The Board is responsible for ensuring that the Group maintains an effective risk management system. It determines the Group’s approach to risk, its policies and the procedures that are implemented to mitigate exposure to risk.
The Board continually assesses and monitors the key risks in the business and Polypipe has developed a risk management framework to identify, report, and manage its principal risks and uncertainties. This includes the recording of all principal risks and uncertainties on
a Group Risk Register, which is updated at least every six months. Risks are fully analysed, allocated owners, scored for both impact and probability, prioritised, and assessed for what mitigation is required.
External risks include economic conditions, the weather, Government action, policies and regulations, raw material prices and information systems disruption. Internal risks include reliance on key customers, and recruitment and retention of key personnel.
The Board seeks to mitigate the businesses’ exposure to strategic, financial and operational risk, both external and internal. The effectiveness of key mitigating controls is continually monitored and subjected to periodic testing by the Group’s internal
audit function.
The heat map and table that follows highlight the principal risks and uncertainties that could have a material impact on the Group’s performance and prospects and the mitigating activities which are aimed at reducing the impact or likelihood of a major risk materialising. These risks have all been considered by the Board when developing the Group’s Viability Statement. The Board does recognise, however, that it will not always be possible to eliminate these risks entirely. In addition, the principal risks listed below do not comprise all of the risks that the Group may face and they are not listed in order of priority, probability or magnitude of potential impact.
The Board determines the appropriate level of risk for operating the business and pursuing its strategic objectives. A key focus of the Board is minimising exposure to financial, operational, human, legislative and reputational risks.
The Board continually assesses and monitors the key risks in the business and Polypipe has developed a risk management framework to identify, report, and manage its principal risks and uncertainties.
The effectiveness of key mitigating controls is continually monitored and subjected to periodic testing by the Group’s internal audit function.
The risk management processes are embedded into the different operational areas within the Group.
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Change in potential impact and/or probability
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1. Failure to manage the availability of raw materials supply and pricing – Brexit
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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, foreign currency exchange rate movements, and changes to suppliers’ manufacturing capacity.
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Any increase in the market price of crude oil or other petroleum feedstocks, foreign currency exchange rate movements, or changes to suppliers’ manufacturing capacity could have a direct impact on the prices the Group pays for raw materials which could adversely affect its financial results.
This impact is potentially exacerbated
by a no-deal Brexit.
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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 lag from notification of the raw material price increase before selling prices can be adjusted in the market.
Competitors of the Group are likely to experience the same pressures of any sustained raw material price increases.
Brexit – the Group is planning a temporary, proportionate increase in working capital in the first half of 2019 to secure supply of raw materials against short-term disruption at ports.
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Increased
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The Group’s manufacturing and distribution operations could be subjected to disruption due to incidents including, but not limited to, fire, failure of equipment, power outages, workforce strikes, or unexpected or prolonged periods of severe weather.
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Such incidents could result in the temporary cessation in activity, or disruption, at one of the Group’s production facilities impeding the ability to deliver its products to its customers, thereby adversely affecting the Group’s 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, thereby adversely affecting its
financial results.
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The Group has developed business continuity, crisis response, and disaster recovery plans.
The Group performs regular maintenance to minimise the risk of equipment failure.
Finished goods holdings across the operations act as a limited buffer in the event of operational failure.
The Group has the ability to transfer some of its production to alternative sites and could also subcontract 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 incidents.
Independent insurer inspections take
place across all sites to identify and
assess potential hazards and business interruption risks.
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No change
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3. 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, while continuing to provide high-quality products delivered on time in full, and developing new innovative products, could lead to a loss of business, thereby adversely affecting the Group’s financial results.
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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 with 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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No change
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4. Recruitment and retention of key personnel
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The Group is dependent on the continued employment and performance of our senior 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 facilitating staff retention and progression through the Group. This succession plan has been augmented through recent recruitment.
The Group aims to provide competitive remuneration packages and incentive schemes to retain and motivate key personnel.
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Reduced
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5. Economic conditions – Brexit
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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,
thereby 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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Increased
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6. Change in Government actions and policies relating to public and private investment
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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, thereby adversely 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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No change
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7. Environmental regulations and other obligations relating to environmental matters
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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 adversely affecting the Group’s financial results.
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The Group has a formal Health, Safety and 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 and environmental matters which require the attention of the Board.
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No change
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8. Product failures in the marketplace could harm our reputation and our results of operation
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The Group manufactures products that are potentially vital to the safe operation of its customers’ products or processes. These products 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 financial 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 adversely 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 or recalls.
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No change
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9. Failure of 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 cybercrime 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 adversely affect the Group’s financial results.
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The Group contracts with several third-party providers to supply off-site, business continuity arrangements for wholesale or partial recovery of the key servers and applications which are used within the various business units of the Group.
These continuity arrangements are subject to periodic validation and testing.
Some business units of the Group also take advantage of their multi-site operations to provision server and applications recovery between those sites.
There are a range of local, business
unit-specific, back-up processes which
are performed on a daily, weekly and monthly basis.
Firewalls are in place to protect the perimeter of the Group’s networks and any off-site access to the Group’s servers and applications is through secure Virtual Private Network connections. In addition, email and Internet traffic filtering is in place to protect against potential viruses or malware entering the Group’s networks. User and server computing devices have anti-virus software installed to protect from potential infection.
The Group continually invests in the maintenance and upgrade of IT infrastructure and information systems.
All upgrades are carefully planned and actively managed by senior personnel to minimise potential business disruption.
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No change
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10. Acquisitions do not perform as expected
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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 lead to management distraction,
a drain on financial resources, and impact on the Group’s ability to successfully implement and deliver
its growth strategy.
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Full due diligence is performed
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 acquisition activity. Where appropriate, the Group will pay deferred consideration linked to the ongoing performance of the acquisition.
The progress of any integration is closely monitored at Board and senior management team level.
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No change
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11. Foreign currency risk
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The risk that the fair value of a financial instrument or future cash flows will fluctuate because of changes in foreign currency exchange rates. The Group’s risk relates primarily to 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 currency exchange rate fluctuations could adversely affect the Group’s financial results.
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The Group enters into forward foreign currency exchange rate contracts for the purchase and sale of foreign currencies to manage its exposure to fluctuations in foreign currency exchange rates primarily in respect of US Dollars and Euros relative to Pounds Sterling. It is not possible for the Group to mitigate foreign currency exchange rate movements which impact the translation of its overseas subsidiaries’ results and net assets as all the Group’s long-term borrowings are Pounds Sterling denominated. However, with the disposal of the French business, foreign currency risk has been reduced.
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Reduced
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12. Credit risk
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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 banks.
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The failure of a counterparty to meet their financial obligations could lead to
a financial loss for the Group.
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Customer credit risk is managed by each business unit subject to the Group’s established policy, procedures and controls 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 is managed in accordance
with the Group’s established treasury policy, procedures and controls. Investments of surplus funds are made only with banks that have as a minimum a single A-credit rating.
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No change
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13. Liquidity risk
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The risk that the Group will not be able to meets its financial obligations as they fall due.
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Insufficient funds could result in the Group not being able to fund its operations.
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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. The successful completion of the refinancing of the RCF has reduced this risk.
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Reduced
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14. Interest rate risk
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The risk that interest rates could rise impacting on the Group’s borrowings.
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Increases to interest rates could result in significant additional interest rate cash payments being required on any borrowings.
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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. These will be progressively renewed when necessary to ensure appropriate levels of cover for utilisation of Group lending.
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No change
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15. Failure to manage health and safety resulting in fatality or serious injury
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The risk that management fail to take the correct measures to prevent fatalities or serious injury.
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Lack of management focus and
a poor cultural attitude towards health and safety could result in increased incidences and serious or indeed fatal accidents.
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There is a Group Health and Safety Director (with a team throughout the Group) with clear accountability for health and safety (‘H&S’). H&S performance is tracked weekly by all levels of management and investigations performed to uncover cause and key learnings as quickly as possible. If employees have failed to adhere to H&S policies, then they may be subject to disciplinary action. Key messages are constantly reinforced throughout the organisation.
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No change
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16. Agreement of unfavourable commercial terms
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The risk that new contracts
(or renewed contracts) with
suppliers and merchants may contain unfavourable commercial terms.
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Lack of experience in negotiating commercial terms and insufficient oversight of such negotiations may result in unfavourable commercial terms being contracted.
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The Group employs experienced procurement specialists to ensure key supplies are secured on the best possible terms (e.g. polymers). In other areas of the business, larger contracts are only negotiated by more senior managers. Significant contracts are also reviewed by Group legal counsel.
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No change
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17. Fraud including misreporting of periodic financial information by business units to the Group
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The risk that actuals reporting and forecasting may be misreported to the Group by the business units.
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Lack of experience or oversight as well as possible excessive pressure placed on managers may result in the misreporting of results (both actuals as well as forecasts).
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Results are subject to regular analytical review by senior management at Group level and appropriate enquiries are made if anomalous results are seen. Balance sheet reviews will be introduced throughout the Group to help uphold the integrity of financial reporting. Financial results are also subject to one external review (‘interims’) as well as a full external audit by Ernst & Young LLP each year. Internal auditing also conducts reasonable procedures to help prevent material misstatements.
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No change
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18. Breach of Group policies regarding Competition Law, the Bribery Act and Sanctions Compliance
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Fines may be levied on the Group and/or individuals if legislation is breached. This legislation includes, but is not limited to, Competition Law, the Bribery Act and Sanctions Compliance.
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Alongside the financial impact of fines, breaches could result in damage to the Group’s reputation and adversely impact potential current and future business.
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Training is provided to all new relevant employees on Competition Law including those changing roles.
Annual declarations of compliance are undertaken in respect of Competition Law and the Bribery Act.
A Sanctions Compliance Policy is in place and all business in higher risk countries requires approval by the Company Secretary.
An external agency (Reuters) is used to check Sanctions against companies and/or individuals.
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No change
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19. Political unrest in the Middle East
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Political unrest in the Middle East could adversely impact the Group’s Middle East operations and/or create a threat
to the safety of Group employees.
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A negative impact to the Group’s Middle East operations could adversely impact the Group’s financial results and its ability to deliver its growth strategy.
If the safety of employees is compromised this could result in serious injuries or fatalities.
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Financial performance, including future expectations, is discussed weekly while cash is remitted to the Group treasury team frequently to minimise the impact to the Group of any changes in the Middle East situation.
The Group retains and encourages an open communication policy with all employees including discussions regarding their welfare and wellbeing.
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No change
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20. Labour availability and wage inflation – Brexit
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Post-Brexit the UK may focus on enabling higher-skilled migration into the UK and potentially introducing a more restrictive policy on lower-skilled migration.
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With UK unemployment at historically low levels, any reductions in labour availability may adversely impact operations.
Further, increased demand for a limited labour pool may increase salary inflation and adversely impact the Group’s financial results.
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The Group continues to recruit and train staff across all levels of the business, being an ’employer of choice’ aiding staff recruitment and retention. All our competitors face the same pressures not putting the Group at a competitive disadvantage.
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New risk
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