The Group's treasury department's main responsibilities are to:
- Ensure adequate funding and liquidity for the Group;
- Manage the interest risk of the Group's debt;
- Invest surplus cash;
- Manage the clearing bank operations of the Group, and
- Manage the foreign exchange risk on its non-sterling cash flows.
Treasury activities are delegated by the Board to the Chief Financial Officer ("CFO"). The CFO controls policy and performance through the line management structure to the Group Treasurer and by reference to the Treasury Committee. The Treasury Committee meets regularly to monitor the performance of the Treasury function.
Policies for managing financial risks are governed by Board approved policies and procedures, which are reviewed on an annual basis.
The Group's debt management policy is to provide an appropriate level of funding to finance the Business Plan over the medium term at a competitive cost and ensure flexibility to meet the changing needs of the Group. Details of the Group's current borrowing facilities are contained in note 16.
The key risks that the Group faces from a treasury perspective are as follows:
The Group's exposure to market risk predominantly relates to interest, currency and commodity risk. These are discussed further below. Commodity risk is due to the Group's products being manufactured from metals and other raw materials, subject to price fluctuation. The Group mitigates this risk through negotiating fixed purchase costs or maintaining flexibility over the specification of finished products produced by its supply chain to meet fluctuations.
Interest Rate Risk
The Group's policy aims to manage the interest cost of the Group within the constraints of the Business Plan and its financial covenants. The Group's borrowings are currently subject to floating rate interest rates and the Group will continue to monitor movements in the swap market.
If interest rates on floating rate borrowings (i.e. cash and cash equivalents and bank borrowings which attract interest at floating rates) were to change by + or – 1% the impact on the results in the Income Statement and equity would be a decrease/increase of £0.5m (2014: £0.6m).
Interest rate movements on deposits, obligations under finance leases, trade payables, trade receivables, and other financial instruments do not present a material exposure to the Group's balance sheet.
Capital risk management
The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The Group manages capital by operating within debt ratios. These ratios are net debt to Earnings Before Interest, Tax, Depreciation and Amortisation ("EBITDA") and fixed charge cover. Fixed charge cover is calculated as being EBITDA plus operating lease charges as a multiple of interest and operating lease charges. The Group also uses a ratio of lease adjusted net debt to EBITDA; this is calculated as being net debt and leases capitalised at eight times, as a multiple of EBITDA plus operating lease charges.
Fair value disclosures
The fair values of each class of financial assets and liabilities is the carrying amount, based on the following assumptions:
|Trade receivables, trade payables and finance lease obligations, short-term deposits and borrowings||The fair value approximates to the carrying amount because of the short maturity of these instruments, using an interest rate of 7.1% for long term finance lease obligations.|
|Long-term borrowings||The fair value of bank loans and other loans approximates to the carrying value reported in the balance sheet as the majority are floating rate where payments are reset to market rates at intervals of less than one year.|
|Forward currency contracts||The fair value is determined using the market forward rates at the reporting date and the outright contract rate.|
Fair Value Hierarchy
Financial instruments carried at fair value are required to be measured by reference to the following levels:
- Level 1: quoted prices in active markets for identical assets or liabilities;
- Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
- Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
All financial instruments carried at fair value have been measured by a Level 2 valuation method.
The fair value of financial assets and liabilities are as follows:
|Cash and cash equivalents||22.4||5.3|
|Loans and receivables||18.4||20.6|
|Forward exchange contracts used for hedging (assets)||3.9||—|
|Total financial assets||44.7||25.9|
|Trade and other payables — held at amortised cost||(157.6)||(135.7)|
|Borrowings at amortised cost||(53.0)||(86.0)|
|Forward exchange contracts used for hedging (liabilities)||(0.1)||(2.1)|
|Total financial liabilities||(221.9)||(234.7)|
Trade and other payables within the scope of IAS 39 include all trade payables, all other payables and £40.1m (2014: £41.3m) of accruals and deferred income.
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was £44.7m (2014: £25.9m) as detailed in the table above.
Foreign currency risk
The Group has a significant transaction exposure with increasing direct-sourced purchases from its suppliers in the Far East, with most of the trade being in US Dollars. The Group's policy is to manage the foreign exchange transaction exposures of the business to ensure the actual costs do not exceed the budget costs by more than 10% (excluding increases in the base cost of the product).
The Group does not hedge either economic exposure or the translation exposure arising from the profits, assets and liabilities of non-sterling businesses whilst they remain immaterial.
During the 53 weeks to 3 April 2015, the foreign exchange management policy was to hedge via forward contract purchase between 75% and 80% of the material foreign exchange transaction exposures on a rolling 18-month basis. Hedging is performed through the use of foreign currency bank accounts and forward foreign exchange contracts.
The carrying amount of the Group's foreign currency denominated monetary assets and monetary liabilities at the reporting date is as follows:
|3 April 2015||28 March 2014|
|Cash and cash equivalents||6.4||1.0||0.3||0.5|
|Trade and other payables||(19.7)||(0.7)||(19.3)||—|
The table below shows the Group's sensitivity to foreign exchange rates on its US dollar financial instruments, the major currency in which the Group's derivatives are denominated.
|10% appreciation of the US dollar||13.0||9.2|
|10% depreciation of the US dollar||(4.0)||(7.6)|
A strengthening/weakening of Sterling, as indicated, against the USD at 3 April 2015 would have (decreased)/increased equity and profit or loss by the amounts shown above. This analysis is based on foreign currency exchange rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, remain constant.
The movements in equity relates to the fair value movements on the Group's forward contracts that are used to hedge future stock purchases.
Pension Liability Risk
The Group has no association with any defined-benefit pension scheme and therefore carries no deferred, current or future liabilities in respect of such a scheme. The Group operates a number of Group Personal Pension Plans for colleagues.
The Group ensures that it has sufficient cash or loan facilities to meet all its commitments when they fall due by ensuring that there is sufficient cash or working capital facilities to meet the cash requirements of the Group for the current Business Plan. The minimum liquidity level is currently set at £30m, such that under Treasury Policy the maximum drawings would be £140m of the £170m available facility, to include the Overdraft Facility of £20m.
The process to manage the risk is to ensure there are contracts in place for key suppliers, detailing the payment terms, and for providers of debt, the Group ensured that such counterparties used for credit transactions held at least an 'A-' credit rating at the time of amend and extend agreement (November 2014). Ancillary business is currently being tendered with the five banks within the new banking group. Following the completion of the amend and extend agreement, at the year-end the banks within this new group maintained a credit rating of A- or above, in line with Treasury policy. The counterparty credit risk is reviewed in the Treasury report, which is forwarded to the Treasury Committee and the Treasurer reviews credit exposure on a daily basis.
The risk is measured through review of forecast liquidity each month by the Treasurer to determine whether there are sufficient credit facilities to meet forecast requirements, and through monitoring covenants on a regular basis to ensure there are no significant breaches, which would lead to an "Event of Default". Calculations are submitted bi-annually to the Group banking agent. There have been no breaches of covenants during the reported periods.
The contractual maturities of finance leases are disclosed in note 12. All trade and other payables are due within one year.
The contractual maturity of bank borrowings, including estimated interest payments and excluding the impact of netting agreements is shown below:
|Due less than one year||1.5||2.4|
|Expiring between 1 and 2 years||1.5||2.2|
|Expiring between 2 and 5 years||57.0||89.6|
|Expiring after 5 years||—||—|
|Contractual cash flows||60.0||94.2|
The following table provides an analysis of the anticipated contractual cash flows for the Group's forward currency contracts. Cash flows receivable in foreign currencies are translated using spot rates as at 3 April 2015 (28 March 2014).
|Due less than one year||78.5||(74.8)||83.2||(85.3)|
|Due between 1 and 2 years||6.0||(5.9)||—||—|
|Contractual cash flows||84.5||(80.7)||83.2||(85.3)|
It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts.