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Raw material prices
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The Group is exposed to volatile raw material prices, particularly polymers, due to fluctuations in the market price of crude oil and other petroleum feedstocks, exchange rate movements, and changes to suppliers' manufacturing capacity.
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Any increase in the market price of crude oil and other
petroleum feedstocks, exchange rate movements, and changes to suppliers' manufacturing capacity could have a direct impact on the prices the Group pays for raw materials which could adversely affect its operating margins and cash flow.
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The Group seeks to pass on raw material price increases to its customers wherever possible. There is usually at least a three month time period from notification of the raw material price increase before selling prices can be actioned in the market. Competitors of the Group are likely to experience similar levels of polymer cost increases.
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Business Disruption
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The Group's manufacturing and distribution operations could be subjected to disruption due to factors including incidents such as fire, failure of equipment, power outages, strikes, or unexpected or prolonged periods of severe weather.
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Incidents such as fires, failure of equipment, power outages, strikes or unexpected severe weather (due to flooding, snow or high winds) could result in the temporary cessation in activity or disruption at one of the production facilities impeding the Group's ability to deliver its products to its customers, adversely affecting its financial results.
In addition, prolonged periods of severe weather could result in a slowdown in site construction activity reducing the demand for the Group's products and adversely affecting its financial results.
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The Group has developed business continuity, crisis response, and disaster recovery plans.
The Group has the ability to transfer some of its production to alternative sites and could also subcontract out some of its tooling to reduce any potential loss in production capacity.
The Group maintains a significant amount of insurance to cover business interruption and damage to property from such events.
Independent insurer inspections take place across all sites to assess potential hazards and business interruption risks.
The Group carries out regular maintenance to minimise the risk of equipment failure.
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Reliance on key customers
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Some of the Group's businesses are dependent on key customers in highly competitive markets.
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Failure to manage relationships with key customers, whilst continuing to provide high quality products delivered on time in full, and developing new innovate products could lead to a loss of business affecting the financial results of the Group.
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The Group's strategic objective is to broaden its customer base wherever possible.
The Group focuses on delivering exceptional customer service and maintains strong relationships with major customers through direct engagement at all levels.
The Group maintains customer service matrices which are continually tracked and monitored and intervention made where required.
The Group closely manages its pricing, rebates, and commercial terms with its customers to ensure that they remain competitive.
The Group continually seeks to innovate and develop its product lines to ensure its products are to the standard our customers expect.
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Recruitment and Retention of Key Personnel
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The Group is dependent on the continued employment and performance of our Executive Management Team and other key skilled personnel.
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Loss of any key personnel without adequate and timely replacement could disrupt business operations and the Group's ability to implement and deliver its growth strategy.
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The Group has a formal succession plan in place ensuring progression through the Group.
The Group aims to provide competitive remuneration packages and incentive schemes to retain and motivate key personnel.
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Economic Conditions
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The Group is dependent on the level of activity in the construction industry and is therefore susceptible to any changes in its cyclical economic conditions.
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Lower levels of activity within the construction industry could reduce sales and production volumes adversely affecting the Group's financial results.
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The Group closely monitors trends in the industry, invests in market research and is an active member of the Construction Products Association. The Group uses Construction Products Association and Euroconstruct forecasts in its budgeting process.
The Group closely manages its demand forecasts and costs through weekly operational review meetings.
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Government Action and Policy
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The Group is in part dependent on Government action and policies relating to public and private investment and is therefore susceptible to changes in Government spending priorities.
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Significant downward trends in Government spending on public and private investment arising from economic uncertainty and ongoing austerity policies could have an adverse impact on the construction industry which could impact on sales and production volumes affecting the Group's financial results.
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The Group's strategy is to have its operations structured so that it has a balanced exposure to the residential, commercial and infrastructure construction sectors so as to reduce the impact of any adverse government action or policy on any one of the construction sectors.
The Group closely monitors trends in the industry, invests in market research and is an active member of the Construction Products Association.
The Group closely manages its demand forecasts and costs through weekly operational review meetings.
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Government regulations and standards relating to the manufacture and use of building materials
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The Group is subject to the requirements of UK and European environmental and occupational safety and health laws and regulations, including obligations to investigate and clean up environmental contamination on or from properties.
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Failure of the Group to comply with changes to environmental regulations and other obligations relating to environmental matters could result in the Group being liable for fines, require modification to operations, increase manufacturing and delivery costs, and could result in the suspension or termination of necessary operational permits, thereby impacting the Group's financial results.
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The Group has a formal Health, Safety & Environmental policy, and procedures are in place to monitor compliance with the policy.
The Group performs internal environmental audits and is subjected to external environmental audits on a periodic basis.
The Group performs weekly and monthly reporting on key Health, Safety & Environmental matters which require the attention of the Polypipe Board.
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Product Liability
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The Group manufactures products that are potentially vital to the safe operation of its customers' products or processes. These are often incorporated into the fabric of a building or dwelling, or buried in the ground as part of an infrastructure system and in each case, it would be difficult to access, repair, recall or replace such products.
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A product failure or recall could result in a liability claim for personal injury or other damage leading to substantial money settlements, damage to the Group's brand reputation, costs and expenses and diversion of key management's attention from the operation of the Group, which could all affect the Group's financial results.
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The Group operates comprehensive quality assurance systems and procedures at each site.
Wherever required, the Group obtains certifications over its products to the relevant national and European standards including Kitemarks, BBAs, WRCs and WRACs.
The Group maintains product liability insurance to cover third party claims arising from potential product failures.
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Information Systems
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The Group is dependent on the continued efficient operation of its Information Systems and is therefore vulnerable to potential failures due to power losses, telecommunication failures, or from an external security breach due to the increasing levels of sophisticated cyber-crime now threatening businesses.
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Disruption or failure of the Information Systems could affect the Group's ability to conduct its ongoing operations which could affect the Group's financial results.
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The Group contracts with a third party to provide business continuity arrangements for wholesale or partial recovery of the key servers and applications which are used within the UK businesses. These continuity plans are subject to periodic testing.
Local back up processes are performed on a daily, weekly and monthly basis.
Firewalls are in place to protect against potential viruses and any off site access to the Group's servers is through a secure Virtual Private Network.
The Group continually invests in its maintenance and upgrades of the Information Systems. All upgrades are carefully planned and actively managed by senior personnel to minimise potential business disruption.
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Acquisitions
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The management of acquisitions activity and their integration play a part in delivering the Group's growth strategy and there is a risk that any acquisitions may not perform as expected.
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Ineffective management of acquisitions could impact on the Group's ability to fully implement and deliver its growth strategy.
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Full due diligence is carried out before any acquisition is made.
The Group seeks contractual assurances from the sellers to mitigate against any identified issues or risks.
Formal Board level approvals are required in accordance with the Group's delegation of authority structure for any acquisitive activity.
The progress of any integration is closely monitored at Board and executive team level.
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Financial Risk Management
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The Group's operations expose it to a variety of financial risks that include the effects of:
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The Group has in place financial risk management procedures that seek to limit the adverse effects of the financial risks as follows:
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Price Risk (considered in raw material prices above)
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Foreign Exchange Risk - The risk that the fair value of a financial instrument or future cash flows will fluctuate because of changes in foreign exchange rates. The Group's risk relates primarily to the its operating activities where the revenue or expense is denominated in a currency other than the functional currency of the entity undertaking the transaction.
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Foreign Exchange Risk - Exchange rate fluctuations may adversely affect the Group's results.
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Foreign exchange risk - The Group enters into forward currency contracts for the purchase and sale of foreign currencies in order to manage its exposure to fluctuations in currency rates primarily in respect of US Dollar and Euros. It is not possible for the Group to mitigate exchange rate differences which impact the translation of its overseas subsidiaries' results and net assets as all of the Group's long term borrowings are Sterling denominated.
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Credit Risk - The risk that a counterparty of the Group will not be able to meet its obligations under a financial instrument or customer contract. The Group is exposed to credit risk from its trading activities (primarily from trade receivables) and from its financing activities, including deposits with bank.
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Credit Risk - The failure of a counterparty to meet their financial obligations could lead to a financial loss for the Group.
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Credit risk - Customer credit risk is managed by each subsidiary subject to the Group's established policy, procedures and control relating to customer credit risk management. Credit quality of the customer is assessed based on an extensive credit rating scorecard and individual credit limits are defined in accordance with this assessment. Outstanding customer receivables are regularly monitored and any shipments to major export customers are generally covered by letters of credit or credit insurance.
Where the Group perceives there to be a significant credit exposure it will take out credit insurance or obtain an irrevocable letter of credit prior to any transaction.
Credit risk arising from cash deposits with banks are managed by the Group's finance department. Investments of surplus funds are made only with banks that have as a minimum a single A credit rating.
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Liquidity Risk - The risk that the Group will not be able to meets its financial obligations as they fall due.
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Liquidity Risk - Insufficient funds could result in the Group not being able to fund its operations.
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Liquidity risk - The Group's approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.
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Interest rate cash flow risk - The risk that interest rates could rise impacting on the Group's borrowings.
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Interest rate cash flow risk - Increases to interest rates could result in significant additional interest rate payments being required on any borrowings.
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Interest rate cash flow risk - To reduce the Group's exposure to future increases in interest rates, the Group has entered into interest rate swaps from variable to fixed interest rates.
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