assessment is the strategic and financial plan which makes assumptions relating to the economic climate, market growth, input cost inflation and growth from the Group's performance drivers. The prospects of the Group have been taken into account, including the size of the current market, the strength of the Group's brands and past production capacity investment. The model was then subject to a series of theoretical "stress test" scenarios based on the materialisation of principal risks, with input from the business functions.

The directors have considered the impact of a number of severe but plausible scenarios associated with the principal risks, including:

· Significant changes in consumer preferences and governmental impact in relation to sugar, plastics and the introduction of a Deposit Return Scheme, specifically in Scotland.

· Financial impact from a significant supply chain disruption (Brexit, technology or material supply).

· In addition the directors measured the impact of a number of scenarios occurring together.

· Finally a reverse "stress test" was performed allowing the Board to assess scenarios and circumstances that would render its business model unviable.

These tests were then reviewed against the Group's current and projected future net cash/debt and liquidity position. During the viability period, 2 out of 3 of the Group's current facilities, totaling £40m, will expire, however given the Group's current covenant strength and that no current covenant breaches are anticipated under the tests above, the Group anticipates it would be able to renew or extend facilities if it was required or desirable.

COVID-19

In addition to these scenarios due to the emergence of COVID-19 and the ongoing health emergency linked to the global pandemic, the directors considered the impact of the current COVID-19 environment on the business for the next 12 months, the viability period and the longer term. Whilst the situation evolves daily, making scenario planning difficult, we have considered a number of impacts on sales, profits and cash flows. We have assumed that our operations remain open and that we will continue to be able sell our products to customers, consistent with DEFRA guidance. Whilst the virus may impact across many functions of the business from supply chain to the ability of our customers to service consumers, it would most likely manifest itself in lost volumes and require significant action in relation to operational cost reductions.

Impact on the business

The major variables are the depth and the duration of COVID-19 measures. The 2 main divisions will be impacted differently, with Barr Soft Drinks operating mainly in multiple retail (take home) and convenience (out of home) outlets and Funkin mainly within the on-trade and leisure sectors. Overall, we scenario planned several out turns with volumes dropping significantly (in the range of 30-40%) and the impact lasting for a significant part of 2020. The revenue and operational leverage impact of such a volume loss would have a major negative impact on Group profitability however the scenario modelling would indicate that the Group would remain profitable over the next 12 months and we would anticipate a recovery in the following years.

Impact on costs and potential mitigations

The test has been based on the most severe but plausible scenario currently envisaged by the Board with a significant volume reduction being mitigated with identifiable cost savings, particularly discretionary spend but including government support and longer term options that recognise the relatively fixed cost nature of the soft drinks operation. While we have curtailed capital investment in 2020 we have maintained our investment in our asset base in line with current strategy over the medium term, again we will look closely at all capital plans to ensure the spend is realistic given the external environment.

Credit facilities

The Group has access to liquidity and has facilities to meet its needs over the next 36 months as follows: 12-24 months £60m, 24-36 months £20m as 2 facilities expire. These take the form of revolving credit facilities. As noted on page 15 since the year end these have been fully drawn down. In addition the Group has access to an overdraft facility which, as an on-demand facility, has been ignored in relation to the viability testing. The revolving credit facilities have two financial covenants, relating to interest cover and leverage, and a material adverse change clause.

Result of stress test

The result of the stress test carried out as a response to COVID-19 shows that the Group has adequate headroom over the next 12 and 36 months and does not breach any financial covenant. We will closely monitor cash conversion and covenants over this period.

Government support for business

We welcome the announcement made by the Chancellor of the Exchequer on Tuesday 17th March 2020, pledging government support which will go far to stabilise many businesses through this troubled time. Given the significant impact of COVID-19 on our business it would be our intention to access this support, including, but not limited to, delaying payment of taxes and employee cost support.

The results of these tests were reviewed taking into account the Group's current position, the Group's experience of managing adverse conditions in the past and mitigating actions available to the Group. Based on this assessment, 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 January 2023.

Appendix C: Related party transactions

The following related party transactions are extracted from the Annual Report and Accounts (page 159):

Related party transactions

Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation. Details of transactions between the Company and related parties are as follows:

	Sales of goods and services		Purchase of goods and services
	2020 £m	2019 £m	2020 £m	2019 £m
Rubicon Drinks Limited	-	-	4.2	4.9

The amounts disclosed in the table below are the amounts owed to and due from subsidiary companies that are trading subsidiaries. In the year to 26 January 2019 new trade terms were agreed between the Company and Rubicon Drinks Limited ("RDL").

The balances are unsecured and are due on demand. The difference between the total of these balances and the amounts disclosed as amounts due by (Note 20) and to subsidiary companies (Note 22) are balances due by and due to dormant subsidiary companies.

	Amounts owed by related parties		Amounts due to related parties
	2020 £m	2019 £m	2020 £m	2019 £m
Rubicon Drinks Limited	-	-	5.6	2.4
Funkin Limited	0.5	0.4	-	-

Compensation of key management personnel

The remuneration of the management directors, non-executive directors, non-management directors and other members of key management (the Executive Committee) during the year was as follows:

	2020 £m	2019 £m
Salaries and short term benefits	3.1	5.3
Post employment benefits	0.5	0.5
	3.6	5.8

The Directors' Remuneration Report can be found on pages 66 to 95.

Retirement benefit plans

The Group's retirement benefit plans are administered by an independent third party service provider. During the year the service provider charged the Group £0.4m (2019: £0.4m) for administration services in respect of the retirement benefit plans. At the year end £nil (2019: £nil) was outstanding to the service provider on behalf of the retirement benefit plans

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