The Group is exposed to changes in the level of activity and therefore demand from the building, construction and civil engineering industries.
Government policy and expenditure plans, private investor decisions, the general economic climate and both business and (to a lesser extent) consumer confidence are all factors which can influence the level of building activity and therefore the demand for many of the Group's products.
- Maintain a broad spread of markets, products and customers to limit risks and act as a natural hedge within any given territory
- The Group Board's portfolio review ensures that the Group's capital is appropriately allocated to the geographies and markets which remain core
- Continual review of all available indicators of market activity and regular communication with key suppliers and customers to ensure that any change in market demand is anticipated as early as possible
- Ensure the Group remains structured in a way that enables it to take prompt action in the event of a material change in the trading environment
- Ensure the Group maintains a strong balance sheet and financial position
- Restructuring actions
- Strategic Initiatives
- Selected ROCE-enhancing acquisitions
- Further diversification through investment in specialist niche markets
Competitors and margin management
Challenging market trading conditions mean that competition pressures from direct specialist competition and the overlap with general suppliers remain high, which in turn results in continued margin pressures being faced by the Group.
- Strong trading presence and positions in the majority of the markets in which the Group trades
- Initiatives designed to improve the Group's core competencies surrounding customer service, sales support and training
- Ongoing pricing and purchasing initiatives, including supplier rebates, designed to improve gross margin
- Tight control of operating costs
- Significant investment in the branch network and distribution capability, people, IT infrastructure and product offering
- Diversified portfolio of products, customers and markets limits the risk from any single competitor
- Specialist training
- Investment in IT
- Professionalising procurement and pricing management
Failure to negotiate competitive terms of business with suppliers or failure to satisfy the needs of customers could harm the Group's business. Customer or supplier consolidation and/or manufacturers dealing directly with customers.
- Ongoing pricing and purchasing initiatives designed to improve gross margin
- The Group has extensive and regular dialogue with all commercial partners to maintain strong relationships
- Key supplier/customer harmonisation and national account strategy planning
- The Group is not overly reliant on any one supplier and all businesses undergo alternative key supplier scenario planning
- No significant customer dependency. Continued focus on customer service to maintain excellent relationships including monitoring of customer satisfaction
- Strategically important supply chain partners are reviewed globally to assess their financial health
- Monitoring of customer behaviour and performance
- Procurement Initiative
- Commercial partner relationship and rationalisation
SIG operates in a number of countries, each with its own laws and regulations, encompassing environmental, legal, health and safety, employment and tax matters. Changes in these laws and regulations, including as a result of Brexit, could impact on SIG's ability to conduct its business, or make the conduct of such business more expensive.
There is also the reputational and financial cost of being penalised for non-compliance.
- Embedding and operating a zero harm culture
- Dedicated resource to monitor compliance with legal and regulatory matters
- Active monitoring of relevant laws and regulations to ensure that any changes to the legal framework are identified and effects minimised
- Review of policies and procedures with reference to changing legislative requirements and the provision of associated training
- Affiliation with regulatory bodies and trade associations
- Strong internal control framework, policies and culture supported by strong leadership, accountability and commitment throughout the organisation
- Continuous monitoring of political environment
- Continuous review of business plans in order to minimise SIG's exposure to potential changes in Government policy
- Compulsory risk management training programmes (eg data protection and anti-bribery and corruption etc) appropriate to their roles in order to increase awareness of potential risks
- 'Zero Harm' programme
- Training and development programmes
Group net debt at 31 December 2016 amounted to £259.9m (2015: £235.9m).
The Group has to manage the following risks relating to its net debt:
- future availability of funding
- interest rate risk
- foreign currency risk
- compliance with debt covenants
- counterparty credit risk.
- Regular meetings of the Tax and Treasury Committee
- Comprehensive Treasury Policy (please see the Treasury Risk Management section)
- Regular monitoring, including sensitivity analysis, to understand the impact of interest rate and exchange rate movements
- Active hedging programme in place
- Monitoring performance against covenants on the Group's Revolving Credit Facility and private placement notes
- Regular discussion with banking and private placement partners
- Maintaining a strong balance sheet to enable access to cost effective sources of third party funding
- Refinancing of maturing private placement debt and securing facilities to ensure certainty of funding for the medium to longer term
- Initiatives to manage and improve the Group's leverage position
Working capital and cash management
Failure to manage working capital effectively may lead to a significant increase in the Group's net debt, thereby reducing the Group's funding headroom and liquidity.
- Post-tax Return on Capital Employed is a Key Performance Indicator of the Group
- Cash flow targets are agreed with each business unit as part of the annual budget process and reviewed on a monthly basis
- Stringent authorisation procedures to control capital expenditure
- Proactive credit management systems supported by daily customer monitoring systems
- Branch reviews
- Strategic Initiatives
- Investment in IT
IT infrastructure and cybersecurity
SIG uses a range of computer systems across the Group. Outages and interruptions could affect the ability to conduct day-to-day operations, which could result in loss of sales and delays to cash flow.
Key systems are breached causing financial loss, data loss, disruption or damage.
A new ERP system is currently being implemented within the UK distribution businesses.
- Continual review of IT strategies to ensure they remain appropriate
- Business continuity framework
- Dedicated internal IT support team together with external support providers
- Regular updates to technology, infrastructure, communications and application systems
- The Group is continuing to invest in advanced hardware and software security to ensure protection of commercial and sensitive data
- For new IT projects, external consultants are utilised in conjunction with internal project management teams
- Collaborative cross-functional risk group in place
- Formal security and information assurance governance structures to oversee and manage cybersecurity and similar risks
- Roll-out of the new ERP system for the UK distribution businesses has continued during the course of 2016 and this will be completed in 2017
- Awareness of increased exposure to cyber-crime and actively sharing IT security information through industry and security forums
- External review of cybersecurity framework
- Implementation of a data warehouse
- Attainment of Cyber Essentials certification
- Joined CISP
Availability and quality of key resources
Unavailability of key resources (eg assets such as property, stock and personnel) will impact on the ability of SIG to operate effectively and efficiently.
Failure to attract and retain key individuals, strong management and technical staff in the future could have an adverse effect upon the Group's business.
- Strategic and budget reviews ensure all key resource requirements are identified and managed
- Senior management succession planning
- Continue to evolve a defined people strategy based on culture and engagement, talent management, training and reward recognition
- Provision of channels for employees to raise concerns to promote an environment of honesty and trust
- Increased employee communication and engagement
- Implemented detailed succession planning for senior management
- Increased training through 'Raising the Bar' programme for Senior Leadership Team
- Establishment of RISE Programme, the new high potential development programme, designed to identify and progress SIG's future leaders and support our strategic growth going forward