Delivering sustainable growth Marshalls plc Annual Report and Accounts 2019 Paving a strong path for the UK’s leading hard landscaping manufacturer Our objective is to deliver sustainable growth, whilst maintaining a strong balance sheet with a flexible capital structure and a clear capital allocation policy. Our new 5 year Strategy lays the foundation for achieving our strategic goal of being the UK’s leading manufacturer of products in the Built Environment. Martyn Coffey Chief Executive Find out more online: www.marshalls.co.uk Front cover Location - Southbank, London (London Eye) Product - Callisto and Larissa Granite Paving Strategic report Strategic report 02 Highlights 03 Our 5 year Strategy 04 At a Glance 06 Chair's Statement Corporate governance 42 Board of Directors 44 Corporate Governance Statement 50 Nomination Committee Report 52 Audit Committee Report 08 Chief Executive’s Statement 55 Remuneration Committee Report 10 Q&A with the CEO 12 Case Study 13 Case Study 14 Growth Markets 16 Business Model 18 Stakeholder Engagement 20 Strategy 22 Key Performance Indicators 24 Risk Management and Principal Risks 30 Case Study 31 Financial Review 36 Sustainability 64 Remuneration Policy 76 Fairness, diversity and wider workforce considerations 84 Annual Remuneration Report 87 Directors’ Report – Other Regulatory Information 89 Statement of Directors’ Responsibilities 91 Independent Auditor’s Report Financial statements 98 Consolidated Income Statement 99 Consolidated Statement of Comprehensive Income 100 Consolidated Balance Sheet 101 Consolidated Cash Flow Statement 102 Consolidated Statement of Changes in Equity 104 Notes to the Consolidated Financial Statements 139 Parent Company Statement of Changes in Equity 140 Company Balance Sheet 141 Notes to the Company Financial Statements 147 Financial History – Consolidated Group 148 Shareholder Information Find us on Facebook MarshallsGroup Follow us on Twitter @MarshallsGroup Follow us on LinkedIn Marshalls Follow us on YouTube MarshallsTV Marshalls plc Annual Report and Accounts 2019 01 Highlights Our proven strategy continues to strengthen the business Our continued focus on New Build Housing, Road, Rail and Water Management means we are positioned in the right parts of the market. Financial highlights • Revenue growth of 10% to £541.8 million (2018: £491.0 million) • Continued improvement in operating margins which increased to 13.4% (2018: 13.2%) • • Strong cash generation has continued with Group operating cash flow at 96% of EBITDA Net debt of £18.7 million (2018: £37.4 million) on a pre-IFRS 16 basis Profit before tax up 11% to £69.9 million (2018: £62.9 million) on a reported basis • Reported net debt of £60.0 million, after the inclusion of £41.3 million of IFRS 16 liabilities Return on capital employed (“ROCE”) improved to 23.7% (2018: 21.9%) on a pre-IFRS 16 basis and on a reported basis was 21.4% • Reported EPS up 12% to 29.36 pence (2018: 26.29 pence) • Edenhall performed well in the period and its operational integration is complete • • Recommended final ordinary dividend increased by 21% to 9.65 pence (2018: 8.00 pence) per share Recommended supplementary dividend of 4.00 pence per share made possible by strong cash management • • Revenue (£’m) £541.8m +10% 2019 2018 2017 2016 2015 541.8 491.0 430.2 396.9 386.2 EBITDA (£’m) Operating profit (£’m) Reported basis Pre-IFRS 16 Reported basis Pre-IFRS 16 £103.9m +29% 2019 £90.1m +12% 90.1 80.8 £73.7m +14% 2019 £72.6m +12% 72.6 64.8 2018 2017 2016 2015 67.9 60.8 51.8 2018 2017 2016 2015 53.4 47.6 37.5 Basic EPS (p) Profit before tax (£’m) Return on capital employed (%) Reported basis Pre-IFRS 16 Reported basis Pre-IFRS 16 Reported basis Pre-IFRS 16 29.36p +12% 29.48p +12% £69.9m +11% £70.1m +11% 21.4% 23.7% – up 180 basis points 23.7 21.9 20.8 23.0 19.0 70.1 62.9 52.1 46.0 2019 2018 2017 2016 2015 35.3 Notes: 1. The financial impact of IFRS 16 is summarised in Note 1. 2. Alternative performance measures are used consistently throughout the Annual Report and Accounts. These relate to like-for-like, EBITA, EBITDA, return on capital employed (“ROCE”), the ratio of operating cash flow to EBITDA and net debt. Following the transition to IFRS 16, reference has been made to “pre-IFRS 16” and “reported basis”, the latter referring to amounts required under IFRS 16. For further details of their purpose, definition and reconciliation to the equivalent statutory measures see Note 1 to the Financial Statements. 3. The 2019 figures in the graphs use the pre-IFRS 16 figures. 2019 2018 2017 2016 2015 29.48 26.29 2019 2018 2017 2016 2015 21.52 18.95 14.32 Final dividend recommended (p) 9.65p +21% 2019 2019 2018 2018 2017 2017 2016 2016 9.65 4.70 8.00 4.00 6.80 4.00 5.80 3.00 2015 2015 4.75 2.00 02 Marshalls plc Annual Report and Accounts 2019 Strategic report Our 5 year Strategy We do the right things, for the right reasons, in the right way. This is The Marshalls Way of doing business Our vision Our vision is to Create Better Spaces and Futures for Everyone; Socially, Environmentally and Economically. Our mission Our Continuing Mission is to Deliver Sustainable Growth through a Brand that Drives Customer Specification of Innovative Product Solutions for the Built Environment. Our Strategic Goal is to become the UK’s Leading Manufacturer of products for the Built Environment Strategic Priorities 1 2 3 Brand preference for product specification Digital transformation New product development Read the Case Study on page 12 Read the Case Study on page 30 Read the Case Study on page 13 5 6 7 4 Logistics excellence 8 Sustainable materials supply Customer centricity Operational excellence Growth in the emerging businesses Enabled by people and talent development Read more about our people and culture pages 36 and 37 The Marshalls Way Find out more about The Marshalls Way on page 11 Marshalls plc Annual Report and Accounts 2019 03 Strategic report At a Glance The UK’s leading manufacturer of hard landscaping products Homeowners Marshalls’ Domestic customers range from DIY enthusiasts to professional landscapers, driveway installers and garden designers. Marshalls specialises in helping homeowners to create beautiful, yet practical outdoor spaces which families can enjoy for years to come. Homeowners revenue 26% Flat 69+ Public Sector and Commercial In the Public Sector and Commercial end market, Marshalls satisfies the needs of a diverse commercial customer base which spans local authorities, commercial architects, specifiers, contractors and housebuilders. We have unrivalled technical expertise and manufacturing capability and an enviable product range. Public Sector and Commercial revenue 69% +15% 69+ International Marshalls’ International operations comprise a manufacturing site in Belgium and sales and administration offices in the USA, China and Dubai. International revenue, which also includes exports from the UK, comprises 5 per cent of Group sales. International revenue 5% +13% 69+ 04 Marshalls plc Annual Report and Accounts 2019 Where we operate We have manufacturing plants, quarries and distribution sites across the UK. Our unique national network ensures proximity to customers and an efficient logistics footprint. Locations: Marshalls Landscape Premier Mortars Mineral Products Edenhall Street Furniture CPM Design Space Administration New Marshalls Design Space – Birmingham The new Marshalls Design Space in Birmingham will support the major redevelopment of the city. Read more on page 12 New factory – Newport, South Wales Edenhall’s new £6 million concrete brick manufacturing facility has significantly increased capacity. Read more on page 13 Strategic report5 + 26 + M 5 + 26 + M 5 + 26 + M Growth agenda Proven record of sustained growth with 5-year CAGR growth in revenue of 9 per cent and PBT of 26 per cent. Strong market position Wide market reach targeting growth areas including New Build Housing, Road, Rail and Water Management. Wide-ranging mineral reserves with the “Marshalls Stone Standard“ quality mark. Revenue £541.8m +10% Operating profit margin 13.4% +2% Read more about our strategy on pages 20 and 21 Read more about our markets on pages 14 and 15 Target acquisitions The acquisitions of both CPM and Edenhall are enabling the Group to offer a broader product choice that complements our existing offering. Both acquisitions are now integrated into the Marshalls’ business. Innovation and new products The continued focus on innovation and new product development ensures we focus on manufacturing and materials technology capabilities. CPM Acquired 19 October 2017 Edenhall Acquired 11 December 2018 Read more about the integration of our acquisitions on page 32 Number of new product ranges 87 launched in the current innovation cycle Read more about our investment in research and development on page 13 Diversified group Serving Public Sector, Commercial and Domestic end markets. These have historically proved to offer security due to their counter-cyclical profiles. Strong asset base and resources Well-invested manufacturing plants with continuing emphasis on high quality maintenance, technology improvements and reinvestment. Capital investment of £22.9 million in 2019. Public Sector and Commercial (% of Group revenue) 69%revenue growth of 15% in 2019 Read more about how we are improving our digital offering on page 30 Capital investment in 2019 £22.9m £101.5 million over the last 5 years Read more about our capital investment on page 34 Sustainability The Group has a sustainable business plan and has set KPIs for the key areas of this plan. Sustainability and corporate responsibility are key elements of The Marshalls Way. Delivering sustainable shareholder value is a key part of Group strategy. Culture The Marshalls Way underpins our culture along with our key objective of doing business responsibly. The corporate culture is embedded into our engagement with stakeholders. ROCE 23.7%On a pre-IFRS 16 basis Read more about how we operate as a sustainable business on pages 36 to 41 Health and safety 14% reduction in working days lost since 2016 (%) Read more about our sustainability strategy on pages 36 to 41 Marshalls plc Annual Report and Accounts 2019 05 Strategic report Chair’s Statement The Marshalls Way means doing the right things, for the right reasons, in the right way Overview I am now in my second year as your Chair and I am privileged to be part of the Marshalls story. The last year has seen record revenue, profit and market capitalisation and the Group continues to outperform the construction market. Edenhall, acquired in December 2018, has had a very strong first year and has been an excellent addition for Marshalls. The business is now integrated into the Group and, given the great opportunity concrete bricks represent in the future, it has significant growth potential. Results Group revenue for the year was £541.8 million, an increase of 10 per cent on 2018, despite market conditions being challenging during the last year. Revenue in the Public Sector and Commercial end market was up 15 per cent, whilst Domestic sales were flat. Profit before tax, on a reported post-IFRS 16 basis, was £69.9 million. On a pre-IFRS 16 basis, profit before tax was £70.1 million (2018: £62.9 million), an increase of 11 per cent. Reported EBITDA was £103.9 million. On a pre-IFRS 16 basis, EBITDA grew by 12 per cent to £90.1 million and the Group’s earnings per share, at 29.48 pence, were up 12 per cent on a pre-IFRS 16 basis. Reported earnings per share were 29.36 pence. Marshalls continues to have strong cash generation with year-end net debt of £18.7 million (2018: £37.4 million) on a pre-IFRS 16 basis. Summary • Revenue growth of 10% despite challenging market conditions • New 5 year Strategy launched during the year • 12% increase in earnings per share reflecting continuing strength of the Marshalls brand • Strong cash generation with year-end net debt down to £18.7 million on a pre-IFRS 16 basis (£60.0 million on a reported basis) • Full year dividend of 18.35 pence (up 15%) and a discretionary supplementary dividend of 4.00 pence The Board is committed to the promotion of strong ethical, environmental and corporate social responsibility principles. 06 Marshalls plc Annual Report and Accounts 2019 Strategic report Dividends The Group continues to follow a progressive dividend policy aimed at achieving up to 2 times earnings cover over the business cycle. For the current year, the Board is recommending a final dividend of 9.65 pence per share (2018: 8.00 pence per share) which, together with the interim dividend of 4.70 pence per share (2018: 4.00 pence per share), makes a combined dividend of 14.35 pence per share (2018: 12.00 pence per share), an increase of 20 per cent for the year. The Board is also recommending a supplementary dividend of 4.00 pence per share for 2019 (2018: 4.00 pence per share). The aim continues to be to maintain a degree of flexibility within our dividend strategy by utilising discretionary supplementary dividends commensurate with free cash flow and after considering future group capital requirements. The payment of this supplementary dividend provides increased returns for shareholders whilst at the same time recognising an appropriate degree of caution and stewardship. Marshalls’ new 5 year Strategy The new 5 year Strategy was launched at our Capital Markets Day in June and has been very well received by investors. Our strategy lays the foundations for our goals and objectives and our 8 strategic priorities provide clear focus. The strategy is explained in more detail throughout this Annual Report and, in particular, in a Q&A format on pages 10 and 11. The Marshalls Way Our 5 year Strategy is underpinned by The Marshalls Way which is fundamental to the Group’s culture of doing business responsibly. The development of The Marshalls Way has drawn on a Group-wide project which has seen significant engagement between the Board, employees and other stakeholders. Our recently refreshed Code of Conduct lays out what we expect from our employees and stakeholders in doing business the right way. This includes more regular and transparent consultation, interaction and reporting. The Marshalls Way means doing the right things, for the right reasons, in the right way. It features throughout this Annual Report because it is relevant to everything the Group does. Environmental, social and governance (“ESG”) objectives The Board is committed to the promotion of strong ethical, environmental and corporate social responsibility principles. This is a fundamental element of The Marshalls Way. We recognise the need to have sustainable products and services and to consider the long-term impact of every decision the Group makes. We are focused on playing our part in addressing the risk of climate change and the protection of the environment and we are engaging with our stakeholders to ensure they also put sustainability first. Our ESG agenda is supported by a detailed framework and comprehensive policies. Governance We are committed to the highest standards of corporate governance and we comply with all the provisions of the UK Corporate Governance Code as outlined in our Corporate Governance Statement on pages 44 to 49. To ensure a strong alignment between the interests of management and our shareholders a large proportion of management’s remuneration continues to be in shares which must be retained for up to 5 years. During 2019, an external evaluation of Board performance was undertaken. The process and the outcomes are discussed in more detail on page 45. No areas of material concern were identified but a programme of priorities has been established for 2020. The Board’s priorities for 2020 include continuing our focus on sustainability and in reducing our net contribution to carbon emissions. We will continue to focus on people and culture through better communications, increased work on safety and strong succession and development programmes with a clear diversity agenda. These initiatives are explained in more detail in the Corporate Governance section on pages 44 to 49. Board changes Angela Bromfield joined the Board as a Non-Executive Director on 1 October 2019. She has relevant sector experience and experience of strategy, marketing and e-commerce. She will be a valuable addition to the Board. Tim Pile will retire from the Board following the 2020 Annual General Meeting having served as a Non-Executive Director since October 2010. I would like to thank Tim for his wise counsel and valuable contribution to Marshalls during his period of office. Our people Our employees continue to be a major strength of the business and every member of our skilled workforce has a key part to play in achieving our priorities and goals. During the year we launched the Employee Voice Group (“EVG”) to promote employee engagement and this comprises representatives from across all business areas and levels. Janet Ashdown attends EVG meetings as our designated Non-Executive Director for workforce engagement. We are committed to developing our people and I would like to thank all our staff for their continuing commitment and dedication to Marshalls. Outlook The Group has delivered further growth in 2019 despite a period of market slowdown and economic and political uncertainty. The CPA’s winter forecast predicted an increase in UK market volumes of 0.6 per cent in 2019 followed by a decrease of 0.3 per cent in 2020. The underlying indicators in our key our key New Build Housing, Road, Rail and Water Management markets remain supportive. The Board believes that the Group’s new 5 year Strategy will continue to deliver sustainable growth, whilst maintaining a strong balance sheet and a flexible capital structure. The strategy is underpinned by positive market fundamentals, focused investment plans and an established brand. Vanda Murray OBE Chair Read about our sustainability on pages 36 to 41 Read about The Marshalls Way on page 11 Marshalls plc Annual Report and Accounts 2019 07 Strategic report In the Public Sector and Commercial end market, Marshalls’ strategy offers sustainable integrated solutions to customers, architects and contractors. The objective is to create a brand preference in order to secure product specification. Our Design Space office in Central London has been updated and refreshed during the year to offer specifiers, designers and clients an enhanced experience and to showcase our full range of brand-leading capabilities and technical and design solutions. During the year we have also opened a new Marshalls Design Space in the heart of Birmingham supporting the major redevelopment in the city. We are continually developing our product ranges and systems to ensure that we remain at the forefront of innovation and technology within our industry. Sales in the Domestic end market, which represented approximately 26 per cent of Group sales, were flat compared with 2018. These results are ahead of the overall Domestic market in 2019. Whilst the Domestic end market was softer in the second half and suffered from the poor weather, continued execution of the 2020 Strategy more than compensated for this by improving operating margins. The survey of domestic installers at the end of February 2020 revealed order books of 9.7 weeks (2019: 10.0 weeks) which compared with 10.9 weeks at the end of October 2019. In the Domestic end market, the Group’s strategy continues to be to drive sales through the Marshalls Register of approved domestic installers. This ensures a consistently high standard of quality, customer service and marketing support. The Marshalls Register comprises approximately 1,900 installer teams. Our business strategy is underpinned by strong market positions, focused investment plans and an established brand. Strategic report Chief Executive’s Statement We have delivered further growth and continue to outperform the market Summary • 2019 has seen further growth despite a period of market slowdown • Operating profit increased by 12% to £72.6 million on a pre-IFRS 16 basis (£73.7 million on a reported basis) • 12% increase in earnings per share • Capital discipline remains a key priority and the Group’s cash generation has continued • The Group’s long-term strategy continues to deliver sustainable growth Introduction The Group has delivered further growth in 2019 despite a period of market slowdown and economic and political uncertainty. Our proven strategy continues to strengthen the business and with continued focus on New Build Housing, Road, Rail and Water Management, we are positioned in the right parts of the market. Based on public indicators we continue to outperform the market. 2019 trading summary Group revenue for the year ended 31 December 2019 was up 10 per cent at £541.8 million (2018: £491.0 million). Excluding the impact of Edenhall, revenue was up 3 per cent. Sales in the Public Sector and Commercial end market, which represented approximately 69 per cent of Group sales, were up 15 per cent compared with the prior year. The Edenhall business, acquired on 11 December 2018, traded strongly during 2019, and its operational integration into the Marshalls Group is now complete. 08 Marshalls plc Annual Report and Accounts 2019 Strategic report International revenue grew by 13 per cent during 2019 and represents approximately 5 per cent of Group sales. The Group continues to develop opportunities by improving its global supply chains and infrastructure to ensure that international operations are sustainable and aligned with market opportunities. Reported operating profit increased to £73.7 million (2018: £64.8 million). The impact of IFRS 16, which has been applied since 1 January 2019, has been to increase operating profit by £1.1 million. Post-IFRS 16 EBITDA was £103.9 million, as a consequence of an additional £12.9 million depreciation in relation to right-of-use assets. On a pre-IFRS 16 basis, EBITDA improved to £90.1 million (2018: £80.8 million), an increase of 12 per cent. This result is after charging £1.4 million of operational restructuring costs. The reported operating margin was 13.6 per cent (2018: 13.2 per cent). Pre-IFRS 16 operating margins increased to 13.4 per cent. Excluding the impact of Edenhall, the operating margin increased to 13.7 per cent. This is a direct result of our successful execution of the 2020 Strategy. The impact on the Income Statement of transitioning to IFRS 16 has been marginal, with reported profit before tax of £69.9 million lower than the pre-IFRS 16 figure of £70.1 million. The financial impact of IFRS 16 is summarised in more detail on pages 104 to 106. Basic earnings per share on a reported basis was 29.36 pence (2018: 26.29 pence) per share, which represented an increase of 12 per cent. Capital discipline remains a key priority and the Group’s strong cash generation has continued. On a pre-IFRS 16 basis net debt at 31 December 2019 was significantly reduced to £18.7 million (2018: £37.4 million). Operating cash flow was 96 per cent of EBITDA on a pre-IFRS 16 basis. Reported net debt was £60.0 million at 31 December 2019 following the inclusion of £41.3 million of IFRS 16 lease liabilities. Group return on capital employed (“ROCE”) remained strong and was 23.7 per cent on a pre-IFRS 16 basis (2018: 21.9 per cent). On a reported, post-IFRS 16 basis, ROCE was 21.4 per cent, following the inclusion of 41.3 million additional debt from lease liabilities. ROCE is defined as EBITA / shareholders’ funds plus net debt. Capital expenditure was £22.9 million in the year ended 31 December 2019 and further capital expenditure of £20 million is planned for 2020. We continue to generate a good pipeline of capital investment projects that will drive future organic growth. Edenhall’s new £6 million state-of-the-art factory in South Wales was completed and fully commissioned in 2019. It has the capacity to deliver 100 million brick equivalents per annum. CPM’s new precast factory was completed in 2018 and has increased the manufacturing capability for bespoke water management solutions. Innovation and new product development In the core Landscape Products business, the growth in revenue from new products continued strongly, increasing by 9 per cent during 2019. Research and development expenditure amounted to £5.5 million (2018: £4.9 million). The objective is to deliver innovative market leading new products that are aligned with customer needs across all business areas. The development pipeline continues to be strong and the Group is committed to providing high performance product solutions. The case study on page 13 provides further information about Marshalls’ new product development strategy and showcases Edenhall’s new concrete perforated bricks. These accounted for 30 per cent of Edenhall’s brick sales in 2019. Improvements in operational efficiency The Group has a national network of concrete manufacturing sites and quarries which continues to provide a competitive advantage. Our flexible operating framework is enabling us to drive cost efficiency improvements across the network and to develop flexible strategies within the supply chain. Our objective continues to be to mitigate inflation on an ongoing basis to ensure sustainable business continuity and cost control. As part of our ongoing digital strategy we are currently integrating artificial intelligence into key business systems in order to create a new artificial intelligence infrastructure that will facilitate the delivery of further growth and efficiency benefits. Health and safety We aim to maintain the highest standards of health and safety which remains a cornerstone of The Marshalls Way. The Group has continued to invest in health and safety awareness training for all managers and supervisory staff and we continue to promote a culture in which all managers visibly demonstrate health and safety leadership. We remain committed to continual improvement in health and safety performance. Marshalls ESG agenda The Group has clear ESG policies which support a strong sustainability strategy. These principles are defined by The Marshalls Way and are embedded in our business model and investment priorities. Marshalls has an MSCI ESG rating of AAA and a FTSE4Good score of 3.5, which is ahead of both the sector and overall UK average. We are promoting our product ethical risk index to ensure that it is embedded throughout the supply chain. Marshalls supports the UN Sustainable Development Goals and as part of the Group’s climate change strategy we are committed to science-based targets. We support the Task Force on Climate Related Financial Disclosures (“TCFD”) and are committed to making disclosures in line with TCFD recommendations. Marshalls’ new 5 year Strategy In June 2019 we set out our new 5 year Strategy, following the successful execution of our 2020 strategy, launched in 2015 to deliver sustainable growth, increase operating margins and improve ROCE. Our new 5 year Strategy is outlined in more detail on pages 10 and 11. The Group’s long-term strategy continues to be to deliver sustainable growth with a continued emphasis on organic growth, investment and ESG initiatives. The priorities for investment within the new 5 year Strategy are set out in the Strategy section of this Annual Report on pages 20 and 21. The strategy continues to focus on the maintenance of a strong balance sheet, a flexible capital structure and a clear capital allocation policy. These objectives drive both long-term growth and shareholder returns. Martyn Coffey Chief Executive Marshalls plc Annual Report and Accounts 2019 09 Strategic report Strategic report Q&A with the CEO Our new 5 year Strategy lays the foundation for delivering further growth Introduction Our new 5 year Strategy lays the foundation for achieving our strategic goal of becoming the UK’s leading manufacturer of products for the Built Environment. At the heart of the strategy are 8 priority areas for investment and business focus. We believe that these areas provide significant growth potential for the Group over the next 5 years. How would you summarise the new 5 year Strategy? We have seen 5 years of good growth and the delivery of our successful 2020 Strategy. We have also made significant progress in positioning the business for future growth. Consequently, the strategic direction for the next 5 years will be one of evolution rather than revolutionary change. We will continue to invest heavily in the business and to accelerate growth over the medium term. We will continue to challenge ourselves to be better, faster, smarter, more efficient, cost effective and innovative in order to challenge the market. We recognise that we have to respond positively to the pace of change in the macro-environment. What does this mean for your future growth prospects? There is an absolute ambition from the Board to make sure we deliver on our plans and continue to move the business forward. Our priority areas of New Build Housing, Road, Rail and Water Management remain attractive markets and we are well placed to deliver continued growth and operational profit improvements. Our capital allocation policy will continue to ensure that appropriate capital is allocated to projects that have the greatest potential. The 8 strategic pillars provide a framework for this. How do you expect to achieve your strategic goals? As part of our strategic plan for the next 5 years we have identified 8 strategic pillars that are summarised in the diagram on page 3 and in the illustration on page 11. These are regarded as areas of significant opportunity and will attract significant management focus and financial investment. We have set out further details covering 3 of these in specific case studies on pages 12, 13 and 30. The delivery of specific targets in all of these areas, and the strategy generally, is underpinned by The Marshalls Way and will be enabled by further investment in people and talent development. The Board regards the Group’s culture as being paramount to the delivery of the strategy. The Marshalls Way is all about doing the right things, for the right reasons, in the right way. What do you see as the Group’s biggest challenges over the next 5 years? The Group continues to have significant challenges, both external and internal to the business. External challenges include ongoing macro-economic and political uncertainty, cyber risk and climate change. We regularly risk assess all these challenges and develop risk mitigation strategies that seek to address a range of downside scenarios. Internal challenges include the ongoing need for all employees to maintain the highest standards in everything we do. The strategic direction for the next 5 years will be one of evolution rather than revolutionary change. In areas such as health and safety, competition, anti-bribery, labour standards, environmental sustainability and ESG, we aim to exceed legal and regulatory compliance. We aim to be at the forefront of defining best practice in all these areas. How do you see changing technology impacting your business model and medium-term strategy? Advances in technology are increasingly part of modern life. Customers are looking for us to provide an end-to-end digital offering and further investment in our digital proposition will continue to be a priority. Digital is one of our 8 strategic pillars and our digital journey is set out in more detail in the case study on page 30. We lead the market on quality for our products and services and our aim is to match this with market leading and forward thinking technology. We have a clear opportunity to pioneer the digital standard for our industry. What part are acquisitions likely to play in your 5 year Strategy? Our strategy towards acquisitions means we will continue to be selective in where we focus our attention and we will look at potential targets that will add value to our existing business model. Specifically, we will focus on bolt-on acquisition opportunities in Water Management and New Build Housing products. Such companies will be manufacturers, have hard assets and be based in the UK, where we are strong. What factors could affect your strategy and how will you prepare for these? The potential impact of extended economic and political uncertainty continues to be a risk. We have had Brexit plans and preparations in place for many months now and are confident that we have done all we can to prepare for further uncertainty in the macro-economy, e.g. delays in key infrastructure projects. Our strategy will be scaled back or accelerated as required, so that we can react to external and economic uncertainties. We are very confident that the strategy is the right one, with in-built flexibility such that the pace at which it is delivered can be adapted. What emerging risks are you worried about and how will you mitigate such risks? We have a well-defined risk management process and we formally review these risks, and the Group’s response to them, twice a year. The Group’s main risks are volatility in the market, cyber risk, the risk of reputational damage if we do not do things 10 Marshalls plc Annual Report and Accounts 2019 Strategic report in the right way and people related risks. Most recently, the implications of an increase in the coronavirus is currently being assessed and we are carrying out appropriate contingency planning. The rapid pace of digital change in the market is a significant emerging risk and new technology could lead to further major changes in the market. In mitigation, we are continuing to invest in digital as a key part of the new 5 year Strategy. How are you ensuring that you have the right people and skills to deliver the strategy? Our People and Talent Development plan supports the delivery of the 5 year Strategy. The Board has led the development of an employee engagement strategy, which will both empower our people and measure engagement and culture. A new “talent strategy” has been implemented which will seek to ensure that we have the right people with the right skills. The aim is to ensure that Marshalls has an increasingly strong talent and skills pipeline, supported by a commitment to improve diversity and our gender pay gap results. Why should potential investors invest in your Company? The recent period of sustained growth has been supported by real changes in the business, its operational processes and controls. Our investments in digital and operational efficiency programmes mean that we are now in the best possible position to benefit from future market growth. We have successfully integrated both the CPM and Edenhall businesses into the core business and we now have a set model that is capable of integrating further acquisitions in the same efficient way. Our focus has been towards New Build Housing, Water Management and Infrastructure and these are now firmly aligned with the national agenda. The Marshalls Way Our culture is built on strong foundations of passion and pride. We are proud of our depth of experience, but we are humble enough never to stop learning. We do the right things, for the right reasons, in the right way. Because this is The Marshalls Way of doing business, which has enabled us to become the UK’s leading hard landscaping manufacturer. Our teams understand what The Marshalls Way means day to day and we work together to demonstrate this in all we do. We all know that when we Act with Courage and Inspire with Purpose then we can help Shape the Future so that we Win Together. Do the right things • We have high standards • We deliver market leading quality to our customers • We strive to meet the needs and expectations of our customers • We are continually developing the business and our people For the right reasons • We consider the long-term impact of every decision we make • We are guided by strong principles • We operate in the most ethical and sustainable way • We take responsibility for every action In the right way • We set clear expectations • We anticipate and embrace change • We put people, communities and the environment first • We work as a team to proactively propose solutions Read our business model on pages 16 and 17 Read more about our sustainability report on pages 36 and 41 Marshalls plc Annual Report and Accounts 2019 11 Strategic report The Marshalls brand We have: • an excellent product range; • market leading quality and performance; • superior product knowledge; • strong working relationships; • a strong digital presence and strategy; • in-field commercial and technical support; • a strong trading policy; and • national reach. Specifiers Contractors and groundworkers Marshalls t n e m e v o v n l i t n a h c r e M Case study – Quintain / Marshalls Wembley Park • 5,000 new homes and supporting infrastructure by 2020 • 12-month process to secure Key Supplier status • Design and delivery of over £1.75 million of product to date • Phased delivery of further hard landscaping in 2020 and 2021 • Granite steps to be supplied to lead up to the stadium from Wembley Way • Total expected value of Marshalls phase 1 work – c£3.34 million • Phase 2 of development programme at Wembley Park now underway Strategic report Case Study Strategic priority To create a brand preference to secure product specification Our products are specified by developers, builders and architects. We have direct links with our customers’ customers. Marshalls have been a trusted partner of Quintain during the delivery of Wembley Park. Marshalls have worked efficiently with our design and construction partners for the past 3 years and have excelled in the process. Quintain Limited Case study – Marshalls Design Space • New Marshalls Design Space in the heart of Birmingham supporting the major redevelopment of the city • Updated and refreshed London Design Space to offer specifiers, designers and clients an enhanced specification • The Design Spaces showcase the continual development of our product ranges and systems to ensure we remain at the forefront of innovation and technology within our industry 12 Marshalls plc Annual Report and Accounts 2019 Marshalls plc Annual Report and Accounts 2019 Strategic report Case Study Strategic priority New product development By choosing Marshalls Edenhall brick over a clay alternative, you are potentially reducing the embodied CO2 impact of the bricks used to build with by nearly a third. Because concrete carbonates over time, the impact over the lifetime of the brick could be reducing the CO2 impact by closer to 50 per cent. We have delivered more products in the Domestic and Commercial space over the last few years than anyone in our industry. We continue to lift our heads above the day to day to really hear what our customers want. Product development focuses on meeting customer needs and increasing speed and efficiency of product installation. Through creating new, innovative products, we continue to drive the market forward. New product sales represented 13% of total revenue for 2019 New product ranges launched in the current innovation cycle 87 R&D investment in the year £5.5 million Edenhall concrete perforated brick • Innovative masonry product – unique manufacturing technique and mix design • Minimal energy input compared to traditional clay brick – far smaller environmental footprint • Produced by compacting a semi-dry concrete mix • 100% recyclable concrete mix • Tighter production tolerances, very consistent and reliable – BRE A+ rated • Low water absorption and minimal efflorescence New £6 million manufacturing facility in South Wales has increased Edenhall’s capacity by 100 million concrete bricks The concrete perforated brick now represents 30% of Edenhall’s revenue and is increasing Edenhall’s concrete facing bricks look very good and production performance has been strong. We have no reservations and since switching to these in 2019 we have taken over 900,000 to site. Phil D’arcy Site Manager, Linden Homes Marshalls plc Annual Report and Accounts 2019 13 Strategic report Growth Markets Based on public indicators we continue to outperform the market Through detailed market analysis, we continue to drive new product development, particularly in the areas of New Build Housing, Water Management, Road and Rail. Construction market growth The CPA’s winter forecast shows total construction output increasing by 0.6 per cent in 2019. The CPA highlights a slowdown in the construction sector in the second half of 2019 due to a combination of poor weather and heightened political and economic uncertainty in the lead up to the revised Brexit deadline and the 2019 General Election. The Group continues to outperform the CPA’s growth forecasts. The CPA forecasts that: • construction output will fall by 0.3 per cent in 2020 before returning to growth of 1.2 per cent in 2021; • private housing starts will fall by 2.0 per cent in 2020 and increase by 2.0 per cent in 2021; and • infrastructure work will rise by 3.4 per cent in 2020 and 5.0 per cent in 2021. There remains economic and market uncertainty as the UK enters the “implementation period” of our exit from the EU which allows for negotiations with the EU on trade agreements. However, the outcome of the UK General Election in December 2019 has created more certainty and a more positive swing in consumer confidence. The GfK Consumer Confidence Index improved by 3 points in December 2019. Although still low this is the biggest positive move since the summer of 2016. The fall in construction output in the second half of 2019 was in all sectors, but was mainly driven by a decline in new construction output, particularly in private housing and infrastructure. Repair and maintenance activity also declined. Against this background, Marshalls continues to target those areas of the market with the greatest growth potential and the underlying indicators in the New Build Housing, Road, Rail and Water Management markets remain supportive. CPA total construction output CPA 2020 K £442m Why is this important for Marshalls? • Detailed analysis means we understand the long-term drivers of market growth • We are able to highlight significant variations between regions and sectors • This information facilitates the formulation of our strategy and scenario planning Lower Upper Central Total construction output Chain linked volume – 2016 prices ) s e c i r p t n a t s n o c 6 1 0 2 t a m £ ’ ( e m u o V l 180,000 170,000 160,000 150,000 140,000 130,000 120,000 110,000 100,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 Response to market challenges – our strategic priorities • We target individual market sectors – those with sustainable growth • We aim to deliver an end-to-end digital offer with market leading and forward thinking technology • We drive specification and sales for the Group’s new product ranges CPA cumulative growth forecasts Cumulative value of growth from 2018 Chain linked volume – 2016 prices Why is this important for Marshalls? • New housing and infrastructure are key sectors for Marshalls’ Public Sector and Commercial business – the chart highlights continued growth in these areas Response to market challenges – our strategic priorities • We deliver products that lead on quality and performance Key sectors for Marshalls • Private housing RM&I is the main driver ) s e c i r p 6 1 0 2 @ m £ ’ ( h t w o r g f o e m u o v l t s a c e r o F 24.1% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 15.9% 14.3% 7.0% 4.3% -0.6% Pu blic N e w H o usin g Private N e w H o usin g All N e w H o usin g N e w Infrastructure N e w Pu blic O ther N e w Private In d ustrial N e w Private C o m for our UK Domestic end market • These 3 sectors are explained in further detail below 1.4% -7.6% m ercial All R M &I 2021 growth cumulative % 2020 growth cumulative % 2019 growth % 14 Marshalls plc Annual Report and Accounts 2019 • We focus on building strong relationships • We aim to ensure that our products are specified by developers, contractors and architects Strategic report CPA all new housing CPA 2019 K £231m All new housing Chain linked volume – 2016 prices ) s e c i r p t n a t s n o c 6 1 0 2 t a m £ ’ ( e m u o v l t s a c e r o F 45,000 40,000 35,000 30,000 25,000 20,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 CPA Other New Work CPA 2020 K £91m Other New Work (Non Housing) Chain linked volume – 2016 prices ) s e c i r p t n a t s n o c 6 1 0 2 t a m £ ’ ( e m u o v l t s a c e r o F 75,000 75,000 70,000 65,000 60,000 55,000 50,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 Why is this important for Marshalls? • New Build Housing is a key strategic growth area • The sector comprises private housing and public housing Lower Upper Central • Public housing starts have been affected by a recent slowdown in the wider market but a return to growth of 2 per cent is forecast in 2021 Response to market challenges – our strategic priorities • We develop strategic relationships with housebuilders and merchants across the UK • We focus on the development of new products • We source and supply sustainable materials and focus on environmental considerations Why is this important for Marshalls? • Demand for infrastructure products (e.g. for road and rail) continues to grow • Water Management, Road and Rail are key strategic growth areas • Demand for new product innovation – e.g. Landscape Protection Lower Upper Central Response to market challenges – our strategic priorities • The acquisition of CPM has significantly extended our water management offer • New Commercial website launched in 2018 • Continued focus on product innovation, research and development and sustainability CPA Private Housing RM&I CPA 2020 K £203m Private Housing RM&I Chain linked volume – 2016 prices 22,000 21,000 20,000 19,000 18,000 17,000 16,000 15,000 ) s e c i r p t n a t s n o c 6 1 0 2 t a m £ ’ ( e m u o v l t s a c e r o F 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Why is this important for Marshalls? • Driven by housing wealth, pension wealth and savings which remain robust in the key over-55s age category • Property transactions and the availability of credit are key drivers of activity in this sector • Consumer confidence remains a key factor along with regional differences in house price inflation Lower Upper Central Response to market challenges – our strategic priorities • We focus on our network of approved domestic installers to drive growth • New Domestic website launched in 2019 • We have invested further in digital technology to enhance the customer experience Housing Completions Historical Government Statistics Historical Government Statistics – Dwellings Completed MAT L 208,417 new dwellings were completed in the 4 quarters to 2019 Q2, 8 per cent more than the 4 quarters to 2018 Q2 and 91,583 behind the Government target set in 2017. l s n o i t e p m o c g n i l l e w d f o r e b m u n l a t o t l a u n n a g n v o M i £350,000 £300,000 £250,000 £200,000 £150,000 £100,000 £50,000 £0 4 Q 8 7 9 1 2 Q 9 7 9 1 2 Q 0 8 9 1 2 Q 1 8 9 1 2 Q 2 8 9 1 2 Q 3 8 9 1 2 Q 4 8 9 1 2 Q 5 8 9 1 2 Q 6 8 9 1 2 Q 7 8 9 1 2 Q 8 8 9 1 2 Q 9 8 9 1 2 Q 0 9 9 1 2 Q 1 9 9 1 2 Q 2 9 9 1 2 Q 3 9 9 1 2 Q 4 9 9 1 2 Q 5 9 9 1 2 Q 6 9 9 1 2 Q 7 9 9 1 2 Q 8 9 9 1 2 Q 9 9 9 1 2 Q 0 0 0 2 2 Q 1 0 0 2 2 Q 2 0 0 2 2 Q 3 0 0 2 2 Q 4 0 0 2 2 Q 5 0 0 2 2 Q 6 0 0 2 2 Q 7 0 0 2 2 Q 8 0 0 2 2 Q 9 0 0 2 2 Q 0 1 0 2 2 Q 1 1 0 2 2 Q 2 1 0 2 2 Q 3 1 0 2 2 Q 4 1 0 2 2 Q 5 1 0 2 2 Q 6 1 0 2 2 Q 7 1 0 2 2 Q 8 1 0 2 2 Q 9 1 0 2 Private Enterprise MAT Target ‘07 Housing Association MAT Local Authorities MAT Target ‘17 NHF ‘18 Why is this important for Marshalls? • Latent demand for housing remains strong and the Government’s manifesto pledge is to increase the supply of new homes to 1,000,000 by the end of the new 5-year parliamentary term • Housing starts are expected to return to growth in 2021 with support from the second phase of Help to Buy • There is a potential lag in relation to starts, as housebuilders focus on completions and finishing units under construction Response to market challenges – our strategic priorities • The acquisition of Edenhall increases our capacity to service the new housing sector • We aim to provide a broader product choice and market leading customer service • We aim to grow our existing business in Mortars and Screeds Marshalls plc Annual Report and Accounts 2019 15 Strategic report Business Model How we do business Our business model is constantly developing through collaboration with customers and feedback from stakeholders. Our customer-focused investment in digital technology is transforming the customer experience and advancing the business model. Our capital Financial • Strong balance sheet and a conservative capital structure • An efficient portfolio of bank facilities, with extended maturities, provides prudent headroom Business • National coverage and sustainable operations across a national network of manufacturing sites • Long-standing relationships with customers and suppliers and a diverse product range covering a number of end markets Intellectual • With over 130 years’ experience we have a reputation built on transparency and long-standing core values • Marshalls is a Superbrand underpinned by efficient, well-invested plants with high skills and expertise • We focus on innovation and strong R&D and NPD Natural resources • Marshalls has extensive reserves of UK natural stone • Strong supply chain relationships ensure the ethical sourcing of natural stone from India, China and Vietnam Human • The Group has an experienced workforce of 2,816 employees with specialist skills and a high level of engagement Technology • We are accelerating the development of our digital strategy to enhance service and the overall customer experience, and to improve operational efficiency and communication Social and relationships • We have strong stakeholder relationships through constructive dialogue with local authorities, industry bodies and regulators • Our stakeholder relationships are underpinned by a focus on responsible business which is a key part of the Marshalls culture Our business Sourcing The Group’s main raw materials are cement, sand, aggregates, pigments, fuel oil and utilities. We use the best materials we can source. Related risks • Macro-economic and political • Security of raw material supply • Cyber security risks • Environmental • Ethical • Climate change Manufacturing The Group manufactures and supplies landscape, driveway and garden products from a range of materials, principally concrete and natural stone. Marshalls has a world-class Manufacturing, Innovation and Development team. Related risks • Competitive activity • Threat from new technologies and business models • IT infrastructure • Legal and regulatory Distribution Due to the scale of our operations, and our national network of regional centres, 97 per cent of our customers are less than 2 hours away. This continues to be a key competitive advantage. Related risks • Macro-economic and political • Road infrastructure • Cost inflation • Environmental • Climate change Customers Our customers range from Domestic homeowners to Public Sector and Commercial. We seek to exceed the expectations of customers in all our end markets. Related risks • Macro-economic and political • Weather • Cyber security risks • Competitor activity • Legal and regulatory The Marshalls Way Read more about The Marshalls Way on page 11 16 Marshalls plc Annual Report and Accounts 2019 Strategic report Strategic objectives: Shareholder value Sustainable profitability Relationship building Organic expansion Brand development Effective capital structure and control framework What makes us different? Sustainability • Commitment to producing new quality products that are better than any existing market offering • Commitment to achieving the highest standards of environmental performance Innovation • Benchmark for excellence, widely regarded as a leader in its field • Marshalls is one of Britain’s strongest Superbrands • Development of a digital strategy Customer service • Strong Manufacturing, Innovation and Development team • Skilled engineers and technicians • Broad range of products Quality • New and innovative products • Patent protection • Machinery design and installation Capital structure • Strong and flexible capital structure • Clear capital allocation policy Dynamic business model • Our business model is constantly developing through collaboration with customers and feedback from stakeholders. Our customer-focused investment in digital technology is transforming the customer experience and advancing the business model Priorities for capital on page 34 Outcomes Shareholders Progressive dividend policy, targeting 2 times dividend cover supported by non-recurring and discretionary dividends Dividend per share 18.35p Customers Industry leading customer service – innovative new products, quality, availability and “on-time” delivery Customer service index 98% Employees Promotion of professional development, career opportunities and competitive benefit packages Active apprenticeships in 2019 50 Suppliers Global supply chain, long-term and mutually beneficial partnerships and ethical trading Suppliers trained on anti-bribery and modern slavery 70% Communities and environment Positive impact, with direct investment in the community and Fair Tax Mark Charitable and community donations £168k Government and regulatory bodies Reinvestment in R&D and capital expenditure to drive sustainable growth R&D expenditure £5.5m The Marshalls Way Read more about The Marshalls Way on page 11 Marshalls plc Annual Report and Accounts 2019 17 Strategic report Stakeholder Engagement Strong relationships across all stakeholder groups Shareholders Link to strategy • We generate value for shareholders by delivering sustainable growth • We maintain a progressive dividend policy - targeting 2 times dividend cover over the business cycle • We are transparent and seek to give a clear, consistent message across all communication channels • We emphasise personal contact and individual dialogue • We work with PR consultants (MHP Communications) to provide ongoing communication support Why we engage • To ensure that our strategy is aligned with the interests of shareholders How we engage • AGM, Annual Report, Trading Updates and presentations • To explain how we aim to deliver sustainable growth and maximise the growth potential of the business • Regular phone calls, face to face meetings, site visits and investor roadshows • To maintain a strong and sustainable • dividend policy Investor relations website – which has been upgraded in 2020 • To increase the share price and total shareholder return Customers Link to strategy • We seek to exceed the expectations of customers • We target very high levels of customer service • We build customer service and health and safety performance into management and employee reward schemes • We seek to grow the business by providing an outstanding customer experience • We track all metrics and strive to obtain a world-class net promoter score Why we engage • To develop a fully customer-centric culture • To maintain very high quality, availability and delivery metrics How we engage • Dedicated “customer experience” team • Service-level agreements and quality standards • New websites and digital solutions • To develop customer-focused focused on the customer solutions • To become the supplier of choice • Customer surveys, customer visits and a commitment to deliver on feedback • To drive improvement and reduce complaints • Customer experience awareness campaign Employees Link to strategy • We have 2,816 staff in the Group across all locations • We have highly experienced and motivated employees • We are a “Real Living Wage” employer with pay positioned at the top end of the industry • We develop and reward our employees both financially and through professional development • We encourage share ownership with around one-third of employees owning shares • We have a full employee experience strategy Why we engage • To ensure that all employees are valued and have a “voice” • To ensure we maintain a skilled and technically competent workforce • To ensure promotion of staff development and personal growth • To ensure ongoing focus on health and safety • To encourage equal opportunities and a more diverse workforce How we engage • Employee Voice Group launched – representation across all business areas and levels • Annual Director “communication roadshow” programme of site visits, staff presentations and workplace dialogue • Focus on development training and succession planning • People and culture strategy to unlock potential Suppliers Link to strategy • We have an absolute commitment to ethical and sustainable procurement practice published in the Marshalls Code of Conduct • We balance economic requirements with environmental, social and ethical considerations over the whole lifecycle • We have a global supply chain and maintain long-term partnerships • We continue to focus on human rights and modern slavery and improve compliance procedures Why we engage • To ensure use of the best quality raw materials and resources we can source • To maintain strong relationships to ensure high supplier standards • To ensure that our materials are sustainable and ethically sourced • To ensure our human rights due diligence is robust, monitored and extremely dynamic How we engage • Effective, regular communication – underpinned by Code of Conduct • Formal tenders and fair terms • Supply chain risk mapping processes and regular audits • ETI Base Code social and ethical audits in India, China and Vietnam • Strategic partnerships with NGOs, ethical regulators and charities, e.g. our “Hope for Justice” strategic partnership 18 Marshalls plc Annual Report and Accounts 2019 “We do the right things, for the... Strategic report Strategic objectives: Shareholder value Organic expansion Sustainable profitability Brand development Relationship building Effective capital structure and control framework Communities and environment Link to strategy • We do business responsibly - The Marshalls Way • We ensure the Group maintains strong ethical and corporate responsibility principles Why we engage • Responsible business provides the foundations for sustainable growth • We value our brand and a reputation built on transparency and proven sustainability expertise • We have strong environmental objectives and targets – driven by our strategic commitment to sustainability • We are strongly committed to human rights • To recognise our role in society • To ensure that our strategic operations address economic, social and environmental aspects • To maintain adherence to all legislative and ISO requirements for environmental and energy management How we engage • Continue to support the UN Global Compact’s commitment to sustainable development • We work with the Carbon Trust to analyse our business footprint and develop improvement strategies • Regular dialogue with local community groups • £168,000 raised for charitable and community causes in 2019 Government and regulatory bodies Link to strategy • We operate within a framework for social and environmental policy set by Government and regulators • We ensure that we do business responsibly (The Marshalls Way) • We conduct business in accordance with the principles set out in the Bribery Act 2010 • We are a constituent of the FTSE4Good index • We maintain our Fair Tax Mark status • We undertake regulatory compliance, operational, ethical and environmental audits Why we engage • To ensure the highest standards of corporate governance • To ensure the Group’s ongoing monitoring, training and compliance procedures meet best practice How we engage • Regular dialogue with Government, regulators and industry groups • Active membership of the CPA and Mineral Products Association (“MPA”) • Effective and clear policies against • To ensure that we pay the right amount of tax at the right time bribery and the elimination of modern slavery • To ensure that our business practices provide a solid foundation for sustainable growth • Reinforce compliance with regulations (e.g. GDPR and anti-bribery) with regular ongoing training for staff and business partners Statement by the Directors in relation to their statutory duty in accordance with S172(1) Companies Act 2006 The Board of Directors of Marshalls plc (the "Company") consider that they, both individually and collectively, have acted in a way that would be most likely to promote the success of the Company for the benefit of its members as a whole (having regard to the stakeholders and matters set out in S172(1)(a-f) of the Act) in the decisions they have taken during the year ended 31 December 2019. In making this statement the Directors considered the longer-term consideration of stakeholders and the environment and have taken into account the following: a) the likely consequences of any decisions in the long term; b) the interests of the Company’s employees; c) the need to foster the Company’s business relationships with suppliers, customers and others; d) the impact of the Company’s operations on the community and the environment; e) the desirability of the Company maintaining a reputation for high standards of business conduct; and f) the need to act fairly as between members of the Company. The Directors fulfil their duty by ensuring that there is a strong governance structure and process running through all aspects of the Group’s operations. The new 5 year Strategy was carefully considered by the Board in conjunction with the Group’s executive management team. Full consideration was given to the Group’s capital structure and capital allocation policy and its resilience to existing and emerging risks (pages 24 to 29). The Group’s culture has been a particular focus of the Board (page 11) and is embodied in The Marshalls Way of doing business. The Group’s strategy and business model are underpinned by the employees and all members of the Board undertake regular site visits and participate in employee workshops to deliver key engagement and development programmes. This area of focus is led by Janet Ashdown as the designated Non-Executive Director for workforce engagement (page 37). The Group engages with its key stakeholders in a variety of ways, explained in more detail in the Strategic Report (pages 18 and 19) and the Corporate Governance section on pages 44 to 49. The Group’s focus on sustainability and ESG issues is particularly relevant to our stakeholders and these are summarised in detail on pages 36 to 41. The Board is kept informed of all relevant issues by means of a number of written reports against agreed KPIs. ...right reasons, in the right way – safely.” Marshalls plc Annual Report and Accounts 2019 19 Strategic report Strategy Delivering sustainable growth Strategic pillars Our objectives What we have achieved Shareholder value To deliver sustainable shareholder value by improving the long-term operating performance of the business. ROCE of 23.7% pre-IFRS 16 basis (2018: 21.9%) Sustainable profitability To maintain a strong market position and grow the business’ profitability in all of the Group’s end markets. EPS growth of 12% Relationship building To develop relationships with key stakeholders, customers and installers. Registered installer teams 1,900 approx. Organic expansion • To make strategic investments for organic growth and acquisitions. • To strengthen the Marshalls brand by developing systems-based solutions. • To have a progressive dividend policy supported by supplementary dividends, as appropriate. • Growth in EBITDA of 12 per cent to £90.1 million on a pre-IFRS 16 basis (£103.9 million on a reported basis). • Market share gains. • Dividend growth of 15 per cent. • Supplementary dividend. • To outperform the market. • To deliver new and innovative product solutions. • To improve operational efficiency of our manufacturing and logistics network. • To drive through sustainable cost reductions. • 12 per cent growth in operating profit (pre-IFRS 16 basis) driven by sustainable efficiency improvements. Increase in operating profit percentage to 13.4 per cent (2018: 13.2 per cent). • • Sales of new products in the core business now represent 13 per cent of total revenue. • Continuing to exceed CPA growth forecasts. • Sustainable and ethical materials supply • Dedicated “customer experience” team – to enable manufacturing flexibility. • To focus on customer satisfaction. • To promote integrated product solutions. • To focus on installer training, marketing and sales support. with strengthened relationships. • 98 per cent customer service KPI. • New Commercial and Domestic websites. • 1,900 registered installer teams. To invest in organic expansion in existing and related markets and product categories to expand the business. Capital investment £22.9m (2018: £29.2m) • To target growth areas such as New Build Housing, Road, Rail and Water Management. • To invest in capital expenditure for organic growth. • To increase sustainable profitability in the emerging businesses. • To increase new product development. • Revenue growth of 10 per cent to £541.8 million. • Significant growth in key focus areas whilst maintaining operational flexibility. • Strong growth in New Build Housing revenue. • Self help capital investment of £39.6 million over the last 4 years. Brand development To strengthen and extend the Marshalls brand by focusing on innovation, service and new product development. R&D investment £5.5m (2018: £4.9m) • To focus on The Marshalls Way. • Customer satisfaction – to be the supplier of choice. • To focus on innovation, customer service and product quality. • To maintain the highest health and safety standards. Effective capital structure and control framework • “Superbrand“ status. • Continued development of Marshalls brand. • Developed product range. • Introduced 87 new product ranges to market in the current innovation cycle. • Award accreditation, e.g. Health and Safety Award from the Mineral Products Association. To ensure that the capital structure remains aligned with the Group’s corporate growth objectives. Net debt:EBITDA (2018: 0.5 times) Reported basis 0.6 times 0.2 times Pre-IFRS 16 20 Marshalls plc Annual Report and Accounts 2019 • To maintain a flexible capital structure that recognises cyclical risk, focusing on security, efficiency and liquidity. • To deliver a capital allocation strategy that is fully aligned with this capital structure. • Strong balance sheet with low gearing (20.3 per cent (6.3 per cent pre-IFRS 16)). • Efficient portfolio of bank facilities with extended maturities and realigned headroom. • Continued focus on working capital management and efficient inventory control. Strategic report Shareholder value Sustainable profitability Relationship building Organic expansion Brand development Effective capital structure and control framework 5 year Strategy Our new 5 year Strategy lays the foundation for achieving our strategic goal of becoming the UK’s leading manufacturer of products for the Built Environment. At the heart of the strategy are 8 priority areas for investment and business focus. We believe that these areas provide significant growth potential for the Group over the next 5 years. What we have achieved Key performance indicators on pages 22 and 23 Our future targets Risks on pages 24 to 29 Future priorities Key 5-year strategic priorities • To grow ROCE and EBITDA. • To deliver long-term sustainable shareholder value. • Digital transformation. • To promote strong ethical, environmental and corporate social responsibility principles. • To focus on new product development • to drive growth. Improve operational efficiency across the manufacturing network. • Logistics excellence. • To improve communication and stakeholder engagement. • To focus on the customer. • To invest in digital technology. • Sustainable materials supply. • To optimise our national network of manufacturing sites. • To grow our emerging businesses and increase their market share. • To develop our global supply chain. Brand preference for product specification We have superior product knowledge, quality and performance. Objective To build relationships and make sure our products are specified by developers, builders and architects. Read the Case Study on page 12 Digital transformation We are continuing to invest in digital and forward thinking technology. Read the Case Study on page 30 New product development We deliver market leading product innovation. Read the Case Study on page 13 Logistics excellence We put customer wants and needs first with direct, informed and professional deliveries. Sustainable materials supply We source and supply sustainable materials, products and solutions. Objective To provide an end-to-end digital offering and to pioneer the digital standard for the industry. Objective To create new, innovative products that will drive the market forward. Objective To deliver logistics excellence with greener vehicles and new technology across our full fleet. Objective To do business responsibly and ethically, to address the risk of climate change and protect the environment. • To maintain the Group’s market leading position. • Responsible business and The Marshalls Way. • ESG principles and responsible business. • To increase brand preference to drive product specification. Customer centricity We balance innovation and tradition and provide an easy-to-use service in a complex and competitive market. Objective To deliver a market leading customer service and exceed customer expectations. Operational excellence We invest in our manufacturing facilities and industrial network and use the best tools, processes and systems. Objective To deliver operational excellence by continuously improving how we work and deliver new ways of thinking. • To operate tight control over business, operational and financial procedures. • To target a net debt to EBITDA ratio of between 0 and 1 times over the business cycle. Growth in the emerging businesses We make selective acquisitions to complement our business and help us advance into new and untapped areas. Objective To grow our emerging businesses to help us expand into key growth areas. Marshalls plc Annual Report and Accounts 2019 21 Strategic report Key Performance Indicators Measuring our performance The Group’s KPIs monitor progress towards the achievement of its objectives. All of the Group’s strategic KPIs have moved forward strongly during 2019. Revenue (£’m) £541.8m +10% Operating profit (£’m) EPS (p) Return on capital employed (%) Reported basis Pre-IFRS 16 Reported basis Pre-IFRS 16 Reported basis Pre-IFRS 16 £73.7m +14% £72.6m +12% 29.36p +12% 29.48p +12% 21.4% 2019 2018 2017 2016 2015 541.8 491.0 430.2 396.9 386.2 2019 2018 2017 2016 2015 72.6 64.8 53.4 47.6 37.5 29.48 26.29 2019 2018 2017 2016 2015 21.52 18.95 14.32 2019 2018 2017 2016 2015 23.7% – up 180 basis points 23.7 23.3 24.8 23.0 19.0 Why is this KPI important? Delivering growth is key to the Group’s strategy. The aim is to outperform the market and grow market share. Performance Group revenue has increased by 10 per cent in 2019. Growth in Public Sector and Commercial revenue was particularly strong at 15 per cent. Link to strategy Principal risks • Macro-economic and political • Customers • Increased range of digital change Risk mitigation • Close monitoring of trends and lead indicators • Diversity of business • Customer centricity Link to remuneration LTIP Stakeholder linkage Customers Suppliers Employees Communities Why is this KPI important? Sustainable improvement in profitability is a strategic priority. Performance Operating profit has increased £72.6 million (pre-IFRS 16) in 2019 with operating margin increasing to 13.4 per cent (2018: 13.2 per cent). Link to strategy Principal risks • Cyber security risks • Competitor activity • Security of raw material supply • Climate change Risk mitigation • Innovation and new product development • Focus on cyber security controls • Proactive supply chain management Link to remuneration AI Stakeholder linkage Shareholders Employees Why is this KPI important? EPS growth is a strategic target. Performance Group EPS has increased by 12 per cent in 2019 to 29.36 pence (29.48 pence on a pre-IFRS 16 basis). Link to strategy Principal risk • Cost inflation and strength of supply chain • Competitor activity • Brand leadership Risk mitigation • Supply chain management • Logistics excellence Link to remuneration LTIP Stakeholder linkage Shareholders Employees Why is this KPI important? ROCE is an important indicator of sustainable shareholder value. Performance Group ROCE for 2019 is 21.4 per cent (23.7 per cent before the impact of IFRS 16). ROCE is defined as EBITA / shareholders’ funds plus cash / net debt. Link to strategy Principal risk • Threat from new technologies and business models • Increased pace of digital change • Capital structure Risk mitigation • Digital transformation • Operational excellence • Flexible capital structure • Capital allocation policy Link to remuneration AI Stakeholder linkage Shareholders Employees Note: 1. The 2019 figures in the graphs use the pre-IFRS 16 figures. 22 Marshalls plc Annual Report and Accounts 2019 Strategic report Links to remuneration: Strategic objectives: LTIP Long-term Incentive Plan Shareholder value AI Annual incentive award Sustainable profitability Relationship building Organic expansion Brand development Effective capital structure and control framework Net debt (£’m) Reported basis Pre-IFRS 16 £60.0m £18.7m Dividend per share (recommended, p) 14.35p +20% Customer service index (%) 98% (37.4) (18.7) (24.3) 2019 2018 2017 2016 5.4 (11.5) 2015 2019 2018 2017 2016 2015 14.35 12.00 10.20 8.70 7.00 2019 2018 2017 2016 2015 98 98 98 98 98 Health and safety (reduction in working days lost since 2016, %) 14% 2019 14 17 20 2018 2017 2016 2015 46 43 Why is this KPI important? Marshalls continues to support an appropriate capital structure. The strategic target is for the ratio of net debt to EBITDA to be between 0 and 1 times over the business cycle. Performance Net debt was £60.0 million at 31 December 2019 (£18.7 million on pre-IFRS 16 basis). Gearing remains low at 20.3 per cent (6.3 per cent on a pre-IFRS 16 basis). Why is this KPI important? A progressive dividend policy remains a key objective. The strategy is to maintain up to 2 times cover over the business cycle. Performance The ordinary dividend per share increased by 20 per cent per share to 14.35 pence. On an IFRS basis, the dividends declared in the year ended 31 December 2019 are 16.7 pence, an increase of 13 per cent. Link to strategy Link to strategy Principal risk • Funding strategy • Overpaying for acquisitions • Cost inflation Risk mitigation • Flexible capital structure • Conservative financial profile Link to remuneration Principal risk • Macro-economic environment • Reduction in revenue and profitability Risk mitigation • Clear corporate strategy • Capital allocation policy Link to remuneration LTIP LTIP Stakeholder linkage Shareholders Employees Customers Suppliers Stakeholder linkage Shareholders Why is this KPI important? Customer centricity is a key strategic priority. Customer service lies at the heart of the Marshalls brand. Performance The combined customer service measure continued to be in excess of 98 per cent throughout 2019. Why is this KPI important? Marshalls is committed to meeting the highest health and safety standards. Performance In 2019 there was a 14 per cent reduction in days lost from workplace incidents compared with the target benchmark. Link to strategy Link to strategy Principal risk • Quality, service and reliability • Brand reputation Risk mitigation • Customer centricity strategy • Digital trading Link to remuneration AI LTIP Stakeholder linkage Customers Communities Environment Principal risk • Consistency of standards • Regulatory controls • Investment in operation network Risk mitigation • Embedded culture – The Marshalls Way • Compliance procedures and policies • Employee training Link to remuneration AI LTIP Stakeholder linkage Employees Communities Environment Marshalls plc Annual Report and Accounts 2019 23 Strategic report Risk Management and Principal Risks Managing risk to deliver strategic objectives Managing risk is key to the delivery of long-term sustainable improvement in shareholder value. All risks are aligned with the Group’s strategic objectives. Achievements in 2019 The Group’s risk function has placed particular emphasis on the following areas during the year: • Cyber risk continues to increase despite the Group’s further extension of mitigation controls. It has remained a major focus area for risk assessment. Additional internal audit projects and cyber security reviews have been undertaken and the Group has further increased its investment in employee awareness training. Further improvements have been made to mitigate risk, improve IT security and safeguard business continuity. Approach to risk management Risk management is the responsibility of the Board and is a key factor in the delivery of the Group’s strategic objectives. The Board establishes the culture of effective risk management and is responsible for maintaining appropriate systems and controls. The Board sets the risk appetite and determines the policies and procedures that are put in place to mitigate exposure to risks. The Group’s risk review process covers emerging risks and incorporates scenario planning and stress testing. The implications of an increase in the impact of the coronavirus are currently being assessed and contingency planning is being undertaken. • KPMG completed a number of targeted internal audit projects during 2019 including reviews of the Group’s Code of Conduct and related procedures, supplier rebate controls and logistics and fleet management. Process There is a formal ongoing process to identify, assess and analyse risks and those of a potentially significant nature are included in the Group Risk Register. • A detailed annual review of the Group’s capital structure has been undertaken to ensure it remains aligned with corporate growth objectives and takes full account of continuing Brexit uncertainty and ongoing volatility and tension in world markets. Scenario planning is undertaken to ensure the Group has appropriate, embedded business resilience. The Viability Statement on page 25 and 26 includes further detail. We maintain a conservative capital structure with a strong balance sheet and comfortable headroom against bank facilities provides significant mitigation against potential market risk. Priorities for 2020 The priorities for the Group’s risk function in 2020 include the following areas: • The potential impact of extended economic and political uncertainty continues to be a risk. During 2020, proactive supply chain management and contingency planning will continue to be a priority. Most recently, this contingency planning is being widened to cover the potential impact of a spread of coronavirus. • The rapid pace of digital change in the market continues and there is an increasing risk that, despite significant additional focus made by the Group in this area in recent years, new emerging technology could lead to changes in the external marketplace. The Group has a clearly articulated strategic plan and continues to monitor competitive threats. • Health and safety remains a major focus area and 2020 will see additional governance and control reviews. • The completion of a number of targeted projects will again be a major focus for KPMG. In 2020, projects covering cyber risk, business continuity, disaster recovery, commercial tendering, recruitment procedures and controls and the integration of Edenhall are planned. • Addressing the risk of climate change and the protection of the environment continues to demand increased attention. Our ESG agenda is a priority and the generation of detailed plans and comprehensive policies is a key focus. The Group Risk Register is reviewed and updated by the full executive management team at least every 6 months and the overall process is the subject of regular review. Risks are recorded with a full analysis and risk owners are nominated who have authority and responsibility for assessing and managing the risk. KPMG, as the Group’s internal auditor, attended the most recent risk review meeting. The conclusion of KPMG is that the process continues to be a robust mechanism for monitoring and controlling the Group’s principal risks. All risks are aligned with the Group’s strategic objectives and each risk is analysed for impact and probability to determine exposure and impact to the business and the determination of a “gross risk score“ enables risk exposure to be prioritised. The Group seeks to mitigate exposure to all forms of strategic, financial and operational risk, both external and internal. The effectiveness of key mitigating controls is continually monitored and such controls are subjected to internal audit and periodic testing in order to provide independent verification where this is deemed appropriate. The effectiveness and impact of key controls are evaluated and this is used to determine a “net risk score“ for each risk. The process is used to develop action plans that are used to manage, or respond to, the risks and these are monitored and reviewed on a regular basis by the Group’s Audit Committee. In addition, the Group has established a formal framework for the ongoing assessment of operational, financial and IT-based controls. The overriding objective is to gain assurance that the control framework is complete and that the individual controls are operating effectively. Additional independent verification checking of key controls and reconciliations are undertaken on a rolling basis. Such testing includes key controls over access to, and changing permissions on, base data and metadata. Risk appetite The Group is prepared to accept a certain level of risk to remain competitive but continues to adopt a conservative approach to risk management. The risk framework is robust and provides clarity in determining the risks faced and the level of risk that we are prepared to accept. Marshalls’ strategies are designed to either treat, transfer or terminate the source of the identified risk. 24 Marshalls plc Annual Report and Accounts 2019 Strategic report There are well-established procedures to identify, monitor and manage risk, and within the internal control framework, policies and procedures are reviewed on an ongoing basis. Viability Statement After considering the principal risks on pages 26 to 29, the Directors have assessed the prospects of the Group over a longer period than the period of at least 12 months required by the “going concern“ basis of accounting. The Directors consider that the Group’s risk management process satisfies the requirements of provision 31 of the UK Corporate Governance Code. The Board considers annually, and on a rolling basis, a strategic plan, which is assessed with reference to the Group’s current position and prospects, the strategic objectives and the operation of the procedures and policies to manage the principal risks that might threaten the business model, future performance and target capital structure. In making this assessment the Board considers emerging risks and longer-term risks and opportunities. The aim is to ensure that the business model is continually reviewed to ensure it is sustainable over the long term. Security, flexibility and efficiency continue to be the guiding principles that underpin the Group’s capital structure objectives. The Group’s funding strategy is to ensure that headroom remains at comfortable levels under all planning scenarios. The objective continues to be to have a range of competitively priced funding lines in place, at all times, with different maturity dates. An additional bank revolving credit facility of £35 million was introduced in August 2019 to replace a maturing facility. The Group’s new 5 year Strategy confirms the objectives and priorities over this 5-year period and has addressed appropriate risks and opportunities. For the purposes of the Viability Statement, however, the Board continues to believe that 3 years is an appropriate period of assessment and considers that it has reasonable visibility of the market over a 3-year period to 31 December 2022. This period is consistent with available CPA forecasts and is aligned with the Group’s corporate planning process. The Group’s strategic plan includes an integrated model that incorporates the Income Statement, balance sheet and cash flow projections. Key KPIs and financial ratios are reviewed along with the ongoing appropriateness of all assumptions used. Scenario planning is undertaken along with stress testing against downside sensitivities. The Board has considered a number of downside scenario combinations. These include disaster recovery scenarios to ensure that mitigation and business continuity planning is effective. Framework The Board: • determines the Group’s approach to risk, its policies and the procedures that are put in place to mitigate exposure to risk. The Audit Committee: • has delegated responsibility from the Board to oversee risk management and internal controls; • reviews the effectiveness of the Group’s risk management and internal control procedures; and • monitors the effectiveness of the internal audit function and the independence of the external audit. Executive Directors: • are responsible for the effective maintenance of the Group’s Risk Register; • oversee the management of risk; Internal audit: • independently reviews the effectiveness of internal control procedures; • reports on effectiveness of management actions; and • monitor risk mitigation • provides assurance to the and controls; and Audit Committee. • monitor the effective implementation of action plans. Operational managers: • are responsible for the identification of operational and strategic risks; • are responsible for the ownership and control of specific risks; • are responsible for establishing and managing the implementation of appropriate action plans; and • are responsible for the impact of controls (net basis). Risk heatmap (net risk scores) 10 4 9 6 7 8 1 2 3 5 H G H I T C A P M I I M U D E M W O L LOW MEDIUM HIGH LIKELIHOOD 1 Macro-economic and political 5 Increased pace of digital change 2 Cyber security risks 6 Customers 3 Security of raw material supply 4 Climate change 7 Competitor activity 8 Threat from new technologies and business models 9 Corporate, legal and regulatory 10 Health and safety Marshalls plc Annual Report and Accounts 2019 25 Strategic report Risk Management and Principal Risks continued Viability Statement continued The stress testing reflects the principal risks that could conceivably threaten the Group’s ability to continue operating as a going concern and focuses on scenarios that might give rise to sales volume reductions, deteriorating operating margins and increases in interest rates. The macro-economic and political background remains the Group’s key risk area and all of the Group’s other principal risks are covered within the same downside stress tests. The stress testing applied in 2019 has taken full account of continuing Brexit uncertainty and an increase in market risk due to political and economic uncertainty. The stress testing undertaken consequently reflects a very cautious economic outlook. Scenario modelling remains a key part of the Group’s detailed approach to capital structure and forecasting. A significant stress test has been applied to reflect a dramatic economic downturn and to replicate the financial impact of the last recession in 2008. This has assumed significantly reduced sales volumes giving rise to a 33 per cent decrease in revenue over the next 3 years. None of the individual sensitivities applied impact the Directors’ assessment of viability. Even under the deep stress test all bank covenants are met and the gearing and net debt / EBITDA metrics remain sustainable. The Group would undertake significant mitigation measures in a deep downturn and this would create additional contingency. In undertaking its review, the Board has considered the appropriateness of any key assumptions, taking into account the external environments and the Group’s strategy and risks. Based on this assessment, and taking account of the Group’s principal risks and uncertainties, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due for the next 3 years. The result of the recent election, the parliamentary approval of the EU Withdrawal Bill and the United Kingdom’s subsequent exit from the EU on 31 January 2020 have removed key elements of uncertainty. However, further delays in the transition process or issues surrounding the negotiation of trade agreements could trigger renewed weakness in Sterling, a reduction in consumer confidence and a further slowdown in the UK economy. Marshalls continues to have strong market positions and a strategy of targeting those market areas where growth prospects are greatest. The potential impact of wider economic and political uncertainties has been considered in the assessment of risk 1 below. This assessment has included significant stress testing of financial models and risk mitigation measures within the Group’s supply chain. The Group has developed a detailed Brexit plan to mitigate the risk of raw material shortages. Principal risks and uncertainties The Directors have undertaken a robust, systematic assessment of the Group’s emerging and principal risks. These have been considered within the timeframe of 3 years, which aligns with our Viability Statement above. The risk process has included extended reporting during 2019 to facilitate greater focus on emerging risks and risk outlook. The reporting includes more detailed assessments of proximity (how far away in time the risk will occur) and velocity (the time that elapses between an event occurring and the point at which the effects are felt). There have been no changes to the principal risks and uncertainties compared to prior years. Impact on business model: Sourcing Manufacturing Distribution Customers Strategic objectives: Shareholder value Sustainable profitability Relationship building Organic expansion Brand development Effective capital structure and control framework Macro-economic and political Impact on business model Link to strategy Nature of risk • The Group is dependent on the Key risk indicators • Delays in the awarding of and completion of contracts. level of activity in its end markets. Accordingly, it is susceptible to economic downturn, the impact of Government policy, interest rates and any political and economic uncertainty in relation to the ongoing Brexit transition process. Potential impact • The potential impact of further delays in the Brexit transition process or wider global macro-economic tension and uncertainty could lead to lower activity levels which could reduce sales and production volumes. This could have an adverse effect on the Group’s financial results. The impact of exchange rate fluctuations and increased interest rates could also have an adverse impact on raw material costs. • Reductions in consumer confidence and order pipeline. Mitigating factors • The Group closely monitors trends and lead indicators, invests in market research and is an active member of the CPA. • The Group benefits from the diversity of its business and end markets. The proactive development of the product range continues to offer protection. • The Group has developed detailed plans to mitigate the risk of raw material shortages. • The Group undertakes scenario planning to support improved business resilience. • The Group continues to target those market areas where growth prospects are greatest, e.g. New Build Housing, Road, Rail and Water Management. • The Group focuses on its supplier relationships, flexible contracts and the use of hedging instruments. Change in risk in the year • The UK’s exit from the EU on 31 January 2020 has removed key elements of uncertainty, although further delays in the transition process could generate renewed uncertainty. There continues to be volatility in world markets and global economic uncertainty continues to be a risk. 26 Marshalls plc Annual Report and Accounts 2019 Strategic report Cyber security risks Impact on business model Link to strategy Nature of risk • Inadequate controls and procedures over the protection of intellectual property, sensitive employee information and market influencing data. The failure to improve controls against cyber security risk quickly enough, given the rapid pace of change and the continuing introduction of new threats. Increasingly, all business are becoming more IT dependent. Potential impact • Risk of data loss causing financial and reputational risk. Security of raw material supply / raw material shortages Nature of risk • Brexit transition uncertainty continues to bring a risk to the security of raw material supply and the risk of shortages in some areas. Changes in the market for certain raw materials have created an increased reliance on imports. The Group is susceptible to significant increases in the price of raw materials, utilities, fuel oil and haulage costs and decreases in vehicle availability. Potential impact • The increased costs could reduce margins and may be further impacted in the event of imbalances in the mix of regional activity. The risk of market demand exceeding raw material supply could lead to inefficient production, which could reduce margins. Key risk indicators • Emergence of new cyber security risks. • Increased examples of data loss in the wider market. Mitigating factors • Use of IT security policies. • The undertaking of regular cyber security risk audits by specialists and the quick introduction of mitigation controls and other recommended procedure updates. • Sensitive data is currently restricted to selected senior and experienced employees who are used to handling such data. • Appropriate tools and training procedures are in place to protect sensitive data when stored and transmitted between parties (e.g. encryption of hard drives, restricted USB devices, secure data transmission mechanisms and third party security audits). • A continuous programme of awareness training for staff. Change in risk in the year • This remains a high profile area and considerable focus is being given to promoting awareness of IT security policies. The net risk is being maintained due to the continued extension of mitigation controls. The risk is fast growing and indiscriminate and the perception is that the gross risk of data loss through new (or as yet unseen) security threats continues to increase. Impact on business model Link to strategy Key risk indicators • Temporary shortages and exchange rate cost inflation. • Decreases in vehicle availability and labour / driver shortages. Mitigating factors • The Group benefits from the diversity of its business and end markets. • We are collaborating with all EU-based Tier 1 and Tier 2 suppliers to ensure any supply risks from the Brexit transition process are minimised. • A focus on governance and financial controls including a rolling “material risk” review process. • The digitisation of the supply chain through the implementation of a best-in-class Supply Relationship Management System. • The Group focuses on its supplier relationships, flexible contracts and the use of hedging instruments. • The Group utilises sales pricing and purchasing policies designed to mitigate the risks. • The Group uses specialist delivery vehicles. Change in risk in the year • The risk of temporary shortages is mitigated by proactive supply chain management and the use of alternative suppliers. However, cost inflation remains a risk as demand for raw materials increases against a backdrop of continuing economic uncertainty. All importers are faced with the same issues. Climate change (including the impact of weather events) Impact on business model Link to strategy Nature of risk • The Group is exposed to the impact of climate change giving rise to unpredictable and extreme weather events. • The longer-term implications of climate change give rise to the transition risk to address the challenges quickly enough. Potential impact • Adverse working conditions could give rise to disruption and delays that might reduce short-term activity levels. This could reduce sales and production volumes and therefore have an adverse effect on the Group’s financial results. • The cost impact of the “Environmental Protocol“, and mitigation programmes could lead to increasingly expensive processes. • Financial risk caused by adverse impact on margins and cash flows as well as sales and production volumes. Key risk indicators • Prolonged periods of bad weather (e.g. snow, ice and floods) which make ground working difficult or impossible. • Changing public perceptions of the longer-term implications of climate change. Mitigating factors • The Group utilises centralised specialist functions to support mitigation plans and the management of relationships on commercial contracts. We are committed to water harvesting and recycling schemes and have an environmental target of not using any mains schemes. • The development of resilience strategies for climate change is a key element of the Group’s Climate Change Policy. • The Group has a continuing focus on new product development, including landscape water management. • The development of the Group’s Water Management business is a significant opportunity. The acquisition of CPM has been a significant step in providing a full water management capability. Change in risk in the year • Weather conditions continue to be closely monitored but are beyond the Group’s control. The Group is committed to the Science Based Targets initiative. • Significant increase in public awareness of climate change and media coverage. Marshalls plc Annual Report and Accounts 2019 27 Strategic report Risk Management and Principal Risks continued Impact on business model: Sourcing Manufacturing Distribution Customers Strategic objectives: Shareholder value Sustainable profitability Relationship building Organic expansion Brand development Effective capital structure and control framework The increased pace of digital change in the market Impact on business model Link to strategy Nature of risk • The rapid pace of digital change in the market continues and there is an increasing risk that new emerging technology could lead to changes in the external marketplace. Potential impact • Despite significant additional focus made by the Group in this area in recent years, there remains a risk that a new third party could use emerging digital technology to enter the market and transition more quickly and effectively. Key risk indicators • The emergence of new digital third parties, possibly from outside the sector, and the more widespread availability of artificial intelligence technology. Mitigating factors • The Group’s digital strategy has been progressing well for several years. • The Group is committed to further investment in this area; the digital strategy is a key part of the Group’s new 5 year Strategy. • The introduction of new trading websites covering both Public Sector and Commercial and UK Domestic. • The ongoing monitoring of competitive threats. Change in risk in the year • The pace of digital change in the market continues to increase and the risk is increasing. This is now seen as a major risk by the market. Customers Impact on business model Link to strategy Nature of risk • The UK business has a number of key customers, in particular the national merchants. This is partly as a result of the consolidated nature of this market. Potential impact • The loss of a significant customer may give rise to a significant adverse effect on the Group’s financial results. Key risk indicators • Changes to market structure or trading relationships. • New customer strategies. Mitigating factors • The Group focuses on brand and new product development, quality and customer service improvement. • The Group maintains a national network of manufacturing and distribution sites. • The Group undertakes ongoing reviews of trading policies and relationships and maintains constant communication with customers. Change in risk in the year • Although the underlying risk continues, the effective management of key relationships and the ongoing diversification of the business continue to mitigate the risk. Competitor activity Impact on business model Link to strategy Nature of risk • The Group has a number of existing Key risk indicators • Threat from new competitors and new technologies. competitors which compete on range, price, quality and service. Potential new low cost competitors may be attracted into the market through increased demand for imported natural stone products. Potential impact • The increased competition could reduce volumes and margins on manufactured and traded products. • Less demand for traditional products and the increased emergence of new digital business models and product solutions. Mitigating factors • The Group has unique selling points that differentiate the Marshalls branded offer. • The Group focuses on quality, service, reliability and ethical standards that differentiate Marshalls from competitor products. • The Group has a continuing focus on new product development. • The continued development of the Group’s digital strategy and its focus for customers and all stakeholders. Change in risk in the year • The more uncertain market environment has not led to any significant changes in competitive pressure. 28 Marshalls plc Annual Report and Accounts 2019 Strategic report Threat from new technologies and new business models Nature of risk • Reduction in demand for traditional products. Risk of new competitors and new substitute products appearing. Failure to react to market developments, including digital and technological advances. Potential impact • The increased competition could reduce volumes and margins on traditional products. Impact on business model Link to strategy Key risk indicators • Less demand for traditional products and routes to market. • Emergence of new competitors and new digital business models. Mitigating factors • Good market intelligence. • Flexible business strategy able to embrace new technologies. • Significant focus on research and development and new products. • Development of the Group’s e-platform and developing digital strategy. Change in risk in the year • The ongoing diversification of the business, the continued development of the Marshalls brand and the focus on new products and greater manufacturing efficiency continue to mitigate the risk. Corporate, legal and regulatory Impact on business model Link to strategy Nature of risk • Inadvertent failure to comply with elements of a significantly increased governance, legislative and regulatory business environment. The Group may be adversely affected by an unexpected reputational event, e.g. an issue in its ethical supply chain. Potential impact • Significant increases in the penalty regime across all areas of business (e.g. competition law, the Bribery Act and GDPR) could lead to significant fines in the event of a breach. An environmental incident could lead to a disruption to production and the supply of products for customers. Such incidents could lead to prosecutions and increased costs and have a negative impact on the Group’s reputation. Key risk indicators • Increased regulatory and compliance requirements. • Integration requirements for new acquisitions. • Significant increases in the penalty regime for environmental incidents. Mitigating factors • Centralised legal and other specialist functions, the use of specialist advisers and ongoing monitoring and training. • The Group has a formal Group sustainability strategy focusing on impact reduction. • The Group employs compliance procedures, policies, ISO standards and independent audit processes which seek to ensure that local, national and international regulatory and compliance procedures are fully complied with. • The Group uses professional specialists covering carbon reduction, water management and biodiversity. Change in risk in the year • The significant increase in governance and regulation continues to increase risk in this area. The Group continues to improve compliance procedures within all areas of the business. The potential impact of the Bribery Act continues to be a high profile risk area. It is receiving additional management focus. Health and safety Impact on business model Link to strategy Nature of risk • Unexpected health and safety Key risk indicators • Integration requirements for new acquisitions. incident, possibly caused by human error or the actions of a subcontractor. Potential impact • Risk of harm to employee or subcontractor. • Significant increases in penalty regime could lead to significant fines and prosecution. • A major incident could lead to a disruption to production and a negative impact on the Group’s reputation. • Significant increases in the penalty regime. Mitigating factors • Centralised specialist functions. • Comprehensive 5-year health and safety strategy. • Ongoing monitoring, training and health and safety audits. • All senior managers receive the Marshalls Health and Safety and Environmental stage 3 training. • The integration of CPM and Edenhall into the Marshalls Health and Safety Management System. Change in risk in the year • The significant increase in regulation. • Health and safety continues to be a high profile risk area at the heart of The Marshalls Way. Marshalls plc Annual Report and Accounts 2019 29 Strategic report Strategic report Case Study Strategic priority Digital transformation Marshalls’ goal is to transform the business digitally throughout the value chain for all our internal and external stakeholders. Our aim is to drive out costs, increase efficiency and quality and improve the customer experience leading to a transformed workplace. Traditional business 2018 l s r e d o h e k a t S l s r e d o h e r a h s , s e e y o p m e l , s r e i l p p u s , s r e m o t s u C i n a h c d n a m e D s r a l l i i p c g e t a r t S l a n o i t a r e p o , y t i c i r t n e c r e m o t s u c , i p h s r e d a e l d n a r B s e s s e n i s u b g n g r e m e i , e c n e l l e c x e s c i t s i g o l , e c n e l l e c x e i n a h c y p p u S l New Commercial website • Providing inspirational imagery and enhanced technical information to help gain and protect product specification throughout a project lifecycle. 2019 New Domestic website • Providing inspirational imagery and content to improve the end-to-end customer journey, whilst supporting merchant and installer partners. Chatbot • Using natural language processing systems to answer automatically customer enquiries and requests at all times of the day. 2020 Group website • Migration of a series of Group websites (e.g. Careers and Investor Relations) to a new platform, helping to address the changing needs of multiple stakeholders. Visualisation • Creating immersive, interactive Commercial and Domestic customer experiences using a combination of both virtual reality and augmented reality technologies. Digital trading • Selling via both traditional and online channels, simplifying existing processes where necessary to create a cohesive, frictionless user experience for all customer types. 2021 Digital planning • Creation of artificial intelligence algorithms that leverage both internal and external data sources to transition existing forecasting and production processes. SMART manufacturing • Utilising internet connected machinery to capture and analyse data which will identify opportunities to automate and improve the manufacturing process. Digital business 30 Marshalls plc Annual Report and Accounts 2019 Strategic report Financial Review Marshalls has delivered the 2020 Strategy successfully Summary • Operating profit up 12% to £72.6 million (on a pre-IFRS 16 basis) and £73.7 million on a reported basis • EBITDA up 12% to £90.1 million (on a pre-IFRS 16 basis) and £103.9 million on a reported basis • Successful integration of Edenhall • ROCE of 21.4% (23.7% on a pre-IFRS 16 basis) • Strong operating cash flow at 96% of EBITDA (pre-IFRS 16 basis) • Significant facility headroom for investment • Increase in final ordinary dividend of 21% • Additional supplementary dividend of 4.00 pence per share Revenue variance analysis 2018 / 2019 560 540 520 500 m £ ’ 480 460 440 420 400 35.6 541.8 15.2 491.0 2018 Revenue Landscape Products Other 2019 Revenue The consistently high ROCE reflects the tight control and management of inventory and monetary working capital. Trading summary Revenue Group revenue for the year ended 31 December 2019 was up 10 per cent at £541.8 million (2018: £491.0 million). Excluding the impact of Edenhall, which was acquired in December 2018, revenue was up 3 per cent. The Domestic market was softer in the second half. However, continued execution of the 2020 Strategy more than compensated by improving gross margins. Analysis of sales by end market UK Domestic Public Sector and Commercial International 2019 £’m 143.7 371.2 26.9 143.5 323.6 23.9 2018 £’m Change % – 15 13 10 UK Domestic Public Sector and Commercial International 541.8 491.0 % 26 69 5 % 29 66 5 Marshalls plc Annual Report and Accounts 2019 31 Financial Review continued Revenue by end market (%) Revenue by area (%) Domestic Public Sector and Commercial International 26% 69% 5% Landscape Products Emerging UK Businesses International 76% 19% 5% L 13% L 13% I Flat 26+ L 15% L 47% M 76+ L 4% Public Sector and Commercial Sales in the Public Sector and Commercial end market include a full year contribution from Edenhall and were up 15 per cent compared with 2018. The performance of Edenhall has been strong and the integration plan is now complete. Public Sector and Commercial revenue represented 69 per cent of Group sales. Marshalls’ strategy continues to deliver sustainable integrated solutions to customers, architects and contractors. The Group’s technical and sales teams remain particularly focused on those market areas where future demand is considered to be greatest including New Build Housing, Road, Rail and Water Management. The Group continues to outperform the market in these areas. Our updated and refreshed Design Space office in Central London showcases the Group’s brand leading capabilities and technical and design solutions. During the year we have also opened a new Marshalls Design Space in the heart of Birmingham supporting the major redevelopment in the city. The objective of these facilities is to showcase new concepts and designs with architects using digital technology to facilitate the selection and specification of our ranges. The objective is to create a brand preference in order to secure product specification. Domestic Revenue in the Domestic end market was flat, although these results were ahead of the overall Domestic market in 2019. Sales to the UK Domestic end market now represent approximately 26 per cent of Group sales. Installer order books at the end of February 2020 were 9.7 weeks (February 2019: 10.0 weeks), compared with 10.9 weeks at the end of October 2019. The Group’s industry leading standards remained high in 2019 with a combined customer service measure of 98 per cent (2018: 98 per cent) and market leading geographical coverage. The Group’s strategy continues to be to drive more sales through quality installers. The Marshalls Register of approved domestic installers comprises approximately 1,900 teams. The objectives continue to be to develop the customer experience by digitalisation and a commitment to innovation. The Group continues to receive good feedback for its consistently high standard of quality, excellent customer service and marketing support. International Sales to International markets increased by 13 per cent and represents approximately 5 per cent of Group sales. The Group’s international focus is centred on the US, Western European and Middle East markets and we continue to develop our global supply chains. Integration of Edenhall A detailed integration plan was instigated upon the acquisition of the business in December 2018. This is now operationally complete and covered all areas of the business and required close engagement between Marshalls and Edenhall’s operational management team. The governance around the integration has been effective and feedback from key stakeholders involved in the project has been positive. Systems were fully integrated in the final quarter of 2019. 32 Marshalls plc Annual Report and Accounts 2019 Return on capital employed (%) Reported basis Pre-IFRS 16 21.4% 23.7% – up 180 basis points 2019 2018 2017 2016 2015 2014 23.7 21.9 20.8 23.0 19.0 12.5 Recent growth has been supported by an expansion in production capabilities following the completion of a new £6 million factory in South Wales. This was fully commissioned in 2019 and has the capacity to deliver 100 million brick equivalents per annum. Operating profit Reported operating profit increased to £73.7 million (2018: £64.8 million). The impact of IFRS 16, which has been applied since 1 January 2019, has been to increase operating profit by £1.1 million. Post-IFRS 16 EBITDA was £103.9 million, as a consequence of an additional £12.9 million depreciation in relation to right-of-use assets. On a pre-IFRS 16 basis, EBITDA improved to £90.1 million (2018: £80.8 million), an increase of 12 per cent. Continuing operations Pre-IFRS 16 As reported 2019 £’m 2019 £’m Pre-IFRS 16 As reported increase % increase % 2018 £’m EBITDA 90.1 103.9 80.8 Depreciation / amortisation (17.5) (30.2) (16.0) Operating profit 72.6 73.7 64.8 12 12 29 14 Basic earnings per share on a reported basis was 29.36 pence (2018: 26.29 pence) per share, which represented an increase of 12 per cent. Profit margins Margin analysis 2018 Landscape Products Other 2019 – pre-IFRS 16 2019 – as reported Reported operating profit £’m Revenue £’m 491.0 64.8 15.2 35.6 541.8 541.8 2.5 5.3 72.6 73.7 Margin impact % 13.2 0.1 0.1 13.4 13.6 The Group has continued to implement its 2020 Strategy and as a result the operating margin has increased to 13.4 per cent (2018: 13.2 per cent). The table illustrates the impact of operational gearing in the core business and shows that growth has continued to be ahead of CPA forecasts. The Group’s Landscape Products business is a reportable segment servicing both the UK Public Sector and Commercial and UK Domestic end markets. Revenue increased by £15.2 million and operating profit grew by £2.5 million in the Landscape Products business. Those businesses that are not large enough to comprise separate operating segments include Marshalls Landscape Protection and Mineral Products and they continue to be a key strategic focus and a positive driver for growth. The chart below illustrates that the Group’s operating margin improved from 7.1 per cent in 2014 to 13.4 per cent in 2019. Strategic report69 + 5 + 19 + 5 + M Operating profit (%) 16% 14% 12% 10% 8% 6% 4% 2% 0% 12.0 12.4 13.2 13.4 9.7 7.1 The chart above also provides a medium-term 3-year analysis of the cash generation capacity of the Group and how cash has been invested to grow the business and also to show the cash returned to shareholders. Cash generated from operating activities was £196.3 million. The Group has invested £72.8 million back into the business to generate growth, improve productivity and provide industry leading manufacturing facilities. The Group has also invested £60.9 million in the targeted acquisitions of CPM and Edenhall. Dividends to shareholders over the last 3 years have totalled £86.5 million, which equates to 44 per cent of net cash generated from operating activities. 2014 2015 2016 2017 2018 2019 OCF:EBITDA (%) Net debt On a pre-IFRS 16 basis, net debt has reduced to £18.7 million at 31 December 2019 (2018: £37.4 million). Reported net debt was £60.0 million at 31 December 2019. The Group increased both capital expenditure and dividends, yet tight control of working capital has led to a reduction in net debt. The ratio of net debt to EBITDA was 0.6 times at 31 December 2019 on a reported basis, and 0.2 times on a pre-IFRS 16 basis. Both are comfortably within our target range, of between 0 to 1 times, and well below covenant levels. 120% 100% 80% 60% 40% 20% 0% 113% 93% 94% 101% 92% 96% 2014 2015 2016 2017 2018 2019 Cash generation Cash generation remains strong, and reported net cash flows from operating activities were £88.1 million. On a pre-IFRS 16 basis net cash flows from operating activities were £75.7 million (2018: £63.3 million). The Group continues to focus on robust capital disciplines, with strong cash management continuing to be a high priority area. The Group operates tight control over business, operational and financial procedures, and continues to focus on inventory levels and the close control of credit management procedures. We report our supplier payment performance statistics on the Government portal and these continue to be within best practice guidelines. The Group maintains credit insurance which provides excellent intelligence to minimise the number and value of bad debts. The Group does not engage in debt factoring. Group cash flow Net cash from operating activities Net cash from investing activities Net cash from financing activities Movement in net debt in the year Foreign exchange IFRS 16 lease liabilities Net debt at beginning of year 2019 £’m 75.7 (22.4) (34.5) 18.8 (0.1) (41.3) (37.4) 2018 £’m 63.3 (39.4) (36.9) (13.0) (0.1) — (24.3) We are continuing to maintain OCF at around 100 per cent of EBITDA over the duration of our 5 year Strategy. As a function of both the enhanced EPS and tight working capital management, our ROCE has remained strong. Return on capital employed (“ROCE”) ROCE was 21.4 per cent (2018: 21.9 per cent), on a reported basis, at 31 December 2019. Capital employed has increased by 17.0 per cent to £355.7 million (2018: £304.1 million) following the acquisition of Edenhall. The consistently high ROCE reflects the Group’s tight control and management of inventory and monetary working capital. ROCE was 23.7 per cent on a pre-IFRS 16 basis (2018: 21.9 per cent). Return on capital employed – pre-IFRS 16 basis CAGR of 14% over 5 years 25.0% 20.0% 15.0% 10.0% 12.5% 5.0% 19.0% 23.0% 20.8% 21.9% 23.7% Net debt at end of year (60.0) (37.4) 0.0% 2014 2015 2016 2017 2018 2019 Cash outflow on capital expenditure in the year was £22.9 million (2018: £29.2 million). This included self help growth expenditure of £9.0 million and the replacement of existing assets, business improvements and new process technology. Dividend payments in the year were £33.2 million (2018: £29.2 million). Analysis of cash utilisation Net cash from operating activities Capital expenditure Proceeds from sale of property assets Share issues Payments to acquire own shares Share-based payments Acquisition of subsidiary undertakings Dividends Pre-IFRS 16 2019 £’m 2018 £’m 75.7 63.3 (22.9) (29.2) 0.5 0.2 (1.5) – – (33.2) 1.6 0.6 – (3.7) (16.4) (29.2) Last 3 years £’m 196.3 (72.8) 6.0 0.8 (2.6) (3.7) (60.9) (86.5) Movement in net debt 18.8 (13.0) (23.4) Impact of IFRS 16 In adopting IFRS 16 from 1 January 2019, the Group has applied the modified retrospective transition approach and not restated comparative amounts for the year ended 31 December 2018. Right-of-use assets of £45.0 million and lease liabilities of £46.5 million were recognised as at 1 January 2019. A transition adjustment of £1.8 million has been taken to retained earnings. In terms of the Income Statement, the application of IFRS 16 resulted in a decrease in other operating expenses of £14.0 million and an increase in depreciation of £12.9 million for the year ended 31 December 2019. The interest expense increased by £1.3 million due to additional IFRS 16 lease interest. Consequently, on a reported basis, there has been an increase in operating profit of £1.1 million and a reduction in profit before tax of £0.2 million. Reported EBITDA of £103.9 million compares with £90.1 million on a pre-IFRS 16 basis. Bank covenants remain on frozen GAAP. Marshalls plc Annual Report and Accounts 2019 33 Strategic report Financial Review continued Continued development of the Group’s growth strategy During 2019, capital investment in property, plant and equipment (including software) totalled £22.9 million (2018: £29.2 million). This compares with pre-IFRS 16 depreciation of £17.3 million (2018: £16.0 million). including scheme administration costs, there was an IAS 19 notional interest charge of £0.6 million (2018: £0.5 million) in relation to the Group’s Pension Scheme. The IAS 19 notional interest includes interest on obligations under the defined benefit section of the Marshalls plc Pension Scheme, net of the expected return on Scheme assets. Self help expenditure is additional to ongoing spend and must be “value added” providing significant improvement in yields and efficiency. Self help capital expenditure was £9.0 million in 2019 (2018: £17.0 million). This includes projects to deliver new, innovative products and to drive through sustainable cost reductions and improvements in operational efficiency. Digital investment has been £9 million over the last 3 years. We continue to have a strong pipeline of such projects and capital expenditure of £20 million is planned for 2020. Capital expenditure Last 4 years m £ ’ 30 25 20 15 10 5 0 Self-help growth capex Ongoing capex 8.6 12.1 5.0 8.9 17.0 9.0 12.2 13.9 2016 2017 2018 2019 Our ESG agenda supports capital projects which improve operational efficiency and better utilisation of resources and raw materials. The investment in our new stone processing sawmills is a good example of this and our procurement process is focused on sourcing ethical and sustainable materials. We are committed to reducing the environmental impact of our products, reducing packaging and the recycling of water at our sites. Research and development expenditure in the year ended 31 December 2019 amounted to £5.5 million (2018: £4.9 million). Investment in research and development covers a number of areas including the development of the Group’s project engineering and manufacturing capabilities, concrete and other materials technology innovations and extending the new product pipeline. Revenue from new products in 2019 in the core Landscape Products business represented 13 per cent of total sales. Further investment continues to be made to develop our wide-ranging digital strategy, encompassing digital trading, digital marketing and digital business. More details are provided on page 30. e c n e p Net financial expenses Net financial expenses were £3.8 million (2018: £1.9 million), including £1.3 million of additional IFRS 16 lease interest. On a reported basis interest was covered 19.2 times and, on a pre-IFRS 16 basis, interest was covered 29.2 times (2018: 34.1 times). Interest charges on bank loans totalled £1.9 million (2018: £1.4 million) and, Taxation The effective tax rate was 17.1 per cent (2018: 18.0 per cent). The Group has paid £9.0 million (2018: £9.9 million) of corporation tax during the year. Deferred tax of £0.5 million in relation to the actuarial gain arising on the defined benefit Pension Scheme in the year has been taken to the Consolidated Statement of Comprehensive Income. For the 6th year running, Marshalls has been awarded the Fair Tax Mark, which recognises social responsibility and transparency in a company’s tax affairs. The Group’s tax approach has long been closely aligned with the Fair Tax Mark’s objectives and this is supported by the Group’s tax strategy and fully transparent tax disclosures. Taking into account not only corporation tax but also PAYE and NI paid on our employee wages, aggregate levy, VAT, fuel duty and business rates, Marshalls has funded total taxation to the UK economy of £93.6 million. Dividends The recommended supplementary dividend of 4.00 pence (2018: 4.00 pence) per share is discretionary and non-recurring. The level of recommended supplementary dividend recognises external market uncertainty and an appropriate degree of caution and stewardship. It also reflects that the business has sufficient capital both to finance increased investment and to maintain an appropriate supplementary dividend. When added to the normal full year dividend of 14.35 pence, this gives a total dividend for the year of 18.35 pence, which represents an increase against the prior year of 15 per cent. The incremental cash outflow in 2019 in relation to the supplementary dividend has been £7.9 million and will be approximately £7.9 million in 2020. 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 4.00 6.80 3.40 2017 3.00 5.80 2.90 2016 2.00 4.75 2.25 2015 4.00 2.00 2014 Interim Final Supplementary 4.00 9.65 4.00 8.00 4.00 4.70 2018 2019 Priorities for capital Organic growth Capital investment in growth projects. Plan £20m in 2020. R&D and NPD Increase research and development and new product development. Ordinary dividends Maintain dividend cover of 2 times earnings over the business cycle. Selective acquisitions Target selective bolt-on acquisition opportunities in New Build Housing, Water Management, Landscape Protection and Minerals. Supplementary dividends Supplementary dividends when appropriate. Discretionary and non-recurring. Delivery over the last 3 years 2016 2017 2018 2019 2016 2017 2018 2019 2016 2017 2018 2019 2016 2017 2018 2019 2016 2017 2018 2019 34 Marshalls plc Annual Report and Accounts 2019 Strategic report Banking facility headroom m £ ’ 180 160 140 120 100 80 60 40 20 0 -20 Committed On demand Seasonal Net debt Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 18 Jun 19 Dec 19 Balance sheet Net assets at 31 December 2019 were £295.8 million (2018: £266.7 million). The Group has a strong balance sheet with a good range of medium-term bank facilities available to fund investment initiatives to generate growth. Group balance sheet Non-current assets Current assets Current liabilities Non-current liabilities Net assets Net debt 2019 £’m 350.0 212.5 2018 £’m 302.8 210.7 (162.3) (141.2) (104.4) (105.6) 295.8 266.7 (60.0) (37.4) Working capital management The Group continues to prioritise the close control of inventory and the effective management of working capital. Debtor days remain industry leading due to continued close control of credit management procedures. The Group maintains credit insurance which provides excellent intelligence to minimise the number and value of bad debts and ultimately provides compensation if bad debts are incurred. We do not engage in debt factoring. The Group complies with prompt payment guidelines and best practice and abides by a clearly defined payment policy which has been agreed with all major suppliers. Pension The balance sheet value of the Group’s defined benefit Pension Scheme was a surplus of £15.7 million (2018: £13.5 million). The amount has been determined by the Scheme actuary. The fair value of the Scheme assets at 31 December 2019 was £368.8 million (2018: £343.7 million) and the present value of the Scheme liabilities is £353.1 million (2018: £330.2 million). These changes have resulted in an actuarial gain, net of deferred taxation, of £2.4 million (2018: £8.3 million actuarial gain) and this has been recorded in the Consolidated Statement of Comprehensive Income. Following the completion of the 2018 triennial actuarial valuation during the year, the Company has agreed with the Trustee that no cash contributions are now payable under the funding and recovery plan. Capital allocation The Group’s capital allocation strategy is to maintain a strong balance sheet and flexible capital structure that recognises cyclical risk, while focusing on security, efficiency and liquidity. The capital allocation strategy prioritises organic capital investment, supported by an increase in new product development and research and development expenditure. The strategy also targets selective bolt-on acquisition opportunities. In addition, the objective is to maintain a dividend cover of 2 times earnings over the medium term and to give consideration to supplementary dividends. Borrowing facilities The Group continues its policy of having a range of committed bank facilities in place with a positive spread of medium-term maturities that now extends to 2024. The Group’s committed facilities are all revolving credit facilities with interest charged at a variable rate based on LIBOR. The facilities include a seasonal working capital facility of £10.0 million which is available between 1 February and 31 August each year. On 6 August 2019, the Group renewed its short-term working capital facilities of £25.0 million and took out an additional of £35.0 million with a 2023 facility. This has increased the capacity within our banking facilities to fund organic investment and selective “bolt-on” acquisitions. The total bank borrowing facilities at 31 December 2019 amounted to £155.0 million (2018: £140.0 million), of which £83.7 million (2018: £60.5 million) remained unutilised. Interest cover and net debt to EBITDA covenants in the facilities were comfortably met at the year end. The bank facilities are unsecured save for inter-company guarantees between the Group and its subsidiary undertakings in favour of the facility banks. Expiry date Committed facilities Q1 2024 Q3 2023 Q3 2022 Q3 2021 Q3 2020 On-demand facilities Available all year Seasonal (February to August inclusive) Facility £’m Cumulative facility £’m 25 55 20 20 20 15 10 25 80 100 120 140 155 165 Conclusion Marshalls has delivered the 2020 Strategy successfully. This has been fuelled by profit growth accompanied by strong cash flow management, which has led to a continuous improvement in ROCE. The Group will retain the same capital discipline over the period of the new 5 year Strategy. Jack Clarke Group Finance Director Marshalls plc Annual Report and Accounts 2019 35 Strategic report Sustainability Sustainability is at the heart of all we do Introduction Operating in the most ethical and sustainable way is a commitment we make to our customers, partners and stakeholders and the communities where we operate. Strategy Our sustainability strategy is built on our vision of creating better spaces and futures for everyone. It is embedded into our business model and aligned with the Group’s new 5 year Strategy. Read our strategy on pages 20 and 21 Read about FTSE4Good on page 38 Culture and The Marshalls Way The Marshalls Way means doing the right things, for the right reasons, in the right way. Diversity and inclusion We have policies in place to improve the gender balance and to address the age profile and under-representation of ethnic minorities in our workforce. Governance The Board oversees the Group’s governance framework which supports the principles of environmental sustainability, strong ethical values and a culture of doing business responsibly. Read about our culture on pages 44 to 49 Read about The Marshalls Way on page 11 UN Sustainable Development Goals Marshalls supports the UN Sustainable Development Goals (“SDGs”) to create a fair and sustainable world by 2030. Non-financial information statement As required by the Companies Act 2006, the table below sets out where the key contents requirements of the non-financial statement can be found within this document (or required by Sections 414CA and 414CB of the Companies Act 2006). Reporting requirements Relevant policies Section within Annual Report Environmental matters Employees Social and community matters Human rights • Environmental Policy Statement* • Climate Change Policy* • Timber and Paper Policy • Code of Conduct* • Health and Safety Policy* • Serious Concerns Policy* • Diversity and Inclusion Policy* • Drug and Alcohol Policy • Code of Conduct* • Social Community Investment Policy • Corporate Responsibility Policy* • Tax Policy* • Human Rights Policy* • Modern Slavery and Anti-Human Trafficking Policy • Children’s Rights Policy • Sustainability strategy (pages 38 and 39) • Sustainability commitments relating to the environment (page 40) • Headcount (page 16) • People engagement (page 37) • Board diversity (pages 42 and 43) • Gender diversity (page 82) • Stakeholder engagement (pages 18 and 19) • Responsible business (page 41) • Charitable donations (page 41) • Health and safety (page 41) • Stakeholder engagement (pages 42 and 43) Anti-bribery and corruption • Anti-Bribery Code* • Governance and compliance (pages 42 to 49) Principal risks Business model Non-financial KPIs • Description of risk process (page 24) • Risk framework (page 25 to 26) • Principal risks and uncertainties (page 26 to 29) • Our business model (pages 16 and 17) • Key performance indicators (pages 22 and 23) • Strategy (pages 20 and 21) Full versions of the policies referred to above form part of the Group’s Policy Framework that supports Marshalls’ Code of Conduct. These can be found on the Group’s investor relations website: www.marshalls.co.uk/about-us/policies. * Key policies referred to in this Annual Report. 36 Marshalls plc Annual Report and Accounts 2019 Strategic report People and talent development The development of our people underpins our 5 year Strategy. We know our people make us who we are. Defining the culture Based on a thorough cultural audit, we developed our people and culture strategy which encourages proactive 2-way communication and collaborative working and enables us to embrace the full potential within our business. The Marshalls Way means working together as one team, guided by strong principles, to operate in the most ethical and sustainable ways. We are committed to our modern employee engagement measurement strategy and we have now launched the Employee Voice Group comprising representatives from across all business areas and levels. The effort and drive we are embarking upon will ensure diversity is threaded through all our people processes. Active apprentices Trained mental health first aiders Engagement Champions 50 60 25 Janet Ashdown – our designated Non-Executive Director for workforce engagement “It is an honour to lead people engagement on behalf of the Board and get directly involved with the talent at Marshalls. The energy and commitment from members of the Employee Voice Group (“EVG”) who represent all business areas has been exceptional. The EVG has provided feedback and contributed to key initiatives like The Marshalls Way and the reward strategy, and its members have signed up to be our Engagement Champions going forward.” The competency framework that supports The Marshalls Way will set the tone for further investment into our people at Marshalls. View our Board on pages 42 and 43 Employee experience People development Leadership development Diversity and inclusion • Apprenticeships in various fields • Implementation of people and • Comprehensive Diversity and and at varied levels culture strategy Inclusion Policy • The Marshalls Learning Zone • Emerging Leaders programme • Social mobility pledge signatories • Professional and functional • Essentials of Management • Marshalls Women’s Talent Network skills development programme • Becoming members of the UN Global Compact on Diversity and Inclusion Engagement Reward • Engagement Champions • Engagement strategy to facilitate feedback and outcomes • Full employee feedback programme for 2020 • Fair and equitable reward and recognition policies and procedures • Equal pay reviews • Regular benchmarking and market analysis Talent management • New careers website launched • Talent identification and succession planning • Work placement scheme with local colleges Marshalls plc Annual Report and Accounts 2019 37 Strategic report Sustainability continued Sustainability pillars The Group’s sustainability pillars listed below are aligned with the key FTSE4Good criteria. They sit alongside the Group’s strategic objectives set out on pages 20 and 21 and ensure that the Group’s priorities and actions take full account of the longer-term sustainability priorities. Sustainability pillars Human rights Human rights and community Read more about our Human Rights Policy www.marshalls.co.uk/about-us/policies Labour Labour standards Read more about our Code of Conduct www.marshalls.co.uk/sustainability/document-library Environment Climate change Read more about our Climate Change Policy www.marshalls.co.uk/ about-us/policies Pollution and resources Read more about our Environmental Policy www.marshalls.co.uk/about-us/policies Water use Anti-corruption Anti-corruption Read more about our Anti-Bribery Code www.marshalls.co.uk/about-us/policies Responsible business Responsible business Read more about our Corporate Responsibility Policy www.marshalls.co.uk/about-us/policies Corporate governance Health and safety Read more about our Health and Safety Policy www.marshalls.co.uk/about-us/policies Sustainability • To support and uphold the UNGC 10 Principles and UN Guiding Principles on Business and Human Rights. • To develop and implement modern slavery remediation processes in supply chains. • To continue to engage with the International Labour Organization’s International Programme on the Elimination of Child Labour. • To engage actively in the Bright Future programme and commit to the SaferJobs initiative. • To deliver our Ethical Trading Initiative Strategic Plan 2018–2020. • To maintain our Real Living Wage accreditation. • To commit to the Science Based Targets initiative and to set targets to reduce greenhouse gas emissions in line with the Paris Agreement. • To reduce packaging by 2 per cent per annum, over a 3-year rolling cycle. • To reduce by 3 per cent the total waste to landfill per tonne of production. • To pilot waste reduction initiatives at site level to maximise recycling opportunities and reduce environmental impacts of waste. • To commit to water harvesting and recycling. • To prioritise areas of stress and abundance in effective water stewardship. • To roll out the installation of water automatic meter reading to improve data accuracy. • To continue to work with suppliers on our Code of Conduct. • To continue to uphold our Anti-Bribery Code. • To continue to support the UN’s Sustainable Development Goals. • To maintain Fair Tax accreditation. • To promote the Safecall whistleblowing process. • To have clear policies in place to improve diversity. • To ensure the governance framework promotes social and environmental sustainability. • To focus on people and culture through effective communications. • To meet the highest standards of health and safety. • To achieve an accident rate lower than the target previous 3-year average. • To embed good practice into the Group’s culture and to focus on comprehensive training programmes. 38 Marshalls plc Annual Report and Accounts 2019 The Marshalls Way Strategic report Stakeholder focus Highlights Shareholders How we engage Focus areas • ESG reporting mechanisms • ESG reporting framework • New investor relations website to communicate sustainability credentials • Investor relationship and engagement programme • Business and human rights communications to 350 employees directly involved in supply chain management. • Modern slavery risk mapping for all business operations and supply chain. • A number of pieces of direct intelligence to UK law enforcement as a result of modern slavery training. Customers How we engage Focus areas • Sustainability website • Ethical risk index • Carbon calculator • Social value • Permeable paving solutions • Placemaking Employees How we engage • Employee Voice Group • Employee feedback programme • Active internal communications Focus areas • Real Living Wage re-accreditation • Social Mobility Pledge partnership programme in schools • Talent management Suppliers How we engage Focus areas • Code of Conduct • Sustainable sourcing • International supply chain engagement • Working with suppliers on scope 3 emissions reporting • Modern slavery risk mapping and product ethical risk index Communities and environment How we engage Focus areas • Counter terror solutions • Sustainable • Carbon Disclosure Project • Science-based targets Development Goals • Science-based target driven carbon reductions • Use of weather data to inform drainage product innovation Government and regulatory bodies Focus areas How we engage • UN Global Compact • Awards, recognition and accreditation • Fair Tax Mark re-accreditation • Governance • Launch of the Employee Voice Group and Marshalls Women’s Talent Network. • Social Mobility Pledge and updated Code of Conduct. • Real Living Wage Employers Accreditation. • Carbon Disclosure Project score of B, which means our actions are associated with good environmental management. • A FTSE4Good score of 3.5 out of 5, where 3 is good practice and 5 is leading. • Working with partners and trade associations to develop initiatives to reduce environmental impact of our products. • Achieved BRE Responsible Sourcing Standard BES6001 and Ethical Labour Sourcing Standards BES6002. • Signatory to UNGC CEO Water Mandate. • Continued commitment to providing customers with permeable paving solutions. • Supplier Code of Conduct giving clear anti-corruption and anti-bribery information using new IT-based platform. • Launch of new Diversity and Inclusion Policy. • Promoted the UN Global Compact’s commitment to sustainable development. • Raised £168,000 for charitable and community causes in 2019. • Launch of Safecall external whistleblowing reporting line to support our whistleblowing procedures. • Increased employee and stakeholder engagement. • Continued to meet the standards of the UK Corporate Governance Code. • Health, safety and environmental stage 3 training programme for all senior managers. • Health, safety and environmental stage 1 training programme for 50 per cent of all non-supervisory employees. • Development and implementation of continuous improvement feedback procedures across all management teams in the business. The Marshalls Way Marshalls plc Annual Report and Accounts 2019 39 Strategic report Sustainability continued The environment Introduction • Marshalls is committed to achieving the highest standards of environmental performance, protecting the environment, preventing pollution from our operation, and identifying, understanding and minimising our significant environmental impacts. • Marshalls assesses the environmental aspects, impacts, risks and opportunities of its activities in setting appropriate environmental objectives and targets. • As part of the Group’s climate change strategy and commitment to science-based targets, Marshalls’ priorities include supporting the Task Force on Climate Related Financial Disclosures (“TCFD”) in line with the UK Government’s expectation that listed companies should make disclosures in line with the TCFD recommendations by 2022. • More information can be found on the Group’s website: https://marshalls.co.uk/sustainability. Science-based targets • Marshalls committed to setting a science-based target with the Science Based Targets initiative (“SBTi”) in September 2018. • We have been working with the Carbon Trust to analyse our business footprint in order to develop appropriate targets. • Our targets have been submitted to the SBTi and we are awaiting approval. Environmental stewardship • The Group’s Finance Director, Jack Clarke, is the Director responsible for the environmental performance of the Group. • The Group’s environmental policies are approved by the Board and reviewed at least annually. • Marshalls voluntarily reports publicly on its progress to initiatives such as FTSE4Good and the Carbon Disclosure Project (“CDP”). • Marshalls operates to an established environmental management system to ensure that all its operations meet or exceed the requirements of legislation and applicable best practice as an integral part of our business strategy. • Marshalls’ environmental policies can be found on the Group’s website: https://marshalls.co.uk/sustainability/ document-library. Carbon emissions – disclosure Marshalls recognises that sound energy management is vital to the future of our business and it must be fully integrated into our management and operational procedures so that it is an everyday part of what we all do. Marshalls commits to ensuring that appropriate energy management systems are developed and maintained, and that sufficient resources are made available to achieve the objectives of our Energy and Climate Change Policy in a sustainable manner and in line with continual improvement principles. Marshalls’ Energy and Climate Change Policy confirms the Group’s commitment to reducing the energy and carbon impact of its business. Our target is to reduce Group absolute CO2e emissions in line with the UK Government’s targets (37 per cent by 2020 and 80 per cent by 2050 from a 1990 baseline). 40 Marshalls plc Annual Report and Accounts 2019 Marshalls continues to report its global scope 1 and 2 GHG emissions in tonnes of carbon dioxide equivalent according to the UK Government’s Carbon Reduction Commitment (“CRC”) Energy Efficiency Scheme. In 2020, however, the introduction of the Streamlined Energy and Carbon Reporting (“SECR”) framework will require Marshalls to also report underlying global energy use as well as the split between UK and offshore energy use in other countries. Marshalls is certified to the Carbon Trust Standard and will seek re-certification in 2021. The Group’s approach to the Energy Savings Opportunity Scheme (“ESOS”) legislation was to define its energy management in compliance with the international standard for energy management, ISO 50001, gaining re-accreditation in 2019. The Group continues to voluntarily disclose data to the Carbon Disclosure Project (“CDP”), receiving a B rating for its 2019 submission. This disclosure includes the wider carbon management performance over time and also provides an insight for shareholders regarding the Group’s energy, carbon and climate change impact management programme. Marshalls has a mandatory duty to report its annual greenhouse gas (“GHG”) emissions under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. Marshalls uses The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (revised edition) and the June 2018 Department for Business, Energy and Industrial Strategy (“BEIS”) published CO2e conversion factors to measure its GHG emissions. The chart below (top) illustrates the Group’s UK absolute CO2e emissions in tonnes, including transport activities, and energy use in kilowatt hours, between 2015 and 2019. The chart below (bottom) illustrates the Group’s CO2e intensity emissions as a proportion of production output, including transport activities between 2015 and 2019. This section of the Annual Report has been audited by a qualified verifier on behalf of BSI. On the basis of the work undertaken this carbon statement is considered to be a fair reflection of the Group’s performance during 2019 and contains no misleading information. Scope 1 and 2 emissions (tonnes CO2e) Scope 1 Scope 2 e 2 O C s e n n o T 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 16,436 14,349 12,582 10,670 40,873 41,602 43,559 38,746 10,430 42,147 2015 2016 2017 2018 2019 Relative CO2e per tonne production scopes 1 and 2 9.20kg CO2e / t -7.3% kg CO2e per tonne 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 t u p t u o n o i t c u d o r p e n n o t r e p e 2 O C g k 10.94 10.57 10.24 9.92 9.21 2015 2016 2017 2018 2019 Strategic report Responsible business Introduction • Underpinned by The Marshalls Way of doing business, we do the right things, for the rights reasons, in the right way – by being transparent in our dealings, whether they be financial, social or environmental, we seek to inspire trust with all our stakeholders. • The Marshalls Code of Conduct sets out the standards that we expect from our employees and all our stakeholders. • Doing business responsibly provides the foundations for sustainable growth. Human rights • We support the Universal Declaration of Human Rights, the United Nations Global Compact and the Ethical Trading Initiative. • We undertake modern slavery risk mapping for all business operations and the development of remediation processes in supply chains is a key priority. • We partner with Bright Future to provide a pathway to employment for survivors of modern slavery. Labour rights • Supported by our Ethical Trading Initiative Strategic Plan (2018–2020), we aim to embed and integrate ethical trade into all business practices. • We are a Real Living Wage employer. • We have signed the Social Mobility Pledge to show commitment to a diverse and inclusive workforce. Community • £168,000 earned for charitable and community causes in 2019. • We are committed to our ongoing apprenticeship programme, with 50 currently active across the Group. Fair tax • We maintain our Fair Tax Mark accreditation. • We contributed tax of £93.6 million to the UK economy in 2019. Read about The Marshalls Way on page 11 Read about our culture and governance on pages 44 to 49 Health and safety The Group’s Finance Director, Jack Clarke, is the Director responsible for the health and safety performance of the Group. The Group’s Health and Safety Policy is approved by the Board and reviewed at least annually. Marshalls is committed to meeting the highest safety standards of health and safety to ensure the safety, health and wellbeing of its employees, visitors and contractors. The Board is fully committed to the continuous development and improvement of the business's safety processes and the importance of engaging and developing a competent workforce. The achievement of annual health and safety improvement targets is directly linked to the remuneration of the Executive Directors and senior management, as explained in the Remuneration Report on pages 55 to 86. The headline target for 2019 was to maintain days lost resulting from workplace incidents at a figure no higher than the 2015 actual result (excluding the impact of acquisitions within a period of 3 years from purchase). The table below shows the KPIs used by the Group to monitor performance, and progress against those KPIs over the last 5 years. Accident frequency and severity rates (per 1 million hours worked) 2014–2019 Marshalls UK 2014 2015 2016 2017 2018 2019 All accidents 59.1 48.8 49.2 43.4 50.5 41.4 All lost time accidents All RIDDORs All days lost 7.2 3.3 5.1 1.6 5.6 2.3 4.1 1.4 3.2 2.9 2.9 0.9 80.7 45.8 38.0 24.6 38.1 32.8 Average UK headcount 2,132 2,237 2,253 2,307 2,302 2,348 Note: The data for CPM and Edenhall is not included for 2018 and 2019 as they are still within the integration period of 3 years from purchase. The primary target for 2020 will be to achieve an accident rate lower than the previous 3-year average (average of 2017, 2018 and 2019, excluding acquisitions). In 2019, the 5-year Health and Safety Strategy which was agreed in 2017 was reviewed to align with the business strategy with set objectives. This strategy clearly demonstrates the commitment of the business to take the safety and wellbeing of its employees to the highest level. In 2019, the business successfully gained ISO 45001 across the UK businesses, being the first in the building products industry to achieve this health and safety standard. Other achievements are listed below: • a programme whereby all senior managers within the business will complete the Marshalls Health, Safety and Environmental stage 3 training programme; • 50 per cent of all non-supervisory employees will attend and successfully pass the Marshalls Health, Safety and Environmental stage 1 training programme; • the integration of PD Edenhall into the Marshalls Health and Safety Management System; • the introduction and implementation of management observations to all management teams across the business; • fully implemented a mental health programme across the business, which included training for management teams and trained mental health first aiders being deployed across the business backed up by an external support network; and • the development and implementation of a digital Marshalls SHEQ concerns app (safety, health, environmental quality). 2019 also saw Marshalls win a coveted health and safety award from the industry body, the Minerals Product Association Awards, for health and safety initiatives. The actual results achieved against the 2016 target were: In 2020, the main health and safety initiatives will include: • 13.7 per cent reduction in days lost resulting from all accidents frequency rate; • completion of the Marshalls SHE stage 1 training for the remaining 50 per cent of non-supervisory employees; • 15.9 per cent reduction in all incident frequency rate; • 48.2 per cent reduction in lost time incidents (“LTIs”) frequency rate; and • 60.9 per cent reduction in incidents reportable to the HSE under the Reporting of Injuries, Diseases and Dangerous Occurrence Regulations (“RIDDOR”). • the development and implementation of a full SHEQ digital integrated management system; and • the introduction of the Marshalls SHE observation initiative, which will promote employee engagement at all levels and be part of the wider behavioural safety programme within Marshalls. Marshalls plc Annual Report and Accounts 2019 41 Strategic report Board of Directors Vanda Murray OBE Chair Martyn Coffey Chief Executive Jack Clarke Chief Financial Officer N R I Term of office Appointed as Non-Executive Director and Chair in May 2018. Elected in May 2019. Length of service 1 year 8 months Skills and experience Fellow of the Chartered Institute of Marketing with extensive experience of corporate leadership in both executive and non-executive roles with a wide range of UK and international businesses. Previous executive roles include Chief Executive of Blick plc from 2001 until its successful sale to Stanley Works Inc. in 2004 and Managing Director of Ultraframe plc between 2004 and 2006. She is a Non-Executive Director of Manchester Airports Group and Pro-Chancellor and Chair of the Board of Governors of Manchester Metropolitan University. External appointments Senior Independent Non-Executive Director and Chair of the Remuneration Committee of Bunzl plc. Non-Executive Director and Chair of the Remuneration Committee of Redrow plc. Term of office Joined the Company and appointed to the Board in September 2013. Last re-elected in May 2019. Term of office Joined the Company and appointed to the Board on 1 October 2014. Last re-elected in May 2019. Length of service 6 years 4 months Length of service 5 years 3 months Skills and experience Wide executive leadership experience: previously Divisional Chief Executive Officer of BDR Thermea Group BV, a leading manufacturer and distributor of domestic and industrial heating and hot water systems operating in 70 countries and with a turnover of €1.8 billion, formed in 2009 from the merger of Baxi and De Dietrich Remeha. Prior to the merger, he was Chief Executive of the private equity-owned Baxi Group. Also held the position of Managing Director of Pirelli Cables where he spent 14 years in the UK, Australia and North America. Holds a BSc in Mathematics. External appointments Director of the Mineral Products Association. Non-Executive Director and Chair of the Remuneration Committee of Eurocell plc. Skills and experience Chartered Accountant. Joined Marshalls from AMEC Foster Wheeler plc, where he was Executive Vice President and Director of Change Management. He has extensive experience in managing international operations, having previously served as CFO of AMEC’s £850 million power and process division and its US$1.5 billion environment and infrastructure division. He has extensive M&A experience. Previous experience includes senior finance and operational management roles with Halliburton and Mobil Oil. Holds an MSc (Civil Engineering) and BA (Economics and Management). External appointments None. Committee key: A N R Audit Committee Nomination Committee Remuneration Committee Chair of the Committee I Independent Director Gender composition Length of service Female Male 1 - 2 years 3 - 4 years 5+ years 42 Marshalls plc Annual Report and Accounts 2019 Corporate governance Graham Prothero Non-Executive Director Tim Pile Non-Executive Director Angela Bromfield Non-Executive Director Janet Ashdown Senior Independent Non-Executive Director, designated Non-Executive Director for workforce engagement NA R I NA R I NA R I NA R I Term of office Appointed in March 2015. Last re-elected in May 2019. Term of office Appointed in May 2017. Last re-elected in May 2019. Term of office Appointed in October 2010. Last re-elected in May 2019. Length of service 4 years 9 months Length of service 2 years 5 months Length of service 9 years 3 months Skills and experience Non-executive experience includes serving on the Boards of SIG plc (until May 2019) and Coventry Building Society (until 2017). Previous executive experience included 30 years with BP plc, most recently as Director, BP Oil UK Limited, and Head of UK Retail and Commercial Fuels. Between 2010 and 2012 she was CEO of Harvest Energy. External appointments Non-Executive Director and Chair of the Remuneration Committee of Victrex plc. Non-Executive Director of the Nuclear Decommissioning Authority. Non-Executive Director and Chair of the Corporate Sustainability Committee of RHI Magnesita N.V (since June 2019). Skills and experience Graham Prothero is a Chartered Accountant and is Chief Operating Officer of Vistry Group PLC (appointed January 2020). He was previously Chief Executive of Galliford Try plc. He is also on the Board of the Jigsaw Trust, a charitable trust. Graham has extensive senior management experience in the sector, including with leading property developer Development Securities PLC (now U+I), Taylor Woodrow, the listed contractor / developer, and Blue Circle Industries plc. Graham also spent 7 years as a partner in the Real Estate, Hospitality and Construction Group of Ernst & Young LLP. External appointments Chief Operating Officer of Vistry Group PLC. Skills and experience Formerly Chairman of Cogent Elliott, the leading independent marketing agency, and was Chief Executive Officer of Sainsbury’s Bank. Previous Non-Executive Director roles include Cancer Research UK. External appointments Senior Independent Director and Chair of Finance and Performance of the Royal Orthopaedic Hospital. Chair of Greater Birmingham and Solihull LEP. Non-Executive Director of the Greater Birmingham Chambers of Commerce. Observer, CWG 22 Board (Commonwealth Games). Term of office Appointed in October 2019. Length of service 3 months Skills and experience Angela Bromfield has extensive commercial strategy, marketing and communications executive experience. She was Strategic Marketing and Communications Director at Morgan Sindall plc until 2013 and prior to that held senior roles at the Tarmac Group, Premier Farnell plc and ICI plc. External appointments Non-Executive Director and Chair of the Remuneration Committee of Churchill China PLC. Non-Executive Director and Chair of the Remuneration Committee of Zotefoams PLC. Non-Executive Director of Harworth Group PLC and a member of the Audit Committee. Cathy Baxandall Group Company Secretary The Board comprises Directors with a broad range of skill and experience comprising leadership, construction, finance, M&A, product development, technology and retail. In decision-making, the Non-Executive Directors have contributed relevant skills and knowledge particularly in strategic thinking and planning, financial matters, innovation, health and safety, engagement with stakeholders and culture change. Marshalls plc Annual Report and Accounts 2019 43 Corporate governance Corporate Governance Statement Engaging with our stakeholders to create value aligned with our culture Dear shareholder I am pleased to introduce our Corporate Governance Statement, which explains how Marshalls’ governance framework supports the principles of integrity, strong ethical values and professionalism integral to our business. The Board recognises that we are accountable to shareholders for good corporate governance, and this report, together with the Reports of the Audit, Nomination and Remuneration Committees on pages 50 to 86, seeks to demonstrate our commitment to high standards of governance that are recognised and understood by all. During 2019: • we have increased employee and stakeholder engagement in decision making through more regular and transparent consultation, interaction and reporting; • our customer experience initiative has put customers at the core of our business with measurable improvements; and • we have continued to invest in our people and our products, with a strong commitment to ethical and sustainable business through The Marshalls Way and our Code of Conduct. In 2020 we will: • invest responsibly to serve the interests of our stakeholders in the widest sense; • further improve the sustainability of our products and services by reducing our net contribution to emissions; and • continue our focus on people and culture through better communications, increased work on safety (particularly in newly acquired businesses) and strong succession and development programmes with a clear diversity agenda. Leadership, governance and purpose Good governance depends on good and effective leadership and a healthy corporate culture, supported by robust systems and processes and a good understanding of risk and risk appetite. Our Strategic Report on pages 24 to 29 explains how we seek to fulfil our purpose, how this is supported by our policies and procedures and our approach to key risks. The reports of our Board Committees give further detail on how our policies and processes have been applied and developed during the year in particular areas and how this relates to our values and strategy. We have focused on engagement and operational improvement, aligning and developing our recruitment, reward and incentive structures, ensuring progress can be measured and monitored appropriately and promoting a business that is resilient, responsible and alive to opportunity. Board evaluation An evaluation of the performance of the Board and its Committees was conducted in 2019 by external evaluator Independent Audit, using a combination of its “Thinking Board” online questionnaire and tailored additional support to ensure that issues identified in the Board’s 2018 evaluation were Compliance statement This Corporate Governance Statement has been prepared in accordance with the principles of the UK Corporate Governance Code dated July 2018 (the “UK Code”) which applies to the financial year 2019. The standards set by the UK Code have been met throughout 2019. Our Governance sections over the following pages explain how the Group has applied the principles throughout the year and up to the date of this Annual Report. 1 2 Board leadership and company purpose • Led by strong and experienced Chair Composition, succession and evaluation • Majority of independent Directors • Focused on strategy • Board with wide experience and • Commitment to sustainability and relevant skills ethical principles • Annual effectiveness audit Read more on page 46 Read more on pages 46 and 47 44 Marshalls plc Annual Report and Accounts 2019 Corporate governance Board evaluation – 2019 process Independent Audit was appointed in July 2019 to conduct an external review of Board and Committee effectiveness. Independent Audit is an independent third party professional organisation with no other connection to the Company. The review was conducted using its online assessment service, Thinking Board. • Questionnaire was adapted to reflect Board priorities and areas that had previously been identified for focus • Questionnaire was circulated to all Board members in September 2019 • Responses were received and analysed in October 2019 • Independent Audit attended the October 2019 Board meeting to present the findings and discuss conclusions • Board reviewed progress against enhancement actions from 2018 evaluation and agreed actions and priorities for 2020 (December 2019 / January 2020) appropriately followed up during the year. Page 48 of this report gives more detail on how the 2018 evaluation outcomes were addressed in 2019, the extent to which the objectives set were achieved, the objectives identified by the 2019 evaluation and how the Board expects to deliver these. Diversity Marshalls’ policy is that no employee or job applicant will be treated less favourably on the grounds of race, colour, nationality, ethnic or national origin, gender (including gender reassignment), pregnancy, marital or civil partner status, sexual orientation, religious belief, age or disability, or on any other grounds which cannot be justified on job related terms. We do not discriminate, and we are committed to equality within our business and in our dealings with other organisations. These policy principles are embodied in our Code of Conduct and are supported by policies and procedures designed to attract and retain talent from the widest range of applicants. Briefs to external recruitment agencies and search consultants are aimed at improving diversity ratios and balance both at Board and senior management level and more widely within the business, while also reflecting the changing strategic needs of the Group. More recently, our Employee Voice engagement initiative is intended to ensure employees are able to contribute to the development of opportunities and the embedding of our positive values across the business. As a Board, we recognise that this is a process that will take time to become embedded. Having set the direction, the Board is fully engaged with the initiatives to deliver an ambitious “people” programme as part of our 5 year Strategy. While there is much work to do to achieve true gender and diversity balance, there is a clear commitment to this programme, with a strong management team performing to measurable objectives that we expect to develop further in 2020. The Remuneration Report contains details of our gender ratios and gender pay gap data (pages 82 and 83), and the Nomination Committee Report (pages 50 and 51) explains in more detail how we implement our policy in relation to recruitment and succession planning and how we aim to achieve improvements. Sustainability, ethics and climate change Marshalls has shown leadership in its well-documented and clear commitment to high standards of ethical and sustainable business over many years. It was the first company in its sector to publish the carbon footprint of its UK-manufactured products, and the first UK manufacturer to become a signatory to the UN Global Compact. It published its first Modern Slavery Statement in 2017 and works with Government and reputable NGOs to ensure that the principles in this statement are applied throughout its supply chain and its customer base. New products are developed with a view to reducing carbon footprint through lower non-sustainable energy use in production processes, increasing the proportion of recycled materials, and responding to environmental needs: for example, better water management, or improving the protection of urban populations. The Board regards environmental sustainability as a key element of its purpose as well as being a core value, and this remains at the forefront of its strategic plans. Further information is set out in the Sustainability Report on pages 36 to 41. Responsibility In the opinion of the Directors these Annual Financial Statements present a fair, balanced and understandable assessment of the Group’s position and prospects and provide the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. The respective responsibilities of the Directors and the Auditor in connection with the Financial Statements are explained in the Statement of Directors’ Responsibilities and the Auditor’s Report on pages 89 and 90 and 55 to 88. Vanda Murray OBE Chair 12 March 2020 3 Division of responsibilities • Clear and transparent reporting procedures 4 5 Audit risk and internal control • Oversight of internal audits and Remuneration • Policy consistent with UK Code risk reviews • Regular dialogue between Board • KPIs, monthly trackers and regular and management reviews to monitor progress • KPI trackers and reporting procedures • Measure delivery outcomes to ensure benefits are realised Read more on page 47 Read more on pages 47 and 48 • Alignment of outcomes with interests of shareholders and stakeholders • Non-financial ESG measures embedded in incentive schemes • Committee discretion to override outcomes where circumstances required Read more on page 48 Marshalls plc Annual Report and Accounts 2019 45 Corporate governance Corporate Governance Statement continued Role of the Board The Board currently comprises an Independent Non-Executive Chair, 4 Non-Executive Directors and 2 Executive Directors. Their biographical details are on pages 42 and 43. There is a written Schedule of Matters Reserved for the Board, reviewed annually, which is available on the website. The reserved matters include: Approving major transactions Overall strategy, business plans and budgets Culture, governance and remuneration matters Any changes to capital, constitution or corporate structure Board appointments, succession planning and Terms of Reference Approval of accounts, financial reporting, internal controls and key policies 17+ The Board delegates specific responsibilities to the Audit, Remuneration and Nomination Committees. The Audit Committee Report on pages 52 to 54 provides details of the Board’s application of Code principles in relation to financial reporting, audit, risk management and internal controls. The Nomination Committee Report on pages 50 and 51 reports how Board and senior management composition, succession and development are managed to reflect Code principles. The Remuneration Report on pages 55 to 88 explains how the Group’s Remuneration Policy has been implemented, and shows Directors’ remuneration for 2019. The Remuneration Report also provides gender pay and balance information. Ad hoc Board Committees are established for particular purposes: for example, during 2019 Board Committees were established to approve preliminary and half-year results. Day-to-day management and the implementation of strategies agreed by the Board are delegated to the Executive Directors. The Group’s reporting structure below Board level is designed so that decisions are made by the most appropriate people in a timely manner. Management teams report to members of the Executive Committee (comprised of senior managers, including the 2 Executive Directors). The Executive Directors and other Executive Committee members give regular briefings to the Board in relation to business issues and developments. Clear and measurable KPIs are in place to enable the Board to monitor progress. These policies and procedures enable the Board to make informed decisions on key issues including strategy and risk management. 46 Marshalls plc Annual Report and Accounts 2019 Leadership and purpose The Board has reviewed its purpose against the UK Code principles during 2019. Delivering long-term sustainable success is a key focus of the strategic plan, and in setting strategy the Board has ensured that the needs of shareholders, stakeholders and wider society have all been fully reflected in the priority areas. The Company continues to make progress in defining the desired culture and identifying the action plans designed to promote and embed this. The Board has been involved with the work on culture as well as re-evaluating purpose and values, and has engaged with the Group HR Director in relation to a number of initiatives introduced during 2019 designed to promote the culture and values of the business as well as ensuring they are aligned with strategy. There are clear and measurable KPIs to monitor objectives and the Board receives regular updates from Executive Directors in relation to these. The Risk Register is reviewed at least twice yearly. The Board receives periodic reports from the internal auditor on a range of matters identified each year that are approved by the Board. The Board engagement with shareholders and employees has been reinforced in 2019 through (i) a regular series of scheduled meetings with major shareholders, and (ii) the introduction of Employee Voice forums attended by employees from all levels of the business and the designated NED. The Board has been involved in both setting objectives and measuring response through Board reporting and individual Executive presentations. The Board has received detailed briefings on recruitment and reward strategy, personal development and succession planning, and alignment of these with the strategic objectives of the Group, also linked closely to culture and fairness principles. A structured and regular reporting format has been introduced in relation to HR strategy which enables the Board to monitor workforce policies and practices throughout the year. Conflicts and concerns The Board maintains a conflicts register that identifies situations in which conflicts may arise, and which is reviewed regularly. In situations where an actual conflict is identified, the affected Director may be excluded from participating in relevant Board meetings or voting on decisions. There is no shareholder with a holding of sufficient significance to exercise undue influence over the Board or compromise independent judgement. Concerns about the running of the Company or proposed action would be recorded in the Board minutes. On resignation, if a Non-Executive Director did have any such concerns, the Chair would invite the Non-Executive Director to provide a written statement for circulation to the Board. The Group’s Serious Concerns Policy sets out the principles under which employees can raise concerns in confidence. This is supported by an independent whistleblowing telephone and online reporting system operated by external specialists, through which concerns may be reported anonymously if preferred. The Board receives reports on matters raised under this policy and the outcome of investigations. Any concerns raised are investigated appropriately by individuals whose judgement is independent and who are not directly involved with the matters raised. Board composition, succession and evaluation There is a transparent and formal process for appointments led by the Nomination Committee supported by external specialist recruiters. Board succession planning is reviewed at least annually by the Nomination Committee, while succession planning at Executive level is reviewed by the Board. The Board also reviews succession planning for senior management and is able to consider and challenge as appropriate the Group’s recruitment policies and how they promote diversity. The policies and process are commented on further in the Nomination Committee Report. Corporate governance17 + 16 + 17 + 17 + 16 Roles and division of responsibilities There is a clear division between Executive leadership and leadership of the Board expressed in the written Terms of Reference of the Chair and Chief Executive. The Chair leads the Board and is responsible for its overall effectiveness. She was independent on appointment in 2018 and brings her objective judgement to the role. The independent review of Board effectiveness, among other issues, focused on the openness of Board debates, the relevance and clarity of Board information and constructive Board relations. No issues were identified in this area. The Chief Executive has responsibility for all operational matters which include the implementation of strategy and policies approved by the Board. The Senior Independent Director provides a sounding board for the Chair and also acts as an intermediary for other Directors and shareholders. The Board has determined each of the Non-Executive Directors to be independent in accordance with Section 2, Provision 10 of the UK Code. Tim Pile’s term of office was extended for a further year to enable the recruitment of his replacement, which has not affected his independence. At least once a year the Chair meets the Non-Executive Directors without the Executive Directors being present. The Senior Independent Director meets the other Non-Executive Directors annually without the Chair to appraise the Chair’s performance. On appointment, the expected time commitment for Board members is made clear. The Chair and other Non-Executive Directors disclosed their other commitments prior to appointment and agreed to allocate sufficient time to the Company to discharge their duties effectively and ensure that these other commitments do not affect their contribution. The current commitments of the Chair and other Directors are shown on pages 42 and 43. We believe our Board has a good combination of skills, experience and knowledge. The Board reviews each year its own composition and assesses whether the current skills, experience and knowledge are aligned with the Group’s strategy and expected future leadership needs. The Board acknowledges the benefit of refreshment and has a clear succession plan designed to ensure that Board members’ terms expire or they retire over clearly defined periods, normally not exceeding 9 years. There is an annual effectiveness review which was conducted in 2019 by Independent Audit (as referenced in the Chair’s introduction). All Directors stand for re-election at every Annual General Meeting, and all current Directors except for Tim Pile will stand for re-election or election at the 2020 Annual General Meeting. The Directors’ biographical details on pages 42 and 43 show their term of appointment and length of service on the Board. Directors have access to the advice and services of the Company Secretary who is responsible for ensuring that Board procedures are complied with and, through the Chair, advises the Board on governance matters. The appointment or removal of the Company Secretary are matters for the whole Board. Audit, risk and internal control The Board has established written policies and procedures for external and internal audit functions designed to ensure that they remain independent and effective. The Board scrutinises financial and narrative statements in accordance with best practice supported by the advice of the auditor. The Board has a well-established procedure to identify, monitor and manage risk, and has carried out reviews of the Group’s risk management and internal control systems and the effectiveness of all material controls, including financial, operational and compliance controls. The Board has reviewed the overall effectiveness of risk management and internal controls, covering all material controls. The Strategic Report comments in detail (pages 20 and 21) on the principal risks facing the Group, in particular those that would threaten our business model, future performance, solvency or liquidity and the controls in place to mitigate them. The Board conducts a rigorous assessment of these risks, particularly operational risks that might affect the Group’s viability in the short term and emerging risks that might impact the longer term. The Board’s risk review covers emerging risks and incorporates some stress testing, by envisaging scenarios that might arise during the financial year and / or the planning cycle, and considering, with financial impact modelling where appropriate, the likely effect on the business and its prospects. The Board reviewed the Group’s risk management system and the system of internal control at risk review meetings in May and November 2019; the Risk Register was reviewed by the Audit Committee in December 2019 and the Board meetings and attendance* Key = Present Absent Vanda Murray OBE (Non-Executive Chair) Janet Ashdown (Non-Executive) Jack Clarke Martyn Coffey Graham Prothero (Non-Executive) Tim Pile (Non-Executive) Angela Bromfield (Non-Executive)+ Board Audit Committee Remuneration Committee Nomination Committee Briefing topics 2019 – – – – – – – Market trends Sales and service delivery Acquisition integration updates Health, safety and environment Emerging businesses Operations HR strategy Climate change and science- based targets * The Chief Executive and the Finance Director are not members of the Audit Committee but normally attend Audit Committee meetings by invitation. The Non-Executive Directors also meet the auditor in private. The Chief Executive attends Remuneration Committee meetings by invitation. The Company Secretary attends Board and Committee meetings as Secretary. Board members also participate in site visits, training sessions and events such as the Group’s annual management conference. + Angela Bromfield attended all scheduled meetings following her appointment on 1 October 2019. Marshalls plc Annual Report and Accounts 2019 47 Corporate governance Corporate Governance Statement continued How Board priorities were addressed during the year Culture, values and engagement • The Marshalls Way statement of values was simplified and relaunched. The Code of Conduct, defining the Marshalls Way, was updated for approval in December 2019 • Board leadership and support for initiatives designed to achieve cultural objectives, supported by measurable targets and a new approach to internal communications Focus areas and actions to enhance effectiveness in 2020 (from 2019 review) Replies to the 2019 evaluation conducted by external evaluator Independent Audit concluded that the Board was considered to be working very effectively and there was openness, mutual respect and good leadership supported by good and timely information. Areas identified for further development were: • Introduction of structured 2-way regular and consistent reporting to the Board on internal culture, stakeholder feedback and survey outcomes Culture • The Board recognises the need to continue to develop and deepen the cultural message throughout the business • Employee Voice forum attended by designated Non-Executive Director for workforce engagement • The Board will establish KPIs to measure progress towards the Board’s desired culture • Annual strategy day review to set strategic priorities and ensure strategy and values are aligned • Regular key shareholder visits for Chair and SID programmed into timetable Succession planning • Adoption of Nomination Policy (March 2019) setting out vision for the recruitment of a diverse and skilled Board able to promote the Company’s success and deliver strategy in a sustainable way • Recruitment of Angela Bromfield as NED to replace Tim Pile • 5-year HR plan now in place with clear aim to align recruitment and people development with strategy, values and culture at senior manager level and throughout the business, which is well understood by the Board • Review of leadership immediately below the Board as part of long-term succession planning and following integration of acquired businesses Strategy and risk • New 5-year plan with strategic milestones identified, investor communications have incorporated and explained this • CEO reports regularly on progress against strategic plan • Board discussions focus on forward-looking strategic matters • NED risk review completed and integrated into Risk Register; Risk Register updated to reflect agreed strategic priorities • External Board training on 2018 UK Code, MAR and other regulatory matters included in meeting programme Audit, risk and internal control continued Non-Executive Directors carried out a risk review in October 2019 the outcome of which was incorporated into the Risk Register. The Audit Committee Report on pages 52 to 54 describes the internal control system, how the Board assures itself of the independence and effectiveness of internal and external audit functions and how they are managed and monitored. The Board acknowledges that such systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. • There will be increased opportunities for Board members to spend time in the business, with structured programme to support Stakeholder engagement • Recognising that there is good shareholder engagement, the Board and senior management will extend programme of presentations, reports and meetings to raise the profile of the views of customers, suppliers and the wider community in Board discussions and decision-making, giving especial weight to improving visibility and understanding of customers and customer experience • Continue to develop engagement with employees through EVG and other established channels Succession planning • Continued focus on succession plans at Executive and senior management level and within the organisation as a whole, designed to improve recruitment and development of the talent of the future to deliver sustainable success and to meet the Company’s diversity and reward objectives • Set measurable KPIs / milestones in succession planning and recruitment Remuneration The current Remuneration Policy was last approved by shareholders in 2017, and a revised Policy will be submitted for approval at the 2020 Annual General Meeting. The Directors’ Remuneration Report contains the 2020 Policy, which has been prepared taking into account the UK Code and the views expressed during a detailed consultation process with the Company’s top 20 shareholders and with external voting agencies. The Remuneration Report also gives details of how the current Policy has been applied, how the Remuneration Committee has carried out its responsibilities during the year and the remuneration practices and outcomes. Vanda Murray OBE Chair 12 March 2020 48 Marshalls plc Annual Report and Accounts 2019 Corporate governance Stakeholders and stakeholder engagement Factoring our stakeholders into Board procedures The concerns of key stakeholder groups are factored into Board discussions and decision making. In performing their duty under S172(1) of the Companies Act 2006, the Board ensures that the impact on our stakeholders is carefully considered by management when formulating all proposals requiring Board approval. Details of how the Group engages with key stakeholder groups is set out on pages 18 and 19. The engagement channels used by the Board in addressing the key concerns of each stakeholder group are set out in the table below. The Directors’ statement in relation to their statutory duty in accordance with S172 (1) of the Companies Act 2006 is on page 19. Stakeholders Key concerns Engagement channels Outcomes Shareholders • Company’s ongoing • Site-based Capital Markets Day in June 2019 • Formal feedback process performance attended by Board members • A full series of meetings • The longer-term • Chair and Senior Independent Director meet is planned for 2020 strategy major shareholders and investors at least annually • Corporate governance • Regular meetings between major shareholders and culture and Executive Directors • Environmental, social and governance (“ESG”) disclosure and performance • Board undertakes site visits to gain understanding of operational business issues • Additional meetings and written consultations in reaction to particular issues (e.g. new policies) • Consultation on policies reflected in final adopted versions • Health and safety • Janet Ashdown is the designated Non-Executive • Janet Ashdown attends Employees* • Employee experience and engagement • Diversity and inclusion • Leadership and people development • Developing culture Director for workforce engagement • Board regular reports include 6-monthly updates on reward and recruitment issues • Board receives monthly health and safety reports and performance tracker • Board attends management conference • Board members participate in projects and mentoring Customers • Customer engagement • Regular reports on the Customer Centricity and satisfaction Project • Quality and customer • Meetings with sales teams and participating service in customer visits • Customer experience • Customer experience scores • New product development and innovation Suppliers • Continuity of supply • Feedback reports on supply chain compliance • Regular supply chain and business continuity audits undertaken • Reports received on ethical sourcing and ETI Base Code • Sustainability management • Quality • Ethical sourcing • Building strong relationships • Financial credibility Community • Health and safety • Feedback reports on environmental needs • Sustainability • Environmental protection • Contribution to community life • Responsible business and priorities • Regular updates from management on sustainability • Sustainable NPD Regulatory bodies • Strong governance • Maintaining Fair Tax Mark accreditation • Transparency in • Maintaining status as a constituent of FTSE4Good reporting • Regulatory compliance audits • Membership of the Living Wage Partnership • The Board receives feedback from external audits and on communication with regulatory bodies • LINGC, modern slavery and victim support organisations *For the purpose of this report, employees includes permanent and temporary staff and agency workers, wherever they are located. Employee Voice Group (“EVG”) formed in 2019 • Nominated Director ensures EVG concerns are fed into Board discussions • 2020 Board priority to establish measurable KPIs in culture • Board approved updated Diversity and Inclusion Policy in 2019 • Board was instrumental in developing Customer Centricity Project • Customer experience has been a key driver of the Group’s digital strategy initiatives • Approval of new Code of Conduct in 2019 • Review of governance process in relation to supplier tendering to be undertaken in 2020 • Increased focus on strategic partnerships and compliance processes • Focus on landscape protection products and sustainable raw material sourcing • The Board aims to reflect the interests of communities • Investment in drainage products to mitigate the impact of local flooding • Board approval of the Group’s submission in relation to the Science Based Targets Initiative • The Board is fully engaged with the Group’s participation in the Government’s working party on modern slavery and the business community’s response to developing legislation Marshalls plc Annual Report and Accounts 2019 49 Corporate governance Nomination Committee Report Our recruitment and succession plans incorporate the principles of diversity, gender equality, objectivity and fairness Dear shareholder I am pleased to report to shareholders on the main activities of the Committee and how it has performed its duties during 2019. I chair Nomination Committee meetings, but would not do so where the Committee was dealing with my own reappointment or replacement as Chair. Members and attendance Vanda Murray OBE – Chair Meetings Janet Ashdown – SID Graham Prothero Tim Pile Angela Bromfield Angela Bromfield joined the Nomination Committee on appointment in October 2019 but did not attend any meetings in 2019 as they both predated her appointment and related to it. 2019 highlights • Adopted Nominations Policy setting out our principles in relation 2020 priorities • Supporting strategy and initiatives to promote diversity to Board and Executive succession planning. and cultural values, applying policy principles. • Recruitment of Angela Bromfield as a Non-Executive Director • Orderly management of Board succession plan. to succeed Tim Pile. • Reviewed succession plan and identified future needs, both for Board and senior management positions. • Focus on "pipeline" below Board level. Link to TOR and Nominations Policy www.marshalls.co.uk/about-us/corporate-governance Marshalls Nominations Policy The table below summarises the key features of our Nominations Policy and how it is applied. Policy principle Supporting measures How implemented in 2019 • Recruitment and succession reflect the strategic needs of the business • Recruitment contributes to desired values and culture • Nominations Committee carries out an annual skills review aligned with 3–5 year strategic plans • New Directors agree commitment to strategic direction and Group policies • New appointment designated to add skills and experience appropriate for 2020 Plan; Angela Bromfield identified and recruited using Inzito Partners (independent recruiter with no other connection to the Company) to replace Tim Pile • Recruitment to achieve diversity • Policy sets direction and gives leadership • Policy adopted February 2019 in widest sense • Brief for search consultants for new • Brief to lnzito incorporated diversity as Board appointments a key objective • Diversity initiatives / succession plans at Executive level reviewed and targets monitored • Introduction of HR reporting template including corporate culture and employee diversity KPls • Review of succession planning below Board level • There should be a clear formal Board succession plan based on objective criteria • Annual review of terms of office • Review completed January 2019 • Annual individual evaluation • Use of independent external search • • Individual evaluations February / March 2019 lnzito used for 2019 NED recruitment process advisers • Directors must devote sufficient time to perform effectively and familiarise themselves with the business • Limit on other Board appointments • Included in letters of appointment • Detailed induction, site visits, training • Board training and visit programme as part and employee engagement programme of Angela Bromfield induction • All Directors participate in site visits, annual management conference and annual strategy day • Compliance / good governance • Conflicts policy and register reviewed • Reviews in January and June 2019 no less than 6 monthly • All Directors stood for election / re-election • Annual re-election of Directors in May 2019 50 Marshalls plc Annual Report and Accounts 2019 Corporate governance The performance of the Committee was evaluated as part of the Board evaluation process in 2019 described on pages 44 and 45. The Committee Terms of Reference were reviewed and updated to take account of the UK Corporate Governance Code published in July 2018 (the “UK Code”), which applies from 1 January 2019. During the year the Nomination Committee held 2 scheduled meetings, and there were additional meetings and discussions in connection with succession planning and recruitment held by telephone. Evaluation and reappointment of Directors Each Non-Executive Director was, on joining, provided with a detailed description of his or her role and responsibilities, and received a detailed business induction. All Directors have an annual one-to-one development review meeting with the Chair to appraise performance, set personal objectives and discuss any development and training needs to enable them to continue to add value to the Board. Before any Director is proposed for re-election, or has their appointment renewed, the Committee considers the outcome of the reviews to ensure that the Director continues to be effective and demonstrates commitment to the role. The Chair provides an explanation to shareholders as to why the Director should be re-elected and confirming that a formal performance evaluation has taken place when the resolution to re-elect is circulated. It is the Company’s policy that Executive Directors can only hold 1 external listed company non-executive directorship. Voluntary service on the governing board of a social, trade or charitable organisation is also permitted. Details of the external appointments held by the Executive Directors are included in the biographical notes on pages 42 and 43. Governance The Committee has acted throughout 2019 in accordance with the principles of the UK Code. In addition, the Committee has assessed its effectiveness during 2019 against the UK Code as part of the annual Board evaluation process. The evaluation concluded that the Committee had been successful in securing a good mix of skills and experience in the composition of the current Board. The framework for the refreshment of skills, experience and diversity to support the needs of the business and its stakeholders in the future is transparent and well understood. Vanda Murray OBE Chair of the Nomination Committee 12 March 2020 We have a well-balanced Board with the skills and experience to deliver our new 5 year Strategy and a clear vision for succession. Vanda Murray OBE Chair of the Nomination Committee Marshalls plc Annual Report and Accounts 2019 51 Corporate governance Audit Committee Report Effective system of risk management and control Dear shareholder In this report I set out the Audit Committee’s objectives and responsibilities and also explain the activities undertaken during 2019 and the priorities for 2020. This report, which is part of the Directors’ Report, explains how the Audit Committee has discharged its responsibilities during 2019. During 2019: • we reviewed the significant financial judgements during the year and the preparation of the 2019 Financial Statements. Areas of focus in 2019 were inventory provisioning and revisions to provisional fair value adjustments on the Edenhall acquisition in 2018; • provided assurance to the Board in respect of the adoption of IFRS 16 “Leases”. This followed feedback from the external auditor in relation to the Group’s adoption of IFRS 16 “Leases”, including the transition and year-end disclosures in the Financial Statements; • provided assurance to the Board on whether the 2019 Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and reviewed the forecasts and sensitivity analyses underlying the Group’s going concern assessment and Viability Statement; • we carried out a detailed review of the outcomes of cyber security audits undertaken by KPMG LLP in order to improve cyber security controls and to ensure that IT controls remain appropriate and robust; and • we commissioned internal audit reviews by KPMG LLP in relation to procurement, health and safety processes, logistics and fleet management, the Code of Conduct, supplier rebates and expenses. In total, 8 individual internal audit reviews were undertaken. In 2020 we will: • continue to oversee the significant financial judgements made by management; • review the delivery of the external and internal audit, to monitor progress and to monitor changes in external regulatory environment and best practice; • assess and improve cyber security controls and ensure that IT controls remain appropriate and robust. This will involve further cyber security audits; and • review the findings from internal audit reviews undertaken by KPMG LLP and monitor the implementation of recommendations made in these reports and the status of progress made against previously agreed actions. There are a further 8 individual internal audit reviews planned for 2020, including cyber security, business continuity, IT disaster recovery, recruitment, supplier tendering and the integration of Edenhall. How the Audit Committee operates During the year, the Audit Committee held 4 formal meetings and there were also meetings between the Audit Committee Chair, the Group Finance Director and the external auditor. The Committee meets both the external and internal auditor independently of management, giving the opportunity to ensure that it has full visibility of matters that have been the subject of 52 Marshalls plc Annual Report and Accounts 2019 Members and attendance Meetings Janet Ashdown Graham Prothero Tim Pile Angela Bromfield (joined the Committee on 1 October 2019 and attended all scheduled meetings following appointment.) Link to TOR and Nominations Policy www.marshalls.co.uk/about-us/corporate-governance particular discussions. The Committee also reports to the Board in relation to the going concern statement and the Viability Statement and whether the accounts are fair, balanced and understandable. Effectiveness of the Audit Committee During the year an external evaluation of the Committee’s performance was undertaken as part of the Board evaluation process. This is explained in detail in the Corporate Governance Statement on pages 44 to 49. The review found the Committee to be effective and well run. No areas of concern were highlighted during this review although a number of agreed actions have been taken forward. The Chair of the Committee is a Chartered Accountant and the Board is satisfied he is independent and has recent and relevant financial experience as required by the Code. Other members also have relevant sectoral and financial experience. Their biographical details are on pages 42 and 43. Financial reporting The Committee has reviewed, with both management and the external auditor, where the more significant judgements have been made and the quality and appropriateness of the Group’s accounting policies. The Committee has also reviewed the assumptions and provided assurance to support the long-term Viability Statement. The Board has adopted the going concern basis in preparing these Financial Statements and considers that the Group is able to continue in operation and meet its liabilities as they fall due for at least the next 12 months. IFRS 16 “Leases” IFRS 16 was adopted on 1 January 2019 and, other than low value and very short-term leases, all leases are now recognised on the Group’s balance sheet. New systems and operating procedures have been introduced to ensure full processing compliance and adherence to all the new financial disclosures and reporting requirements. The Committee has monitored the progress of the transition exercise and has reviewed the financial impact. Key priorities for the Committee have been the adequacy of controls over data accuracy and completeness. Authorisation and data processing procedures and controls have been integrated within the Group’s core systems. Further information about the financial impact for the Group is included in Note 1 on pages 104 to 106. Risk management and internal control The Board is responsible for reviewing the effectiveness of the system of risk management and control, and for ensuring that it continues to meet the necessary standards. The systems and controls are also subject to a regular rolling programme of review, the results of which are periodically reported to the Board. Corporate governance other than those that are “de minimis“ in value, of less than £5,000 in aggregate in any financial year. Any other non-audit services require the specific approval of the Committee. Where the Committee perceives that the independence of the auditor could be compromised, the work will not be awarded to the external auditor. Details of amounts paid to the external auditor, and its entire network, for audit and non-audit services in 2019 are analysed in Note 3 on page 116. Other than the Half-yearly review of Marshalls plc, for which a fee of £20,000 was charged (2018: £20,000), no amounts were paid for non-audit work during 2019. The aggregate amount paid to other firms of accountants for non-audit services in the same period was £240,000 (2018: £387,000). Internal audit The Committee has responsibility for monitoring the effectiveness of internal controls and reviews these on an ongoing basis. The internal audit process is carried out by KPMG LLP, appointed by the Committee in 2015 to act as internal auditor for the Group. The annual internal audit programme uses a risk-based assessment that takes into account the Risk Register and management input. KPMG attends the Group’s Risk Register review meeting on an annual basis. This risk-based assessment is reviewed and approved by the Audit Committee, and the process is overseen by the Group Finance Director. KPMG LLP is independent from the Company’s external auditor and has no other connection with the Group. The Company operates a self-certification internal control process to support the internal audit process throughout the year. The internal audit programme includes both regular audit checks and assignments to look at areas of critical importance. These assignments form part of a much wider programme of independently audited aspects of the Group’s operations. Any areas of weakness that are identified through this process prompt a detailed action plan and a follow-up audit check to establish that actions have been completed. Instances of fraud or attempted fraud (if any) and preventative action plans are also reported to the Committee and recorded in a fraud register. During the year, in addition to the regular internal control process, KPMG LLP conducted specific reviews on cyber security risk, procurement, health and safety processes, logistics and fleet management, the Code of Conduct, supplier rebates and expenses. Graham Prothero Chair of the Audit Committee The Group’s Risk Committee, comprising the Executive Directors and members of senior management with Executive accountability for particular risk areas, meets at least twice yearly to identify, evaluate and consider steps to manage any material risks which might threaten the Group’s business objectives. The Group has an established internal control framework, which governs the internal financial reporting process of the business, with checks and balances built into the system that are designed to reduce the likelihood of material error or fraud. There are well-established procedures to identify, monitor and manage risk, and within the internal control framework, policies and procedures are reviewed on an ongoing basis. The Group has a formal process for the ongoing assessment of operational financial and IT-based controls, the objective being to gain assurance that the control framework is complete and that individual controls are operating effectively. A rolling programme of independent internal checking is undertaken focusing on key controls, reconciliations and access to, and changing permissions on, base data. The Audit Committee has carried out an assessment of the effectiveness of the Group’s risk management and internal control system, covering all material controls including its financial, operational and compliance controls and risk management systems for the year to 31 December 2019. The Group maintains a written Risk Register that identifies the Group’s key risk areas, the probability of these risks occurring and the impact they would have on the Group. Each risk has a designated control owner and, against each risk, the effectiveness of the controls that exist to manage and, where possible, minimise or eliminate those risks are also listed. The Risk Register process identifies areas for action and independent audit assessment in order to test the effectiveness of the Group’s risk control systems. Information relating to the management of risks and any changes to the assessment of key risks is regularly reported to the Board, and the Risk Register is updated to reflect changes. Reporting has been improved in 2019 to include better assessment of the Group’s risk appetite and emerging risks. The reporting highlights the proximity (how far away in time the risk will occur) and velocity (the time between an event occurring and the impact taking effect) of each significant risk. To the extent that any failings or weaknesses are identified during the review process, appropriate measures are taken to remedy these. No significant weaknesses have been identified during the year. The key risks affecting the Group, how they relate to strategy and how they changed during the year, together with a description of the controls and mitigation associated with such risks, are highlighted in the Strategic Report on pages 20 and 21. External audit, auditor independence and objectivity The Audit Committee has primary responsibility for making a recommendation to the Board on the appointment, reappointment and removal of the external auditor. It keeps under review the scope and results of the audit, its cost effectiveness and the independence and objectivity of the auditor. In considering the scope of the audit, the Committee, ensures that there is focus and challenge in relation to materiality and effectiveness of planning. The Group’s current auditor, Deloitte LLP, has processes in place designed to maintain independence, including regular rotation of the audit partner. Deloitte LLP was appointed in May 2015 as statutory auditor following a tender process, and Christopher Robertson, who has acted as audit partner since the appointment of Deloitte LLP in May 2015, will rotate off the audit following the 2020 AGM. The Company has complied with the Competition and Markets Authority’s Order for the financial year under review. The Committee has adopted policies to safeguard the independence of its external auditor. It is the policy of the Company that the external auditor should not provide non-audit services, Marshalls plc Annual Report and Accounts 2019 53 Corporate governance Audit Committee Report continued Significant issues related to the Financial Statements When reviewing the annual and half yearly results, the Committee exercises its judgement in relation to matters drawn to its attention by the internal audit function, the Risk Committee and the Group’s external auditor, and were satisfied by the conclusions. The significant areas considered by the Committee for 2019 are summarised below. In each case the Committee reviewed the findings of the external auditor and considered the assessments and conclusions made by management: • The risk of management override of controls – management’s assessment of the control framework including authorisation controls and segregation of duties. The Committee considered those areas where management applies judgement in determining the appropriate accounting and discussed this with the external auditor. The external auditor presented its findings and its use of data analytics. • Inventory provisioning – management’s assessment of the appropriate level of provisioning against inventory obsolescence. The gross levels of finished goods inventory held and the provisions recorded against obsolescence and in respect of items that might be sold at lower than cost were reviewed by the Committee. The review included meetings with operational management to discuss the inventory provisioning strategy. The external auditor presented its findings with regard to the audit testing over inventory valuation. • Revenue and rebate recognition – management’s assessment of the appropriate levels of accruals to recognise for rebates due to customers at the year end. The Committee discussed the policy on rebate recognition with operational management. The external auditor presented its findings with regard to the audit testing in this area to the Committee. The Committee is satisfied with the controls and procedures that support the timeliness and completeness of recognition of rebates due to customers. • Revisions to the provisional fair value adjustments on the Edenhall acquisition in 2018 – management’s assessment of the process for identification and revised valuation of fair value adjustments. The Committee considered those areas where management judgement was applied. The external auditor tested significant revisions to provisional fair value adjustments by reference to supporting evidence. Internal audit continued The Committee is pleased to report that, although the wider risk of cyber fraud continues to increase, no significant failings or weaknesses were identified during the year. There were no incidences of fraud that significantly affected the Group’s business during 2019. A rolling programme of cyber security awareness training is undertaken and external presentations were made to selected groups of employees by specialists from the Group’s banking partners. Whistleblowing and bribery The Board is responsible for the Group’s Serious Concerns Policy and whistleblowing procedures. The Audit Committee monitors on behalf of the Board any reported incidents under the Serious Concerns Policy (our Whistleblowing Policy), which is available to all employees. A review of the policy and related procedures has been undertaken during the year. As a consequence of this review, Safecall, a third party organisation, has been appointed to handle all concerns independently and confidentially on behalf of the Group. These procedures are embedded into the Code of Conduct and are relevant to all stakeholders including suppliers, partners and employees. The policy and the Safecall process are displayed on operating site noticeboards and on the Company’s intranet, and set out the procedure for employees to raise legitimate concerns about any wrongdoing without fear of criticism, discrimination or reprisal. 54 Marshalls plc Annual Report and Accounts 2019 Fair, balanced and understandable The Committee has considered whether, in its opinion, the 2019 Annual Report and Financial Statements is, taken as a whole, fair, balanced and understandable, and whether it provides the information necessary for shareholders to assess the Group’s position, performance, business model and strategy. As part of its review the Committee considered the disclosures in the Strategic Report relating to the Group’s new 5 year Strategy, The Marshalls Way and Code of Conduct along with climate change and other sustainability issues. In making this assessment, the Committee has advised the Board in relation to the statement required by the UK Corporate Governance Code. The Committee has concluded that the disclosures, and the process and controls underlying their production, were appropriate to enable it to determine that the 2019 Annual Report and Financial Statements is fair, balanced and understandable. Effectiveness of the external audit An annual review of external audit effectiveness was undertaken by the Committee in 2019. The conclusion of the review was that the external auditor had conducted a comprehensive, appropriate and effective audit. Communication, at all levels, had been open and constructive and areas where the external auditor could work more effectively, in respect of each phase of the audit, were identified. Effectiveness of the internal audit An annual review of internal audit effectiveness and of the performance of KPMG LLP as independent internal auditor was undertaken by the Committee in 2019. The conclusion was very positive and was that the current internal audit process continues to be an efficient and effective means of managing the internal audit function. The Committee has considered, with KPMG LLP, how this process can be developed further and further improvements have been reflected in the 2020 plan. The Committee is satisfied that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action. The outcome of any investigation and recommended action is reported to the Board. The Company is committed to a zero-tolerance position with regard to bribery, made explicit through its Anti-Bribery Code and supporting guidance on hospitality and gifts. The policy and procedures are published on the Company website and displayed on operating site noticeboards. Online training is available to all employees to reinforce the Anti-Bribery Code and procedures, and classroom-based training sessions are also held throughout the year. During 2019, Edenhall employees received their training as a key part of their integration. All employees in decision-making roles with potential exposure to bribery risk have completed the training and must self-certify annually that they continue to comply. There is a maintained register of employee interests and a gifts and hospitality record. The internal audit review programme included an update review of the adequacy of the Company’s procedures in relation to anti-bribery controls and procedures. The Audit Committee Report has been approved by the Board and signed on its behalf by: Graham Prothero Chair of the Audit Committee 12 March 2020 Corporate governance Remuneration Committee Report A clear and transparent policy linked to delivery of long-term success 2019 highlights • Strong Group performance resulting in achievement of Executive incentive targets, with significant element of variable award in shares or share equivalents. • Committee Terms of Reference, procedures and evaluation measures reviewed. • Developed the new Remuneration Policy and its application for 2020. • Consulted with shareholders and other stakeholders in relation to the new 2020 Policy. • Sought shareholder approval to extend the Management Incentive Plan to align with the new 2020 Remuneration Policy under which it operates. • Executive Director and senior management remuneration packages for 2020 set, having taken into account the pay and benefits of the wider workforce and the comparator group. • Incentive scheme targets set for 2020 using stretching financial and non-financial measures designed to align with strategic objectives and shareholder interests. • Continued development and implementation of the remit 2020 priorities • Monitor the results from the 2020 AGM and conduct any necessary stakeholder engagement or action plan. • Determine incentive outcomes for 2020. • Set incentive scheme targets for 2021. • Continue to monitor the success of the action plan for engagement with employees and other stakeholders on remuneration. • Review alignment with wider workforce pay policies and incentives. • Review the action plans to reduce scope for gender pay gaps and progress against measurable KPIs. Members and attendance Meetings Janet Ashdown Vanda Murray OBE Tim Pile Graham Prothero and supporting framework for Janet Ashdown (the designated Non-Executive Director for workforce engagement) to engage with employees and stakeholders on pay and benefits during the year. Angela Bromfield (joined the Committee on 1 October 2019 and attended all scheduled meetings following appointment.) • Reviewed the success of the 2019 action plan for engagement with employees and other stakeholders on remuneration. • Reviewed alignment with wider workforce pay policies and incentives. • Reviewed the action plans to reduce scope for gender pay gaps and progress against measurable KPIs. The CEO attends as appropriate but may not participate in discussions about his own remuneration. The Company Secretary acts as secretary to the Committee and attends Committee meetings, along with the Group Human Resources Director. Terms of Reference www.marshalls.co.uk/about-us/corporate-governance Our Policy and incentive plans are clearly linked to our strategy, values and culture. Janet Ashdown Chair of the Remuneration Committee Marshalls plc Annual Report and Accounts 2019 55 Corporate governance Remuneration Committee Report continued Chair’s annual statement Dear Shareholder I am writing to you as the Chair of Marshalls’ Remuneration Committee and am pleased to set out in this report how the Committee has carried out its objectives and responsibilities during 2019. This report is divided into 3 sections: an introduction and at a glance “summary” of our activities, our proposed new 2020 Remuneration Policy, and our Annual Remuneration Report showing how our current Policy was applied during the year and outcomes for our Executives. Business performance The Group’s KPIs monitor progress towards the achievement of the Group’s objectives. All of the Group’s strategic KPIs have moved forward strongly during 2019, as shown on pages 22 and 23 of the Strategic Report. The Company operates a single long-term incentive plan, the Management Incentive Plan (“MIP”), which focuses directly and indirectly on aligning the reward of Executive Directors and senior management with delivery of these KPIs. EPS, net debt, customer service and health and safety are the measures expressly used to determine awards under the MIP. Outcomes for 2019 Page 59 sets out the performance conditions, targets set, level of satisfaction and corresponding percentages of salary earned under the MIP for 2019 by the Executive Directors. Martyn Coffey (CEO) received an MIP award of 248.9 per cent of salary (maximum 250 per cent) and Jack Clarke (Group Finance Director) received an MIP award of 248.9 per cent of salary (maximum 250 per cent). Discretions The Committee determined that the incentive outcomes for 2019 based on the application of the MIP Rules and performance conditions were in line with the overall performance of the business and did not exercise its discretion to alter the outcomes. The Committee did not adjust any incentive outcome to account for share price appreciation over the vesting period, having concluded that the value delivered was commensurate with performance over the period. The consideration of performance against non-financial ESG measures is integrated into our review of overall remuneration. The Remuneration Policy operated over the 2019 financial year as intended by the Committee. New Remuneration Policy for 2020 The current approved Policy is due for renewal at the 2020 AGM, having last been approved at our 2017 Annual General Meeting. The Committee therefore conducted a comprehensive review of Marshalls’ Executive remuneration arrangements in 2019 and determined that the current Policy continues to support the Shareholder engagement The Committee consulted with the Company’s 23 largest shareholders, Glass Lewis, the IA and ISS on the new Policy. I am pleased to report that the significant majority of our largest shareholders were supportive of the new Policy. The following table sets out the main areas of discussion, comments or amendments suggested by shareholders, the Committee’s response and rationale for the final position set out in the new Remuneration Policy: Comments or amendments suggested by shareholders Committee’s response and rationale for final position in policy One shareholder was uncomfortable with the MIP structure. As only one shareholder was uncomfortable with the structure of the MIP, and the Committee believes that it continues to support the Company's strategy and culture, there is no requirement to materially change it. Areas of discussion Management Incentive Plan Incumbent Executive Director pension alignment with the wider workforce Several shareholders asked whether there is a plan to reduce the pension contribution for incumbent Executive Directors to align with the workforce by 2022. Approach to the post-cessation shareholding requirement Some shareholders were seeking the full 200% of salary shareholding requirement to apply for 2 years post cessation, in line with the IA Principles. 56 Marshalls plc Annual Report and Accounts 2019 The Committee is prepared to make the commitment that, by the end of 2022, we will ensure alignment of our incumbent Executive Directors with the majority employee pension contribution. However, at this point it is difficult to set out the phasing and progression as the Company is currently reviewing the contribution levels for all employees and the differential contribution rates throughout the Company (we are already increasing the pension contribution rate for the majority of the workforce by 1% in April 2020), particularly given a number of recent acquisitions (CPM and Edenhall) - not just the Executive Directors. This will take some time and there are a number of factors which will impact on this including overall cost to the Company. We have, however, in view of the feedback, agreed a clear reduction plan for the CEO’s pension contribution. We have carefully considered the balance between the interests of stakeholders in the Executive Directors retaining a shareholding post cessation and the level and duration of that holding. Following this consideration, the Committee does not intend to make any changes to the proposed post-cessation shareholding requirement. Our independent adviser, PwC, conducted detailed modelling which suggests that the existing 2-year post-cessation holding period on the current MIP B Element awards held by our 2 Executive Directors would achieve the same effect as a shareholding requirement of 200% of salary for both years 1 and 2 post cessation for a good leaver. Therefore, we believe that the combination of the existing post-cessation holding period on MIP Element B awards and our proposed post-cessation minimum shareholding requirement provides the appropriate balance for all stakeholders. The Committee will continue to monitor market developments and will review its position on this issue should it become necessary in future. Corporate governance Company’s strategy and culture and that there was no requirement to materially change it. As the shareholder approval of the current MIP is also due to expire in 2020, the Company is seeking to renew the MIP to support the new 2020 Policy and there is no intention to change the structure or operation of the MIP on renewal except to enhance the malus and clawback triggers to align with best practice. Consequently, the changes made to the 2020 Policy are intended to bring the new Policy up to date with market developments, the new 2018 UK Corporate Governance Code and regulations, specifically: • new Executive Directors’ employer pension contributions will be The CFO’s salary will increase for 2020 in line with the workforce increase under Policy principles. The above approach is consistent with the remuneration principles applied throughout the organisation at all levels, namely: • The policy is to target a remuneration package that is at around median for median performance, and in the upper quartile for exceptional performance, and which is closely linked with the Company’s strategic objectives. • In setting all elements of remuneration the Company seeks to benchmark itself against comparable companies. set at the majority rate for employees, and incumbent Executive Director employer pension contributions will be reduced to align with the workforce by the end of 2022; • The aim of the Company’s policy is to attract, retain and continue to motivate talented employees while aligning remuneration with the achievement of the Company’s strategic objectives. • introduction of an explicit post-cessation minimum shareholding requirement of 200 per cent of salary for one year and 100 per cent of salary for a further year; and • enhancement of malus and clawback triggers to align with the FRC’s Guidance on Board Effectiveness. CEO phased pension reduction plan The Committee recognises the wish of shareholders to see alignment between Director pension contributions and those of the workforce. The Committee has agreed the following plan for the reduction of the CEO pension contribution over time: • an immediate 2.5 per cent reduction from 20 per cent to 17.5 per cent of salary for 2020; • a further 2.5 per cent reduction to 15 per cent of salary for 2021; and • reduction to workforce levels (currently 5 per cent of salary) by the end of 2022. Wider workforce considerations Marshalls is committed to creating an inclusive working environment and to rewarding its employees in a fair manner. In making decisions on Executive pay, the Remuneration Committee considers wider workforce remuneration and conditions. This report includes information on our wider workforce pay conditions, our CEO to employee pay ratio, our gender pay statistics and our diversity initiatives. The Committee’s role in monitoring and reporting on such issues is key to the promotion and development of our values and culture. Board and committee membership Angela Bromfield was appointed to the Board as a Non-Executive Director and joined the Remuneration Committee on 1 October 2019. Angela Bromfield has served as a member or Chair of a number of other remuneration committees. Her experience is welcomed. I would like to thank our shareholders for their continued support during the year demonstrated by the vote at the 2019 AGM. I will be available at the Company’s 2020 AGM to answer any questions in relation to this Remuneration Report. Janet Ashdown Chair of the Remuneration Committee 12 March 2020 Implementation of the new Policy in 2020 CEO salary increase The latest review of the remuneration of senior Executives and managers at Marshalls, reliably demonstrated to the Committee that, due to a material increase in the scale and complexity of the Group over the last few years, senior Executive salaries have fallen significantly below market and do not reflect the increased scope and responsibilities of the CEO role in particular. Under the leadership of the current CEO, the Company has grown significantly in both size and complexity. The Group has made a number of successful acquisitions, improving all of its key performance measures including market capitalisation (increasing by around two-thirds over the last year), turnover and profit. Headcount has increased to 2,816 and the number of operating locations has increased to 55. The Committee recognises that salary increases of more than the workforce are a sensitive issue in the current environment. However, the CEO’s current salary no longer reflects his expanded role, and the Committee recognises that this is likely to compromise the ability of the Company to attract, recruit and retain a CEO of the necessary calibre and experience to manage the materially expanded and more complex organisation that Marshalls is today, in particular given the expectation from investors that new Directors are appointed on the same (or lower) salary as their predecessor. As a result, the Committee felt it necessary to review the approach to the CEO’s salary for 2020. Both the current approved Policy and the proposed 2020 policy provide that salary increases for Executive Directors will normally be in line with the increase for the wider workforce. There are exceptions where: • an individual’s package is below market level and a decision is taken to increase base pay to reflect proven competence in the role; or • there is a material increase in scope or responsibility in the individual’s role. The Committee has determined that both of these exceptions apply as explained above, and that a salary increase of 9 per cent for the CEO is therefore appropriate and necessary for 2020. The Committee has reviewed external benchmarking data against companies of similar size, with validation against industry / sector peers, to ensure the level of increase proposed is not excessive. The resulting salary of £501,000 remains below the lower quartile against comparable companies and on a total remuneration basis results in a package of between the lower quartile and median. Marshalls plc Annual Report and Accounts 2019 57 Corporate governance Remuneration Committee Report continued Chair’s annual statement continued External advisers The Remuneration Committee was advised during the year by external remuneration adviser PricewaterhouseCoopers LLP (“PwC”). PwC attends meetings of the Committee by invitation. PwC’s fees are agreed by the Remuneration Committee according to the work performed. PwC were appointed after a tender process by the Committee in 2016, and their terms of engagement are available on request from the Company Secretary. PwC also provided general consulting services to the Company during the year on pension matters and potential acquisitions. The Committee is satisfied that the remuneration advice from PwC is objective and independent based on the separation of the team advising the Committee from any other work undertaken by PwC for the Group and the fact that PwC is a signatory to the Remuneration Consultants Group’s Code of Conduct. PwC’s work relating to Executive remuneration during 2019 included a comprehensive review of the Remuneration Policy and support with the 2020 Policy design; shareholder consultation support; preparation of the Remuneration Committee Report; advice on employee engagement and stakeholder reporting obligations under the Committee’s expanded remit; total remuneration benchmarking of Non-Executive and Executive Directors and senior Executives; and general advice on remuneration trends, regulations and best practice. The amount paid to PwC in respect of remuneration advice received during 2019 was £62,500 (2018: £52,000). Our Remuneration Report has been prepared in accordance with the Companies Act 2008 and Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. It meets the requirements of the 2018 UK Corporate Governance Code (the “UK Code”) and is also prepared in accordance with the UK Listing Authority’s Listing Rules and Disclosure and Transparency Rules. Remuneration Report For Against Votes withheld Voting outcomes 2019 95+ 95.9 per cent of shareholders voted in favour of the Remuneration Report at the Company’s 2019 AGM. Voting results were: • For: 140,527,576 (95.90 per cent of votes cast) • Against: 6,002,392 (4.10 per cent of votes cast) • Withheld: 1,434,035 The Remuneration Policy received a vote of 96 per cent in favour at the 2017 AGM (142,908,317 votes in favour; 6,471,716 votes against and 2,094,134 votes withheld), and the new Policy is being submitted to shareholders at the 2020 AGM. 58 Marshalls plc Annual Report and Accounts 2019 Corporate governance4 + 1 + I At a glance 2019 remuneration outcomes The tables below show how the Group performed against targets for the MIP in 2019. Performance measures and targets are linked to the key strategic objectives highlighted on pages 20 and 21 of the Strategic Report. MIP Element A: 99.6 per cent of maximum (2018: 98 per cent of maximum) was awarded to the CEO and CFO. MIP Element B: 99.6 per cent of maximum (2018: 98 per cent of maximum) was awarded to the CEO and CFO. Threshold (0% payable) Maximum (100% payable) Actual (2019) Weighting outcome (% total award) CEO £’000 CFO £’000 EPS (75% of maximum) 26.68p 29.70p 29.76p Operating cash flow (“OCF”) to EBITDA ratio (25% of maximum) £73.3m Non-financial targets (customer service / health and safety) Total £88.9m £88.4m 100% 98.3% £862,665 max £862,665 actual £287,555 max £282,580 actual £565,888 max £565,888 actual £188,629 max £185,366 actual 100% No deduction No deduction Performance conditions were set at the beginning of 2019 and the Committee took account of both internal budgets and external factors such as the market consensus of investors for the full year 2019. Definitions Other than in respect of IFRS 16, the EPS and OCF ratio for 2019 were measured using International Financial Reporting Standards (“IFRSs”) based on the audited results of the Group and subject to the discretion of the Committee with regard to one-off items. The Committee determined that pre-IFRS 16 targets were to be used in 2019. EPS EPS relates to our strategic objective to grow profits. Reported EPS (post-IFRS 16) grew by 12 per cent to 29.36 pence in 2019. OCF / EBITDA OCF / EBITDA ratio relates to our strategic objective to convert earnings into cash flow and to use cash responsibly. The OCF / EBITDA ratio was 98.3 per cent in 2019. Non-financial targets Our customers are at the heart of our business model, and our measurement of customer service uses factors such as product availability, on-time delivery performance and administrative and delivery accuracy to assess performance. The Group’s average customer service performance, assessed monthly, exceeded its minimum target of 95 per cent throughout 2019. The Group also continued its excellent performance against its stated objective of keeping days lost to accidents to a minimum, by reference to the 2016 rate. Days lost to accidents year on year actually reduced by a further 13.7 per cent. Had either of these targets not been met, the overall level of MIP award would have reduced by 10 per cent for each measure; the achievement of these measures means that no reduction factor will apply. See page 85 for details of the awards made. Link to Company strategy The following table sets out the Group’s KPIs and how they are reflected in the operation of the MIP: Strategic KPI Revenue Profit ROCE Net debt Customer service Health and safety Measure EPS / OCF EPS / OCF EPS / OCF OCF Index KPI Target KPI Remuneration element MIP A / MIP B MIP A / MIP B MIP A / MIP B MIP A / MIP B MIP A / MIP B MIP A / MIP B The use of EPS under the MIP as the main performance condition ensures that the Executive Directors are focused on driving increased profitable growth in accordance with the Company strategy. The OCF to EBITDA ratio ensures that this growth in profit is not at the expense of its quality and sustainability. The customer metric and health and safety performance conditions reflect our commitment to service and employee wellbeing and the need to ensure that growth and profitability are not achieved in a way that is detrimental to the Company’s customers and employees nor in a way that promotes short-term, high risk behaviour. Full details of the Company’s strategy are set out in the Strategic Report on pages 20 and 21. Marshalls plc Annual Report and Accounts 2019 59 Corporate governance Remuneration Committee Report continued At a glance continued Long-term performance The following chart shows the single figure of remuneration for the CEO over the last 5 financial years compared to the Company’s EPS and operating cash flow over the same period. The EPS and operating cash flow for 2019 have been disclosed on a pre-IFRS 16 basis in order to be consistent with prior periods. The chart demonstrates a strong correlation between Company performance demonstrated by these measures and the remuneration paid to the CEO. 300 250 200 150 100 2014 2015 2016 2017 2018 2019 — CEO single figure — EPS — Operating cash flow (£’m) 2018 / 19 single figure The following charts summarise the single figure of remuneration for 2019 in comparison with 2018 and with the minimum, target and maximum remuneration scenarios from the 2017 Remuneration Policy to show how the actual remuneration compares to the Policy remuneration. For those elements of remuneration provided in shares in 2018 and 2019, we have separated out their original value on grant and the additional value generated due to share price growth over the vesting period. It is the Committee’s view that one of the key objectives of equity-based remuneration is to align Executives’ interests and those of shareholders. With such a high proportion of MIP awards expressed in or linked to shares, the impact of share price movement on overall Executive reward can be significant. The increase in the value of awards due to share price growth over the vesting periods is another demonstration of how our Policy aligns with strategy and the interests of shareholders. Explanatory notes on the single figure can be found in the Annual Report on Remuneration (page 84). Martyn Coffey (CEO) 2019 2018 -12 493 477 92 89 602 229 342 455 2,213 497 218 333 1,602 Jack Clarke (CFO) 2019 315 60 394 150 224 299 1,442 2018 -7 305 58 326 143 191 1,016 0 500 1,000 £’000 1,500 2,000 2,500 Salary and other benefits Long-term incentives Proportion due to share price change Salary supplement in lieu of employer pension contribution MIP Element A MIP Element B Total remuneration opportunity under the 2017 Policy for each of the Executive Directors at 3 different levels of performance is shown below: CEO Outperformance 585 740 493 247 Target 585 370 247 62 Below threshold 585 CFO Outperformance 375 Target 473 315 158 375 236 158 39 Below threshold 375 0 500 1,000 £’000 1,500 2,000 0 500 1,000 1,500 £’000 Salary, benefits and pension contribution MIP Element A MIP Element B Proportion due to share price growth Notes: a) Base salary, benefits and pension information is taken from the single figure remuneration table in the 2019 Annual Remuneration Report. The benefits value reflects a fully expensed company car, medical insurance and any other taxable benefits, and pension includes the level of salary supplement paid instead of contractual employer pension contributions. b) At target, 50 per cent of the annual award under the MIP pays out. c) The minimum assumes a performance that fails to meet the threshold for Element A and Element B so is the level below which no variable pay under the MIP is earned. d) The maximum represents the full 250 per cent of salary potential under the MIP. 60 Marshalls plc Annual Report and Accounts 2019 Corporate governance Comparison to peers The following chart shows the relative position of base salary and total compensation for our Executive Directors compared to our peers. 2,500 2,000 1,500 1,000 500 0 0 0 0 £ ’ ) O E C ( y e ff o C n y t r a M Base salary Total compensation 1,400 1,200 1,000 800 600 400 200 0 0 0 0 £ ’ ) O F C ( l e k r a C k c a J Base salary Total compensation Lower quartile to median Middle to upper quartile Martyn Coffey (CEO) / Jack Clarke (CFO) The charts demonstrate the Committee’s policy that salary and benefits should be set at or below the market level, with variable incentives allowing an overall above-market positioning when the Company has performed well. The variable element assumes an “on-target” performance under relevant incentive schemes. Shareholding requirement The minimum shareholding requirement for Executive Directors and their actual holding is set out below. It must be built up over a 5-year period and then subsequently held at an equivalent of 200 per cent of base salary. Martyn Coffey (CEO) Jack Clarke (CFO) 200% 200% 827% 610% 0% 100% 200% 300% 400% 500% 600% 700% 800% 900% Actual shareholding Shareholding requirement Under the new 2020 Policy, the full shareholding requirement will continue to apply for one year post cessation of employment and half of the requirement for a further year. Impact of share price appreciation It is the Committee’s view that it is important when considering the remuneration paid in the year under the single figure to take a holistic view of the Director’s total reward linked to the performance of the Company. In the Committee’s opinion, the impact on the total reward of the Director is more important than the single figure in any one year. This approach encourages Directors to take a long-term view of the sustainable performance of the Company, which is critical in a cyclical business. The ability for the Directors to gain and lose, dependent on the share price performance of the Company, at a level which is material to their total remuneration is a key facet of the Company’s Remuneration Policy. The Committee has discretion to adjust remuneration as a result of share price appreciation or depreciation, but has not seen fit to exercise this discretion in relation to 2019 outcomes. The following table sets out the single figure for 2019, the share interests held by the Executive Directors at the beginning and end of the financial year and the impact on the value of these share interests taking the opening price and closing price for the year. Impact of share price change on single figure remuneration Impact of share price change on value of shares held Martyn Coffey (CEO) Jack Clarke (CFO) 2,213 1,758 4,600 2,486 1,442 1,143 1,711 925 0 500 1,000 1,500 2,000 2,500 0 1,000 2,000 3,000 4,000 5,000 Full impact with share price change Assuming no share price change £’000 Marshalls plc Annual Report and Accounts 2019 61 Corporate governance Remuneration Committee Report continued Implementation of the Policy in 2019 and 2020 The table below sets out the following information: • summary of the current 2017 Remuneration Policy; • how the Company implemented the 2017 Remuneration Policy • changes from the 2017 Remuneration Policy in the proposed 2020 Remuneration Policy; in 2019; and • how the Company proposes to implement the 2020 Remuneration Policy in 2020. 2017 Policy Changes to the new 2020 Policy How we implemented the 2017 Policy in 2019 How we will implement the new 2020 Policy in 2020 Salary Base salaries are set taking into account the individual’s scope, role, responsibilities and performance, performance of the Group, wider employee salary increases, remuneration practices in the Group, and the economic environment. None. Typically, the base salaries of Executive Directors in post at the start of the Policy period and who remain in the same role throughout the Policy period will be increased by a similar percentage to the average annual percentage increase in salaries of all other employees in the Group. Benefits and pension The maximum Company contribution or pension allowance is 20% of salary for incumbent Executive Directors. Benefits typically include car or car allowance, private medical insurance, life assurance and membership of the Group’s employee share plans. New Executive Directors’ employer pension contributions will be set at the majority rate for employees. Plan to progressively reduce incumbent Executive employer pension contributions to align with the workforce by the end of 2022. Management Incentive Plan Element A Maximum 150% of salary Annual performance conditions and targets are set at the beginning of the plan year. A minimum of 50% of the bonus is based on financial performance measures. Threshold 0% of maximum. Target pays 50% of maximum. Upon assessment of performance by the Committee, a contribution will be made by the Company into the participant’s Plan Account and 50% of the cumulative balance will be paid in cash. Any remaining balance will be converted into shares or share-linked units. 100% of the balance in the final year of the plan will normally be paid in shares to the participant. During the plan period, 50% of the retained balance is at risk of forfeiture based on a minimum performance measure determined annually by the Committee. Management Incentive Plan Element B Maximum 100% of salary Annual targets are set by reference to financial, strategic and operational objectives by the Remuneration Committee. Awards are granted retrospectively in shares based on the performance targets for the relevant year. Awards vest (subject to continued employment) 3 years from grant. Awards, once vested (net of tax), may not be sold for a further 2 years. There is a financial underpin which, if not achieved over 3 years, results in the loss of up to 50% of unvested awards. ESG factors The Committee has discretion to set annual targets related to ESG measures and avoidance of ESG risks. Threshold 0% of maximum. Target pays 50% of maximum. Minimum shareholding requirement Executive Directors must build up over a 5-year period and then subsequently hold a shareholding equivalent to a minimum of 200% of base salary. Executive Directors are required to retain 50% of the post-tax number of vested shares from the Company incentive plans until the minimum shareholding requirement is met and maintained. Introduction of an explicit post-cessation minimum shareholding requirement of 200% of salary for one year and 100% of salary for a further year. 62 Marshalls plc Annual Report and Accounts 2019 Executive Director salaries for 2019 were as follows: From 1 January 2020, Executive Director salaries will be: • CEO - £460,000; and • Group FD - £302,000. for UK employees generally. Salary increases were 3.3% in 2019, in line with inflation and increases The general UK employee salary increase for 2020 is 2.7%. See page 57 for the rationale behind the CEO’s salary rise. • CEO - £501,000 (9% increase); and • Group FD - £310,000 (2.7% increase). The maximum Company contribution or pension allowance is The CEO’s employer pension contribution will be reduced by 20% of salary. 2.5% to 17.5% of salary. Outcome level in 2019 was as follows: No change to maximum opportunities under the MIP. • CEO – 149% of base salary; and • Group FD – 149% of base salary. The performance measures were: • EPS (75%); • ratio of OCF to EBITDA (25%); and • non-financial targets (if not met, it results in a deduction from “base” year (2016). amount earned under other measures). See page 59 of the at a glance section for details of the targets, their level of satisfaction and the corresponding bonus earned. Outcome level for 2019 was as follows: • CEO – 99% of base salary; and • Group FD – 99% of base salary. The performance measures were the same as for Element A. This will be reduced by a further 2.5% in 2021, and a final reduction in 2022 to align with the majority workforce contribution. No immediate change for the Group FD. See page 57 of the Chair’s annual statement for the rationale behind the pension alignment process. No change to the performance conditions under the MIP. Additional non-financial performance conditions to reflect our focus on brand, customers and employees will continue to apply: • customer service (must remain at or above 95%); and • health and safety incidence: the rate of accidents must not fall below an agreed threshold, benchmarked by reference to the If they are not met, there is a reduction of award value earned by 10% in relation to each of these additional conditions. Element A awards have a forfeiture threshold set annually at the time of confirmation of the award. If this is breached, 50% of the deferred balance in a participant’s Element A MIP account is forfeited. Element B awards also have a long-term financial underpin based on a minimum EPS threshold that must be maintained over the 3 years from the date of grant. If this is breached, 50% of the Element B award is forfeited. Element B awards are granted after the end of the financial period by reference to which they have been earned and the underpin is set at the time of grant. The measurement period under the MIP by reference to which these targets must be met will be the full financial year ending 31 December 2020. It is the view of the Committee that the targets for the MIP are commercially sensitive as they are primarily related to budgeted future profit and cash levels in the Company and therefore their disclosure in advance is not in the interests of the Company or shareholders. The Committee will, however, provide full retrospective disclosure to enable shareholders to judge the level of award against the targets set. The non-financial performance conditions include a Health and Safety element. In addition, the strategic KPIs against which overall performance is measured include sustainability and carbon reduction targets. In line with the 2017 Policy. The new post-cessation minimum shareholding requirement will apply. Corporate governance Base salaries are set taking into account the individual’s scope, role, responsibilities and performance, performance of the Group, wider employee salary increases, remuneration practices in the Group, and the economic environment. Typically, the base salaries of Executive Directors in post at the start of the Policy period and who remain in the same role throughout the Policy period will be increased by a similar percentage to the average annual percentage increase in salaries of all other employees in the Group. Benefits and pension The maximum Company contribution or pension allowance is 20% of salary for incumbent Executive Directors. Benefits typically include car or car allowance, private medical insurance, life assurance and membership of the Group’s employee share plans. Management Incentive Plan Element A Maximum 150% of salary Annual performance conditions and targets are set at the beginning of the plan year. A minimum of 50% of the bonus is based on financial performance measures. Upon assessment of performance by the Committee, a contribution will be made by the Company into the participant’s Plan Account and 50% of the cumulative balance will be paid in cash. Any remaining balance will be converted into shares or share-linked units. 100% of the balance in the final year of the plan will normally be paid in shares to the participant. During the plan period, 50% of the retained balance is at risk of forfeiture based on a minimum performance measure determined annually by the Committee. Management Incentive Plan Element B Maximum 100% of salary by the Remuneration Committee. Annual targets are set by reference to financial, strategic and operational objectives Awards are granted retrospectively in shares based on the performance targets for the relevant year. Awards vest (subject to continued employment) 3 years from grant. Awards, once vested (net of tax), may not be sold for a further 2 years. There is a financial underpin which, if not achieved over 3 years, results in the loss of up to 50% of unvested awards. The Committee has discretion to set annual targets related to ESG measures and ESG factors avoidance of ESG risks. New Executive Directors’ employer pension contributions will be set at the majority rate for employees. Plan to progressively reduce incumbent Executive employer pension contributions to align with the workforce by the end of 2022. Threshold 0% of maximum. Target pays 50% of maximum. Threshold 0% of maximum. Target pays 50% of maximum. 2017 Policy Salary Changes to the new 2020 Policy How we implemented the 2017 Policy in 2019 How we will implement the new 2020 Policy in 2020 None. Executive Director salaries for 2019 were as follows: From 1 January 2020, Executive Director salaries will be: • CEO - £460,000; and • Group FD - £302,000. • CEO - £501,000 (9% increase); and • Group FD - £310,000 (2.7% increase). Salary increases were 3.3% in 2019, in line with inflation and increases for UK employees generally. The general UK employee salary increase for 2020 is 2.7%. See page 57 for the rationale behind the CEO’s salary rise. The maximum Company contribution or pension allowance is 20% of salary. The CEO’s employer pension contribution will be reduced by 2.5% to 17.5% of salary. Outcome level in 2019 was as follows: No change to maximum opportunities under the MIP. This will be reduced by a further 2.5% in 2021, and a final reduction in 2022 to align with the majority workforce contribution. No immediate change for the Group FD. See page 57 of the Chair’s annual statement for the rationale behind the pension alignment process. • CEO – 149% of base salary; and • Group FD – 149% of base salary. The performance measures were: • EPS (75%); • ratio of OCF to EBITDA (25%); and • non-financial targets (if not met, it results in a deduction from amount earned under other measures). See page 59 of the at a glance section for details of the targets, their level of satisfaction and the corresponding bonus earned. Outcome level for 2019 was as follows: • CEO – 99% of base salary; and • Group FD – 99% of base salary. The performance measures were the same as for Element A. The non-financial performance conditions include a Health and Safety element. In addition, the strategic KPIs against which overall performance is measured include sustainability and carbon reduction targets. Minimum shareholding requirement Introduction of an explicit post-cessation In line with the 2017 Policy. Executive Directors must build up over a 5-year period and then subsequently hold minimum shareholding requirement of 200% a shareholding equivalent to a minimum of 200% of base salary. of salary for one year and 100% of salary for Executive Directors are required to retain 50% of the post-tax number of vested shares from the Company incentive plans until the minimum shareholding requirement is met and maintained. a further year. No change to the performance conditions under the MIP. Additional non-financial performance conditions to reflect our focus on brand, customers and employees will continue to apply: • customer service (must remain at or above 95%); and • health and safety incidence: the rate of accidents must not fall below an agreed threshold, benchmarked by reference to the “base” year (2016). If they are not met, there is a reduction of award value earned by 10% in relation to each of these additional conditions. Element A awards have a forfeiture threshold set annually at the time of confirmation of the award. If this is breached, 50% of the deferred balance in a participant’s Element A MIP account is forfeited. Element B awards also have a long-term financial underpin based on a minimum EPS threshold that must be maintained over the 3 years from the date of grant. If this is breached, 50% of the Element B award is forfeited. Element B awards are granted after the end of the financial period by reference to which they have been earned and the underpin is set at the time of grant. The measurement period under the MIP by reference to which these targets must be met will be the full financial year ending 31 December 2020. It is the view of the Committee that the targets for the MIP are commercially sensitive as they are primarily related to budgeted future profit and cash levels in the Company and therefore their disclosure in advance is not in the interests of the Company or shareholders. The Committee will, however, provide full retrospective disclosure to enable shareholders to judge the level of award against the targets set. The new post-cessation minimum shareholding requirement will apply. Marshalls plc Annual Report and Accounts 2019 63 Corporate governance Remuneration Committee Report continued Implementation of the Policy in 2019 and 2020 continued Non-Executive Directors There was an increase in the base fee of Non-Executive Directors and the Chair of 2.7 per cent from 1 January 2020, in line with UK employees. Non-Executive Directors reclaim business expenses incurred in the performance of their duties retrospectively against duly presented invoices. Director Vanda Murray (Chair) Janet Ashdown (SID, Chair of Remuneration Committee) Graham Prothero (Chair of Audit Committee) Tim Pile Angela Bromfield (appointed on 1 October 2019) Remuneration Policy 1 January 2020 £’000 1 January 2019 £’000 Percentage increase 175.0 64.8 57.6 49.1 49.1 170.4 63.1 56.1 47.8 – 2.7% 2.7% 2.7% 2.7% – Introduction The Remuneration Committee is required to submit its new Remuneration Policy to a formal shareholder vote at the next Annual General Meeting of the Company. This new Policy is intended to apply for the 3 years beginning on the date of approval at the 2020 Annual General Meeting. The Remuneration Committee, having reviewed its current Remuneration Policy and invited shareholder comment, concluded that the current Policy in substance remained fit for purpose to support the implementation of the Company’s strategy over the next 3-year Policy period. Committee process to determine new Remuneration Policy The process the Committee went through in determining the 2020 Remuneration Policy was as follows: • the Committee considered the Company’s strategy and how the current Remuneration Policy related to and supported the strategy, and formed its own views on the changes (if any) required to the Policy to align with the strategy; • the Committee received advice from its independent remuneration consultant on the impact of the 2018 UK Code, regulations and current investor sentiment; and • the Committee also consulted with Executive Directors and other relevant members of senior management on the proposed changes to the Remuneration Policy. The Committee was mindful in its deliberations on the new Remuneration Policy of any potential conflicts of interest and sought to minimise them through an open and transparent internal consultation process, by seeking independent advice from its external advisers and by undertaking a full shareholder consultation exercise. No member of the Committee is entitled to participate in any Company or Group incentive scheme. During the consultation, Janet Ashdown and Vanda Murray arranged 8 face-to-face meetings with shareholders, and communicated directly with the Company’s 23 largest shareholders, as well as investment and voting institutions such as Glass Lewis, the IA and ISS. All comments and feedback were carefully considered, and certain aspects of the initial draft policy were altered to reflect majority shareholder views. This was a detailed and extensive process, and the Committee is grateful to those who participated to provide comment and feedback. 64 Marshalls plc Annual Report and Accounts 2019 Corporate governance In determining the new Remuneration Policy, the Committee paid particular attention to Provision 40 of the UK Code. The following table summarises the Committee’s views: Factor Clarity Simplicity Risk Predictability Proportionality Alignment to culture How our new Remuneration Policy aligns • The current approach to remuneration has been operated by the Company for 6 years and is well understood by participants and other stakeholders. • The Committee has consulted 3 times with shareholders on the current approach which has been strongly endorsed each time. • The remuneration arrangements are simple, consisting of a combination of an annually benchmarked fixed salary and benefits package and a single incentive plan – the Management Incentive Plan (“MIP”) originally approved by shareholders in 2014. • The rationale and operation of the MIP is easy to understand as it aligns with the Company’s strategy. • The Remuneration Policy is designed to ensure that incentives do not encourage short-term risk taking at the expense of a long-term sustainable business. To this end, the key features of the MIP include: • setting defined limits on the maximum awards which can be earned; • requiring the deferral of a substantial proportion of awards in shares for a material period of time; • aligning the performance conditions with the strategy of the Company; • ensuring a focus on long-term sustainable performance through the MIP; • applying forfeiture thresholds so that awards remain at risk where there is subsequent underperformance; and • ensuring there is sufficient flexibility to adjust payments through malus and clawback and an overriding discretion to depart from formulaic outcomes. • These elements mitigate the risk of target-based incentives by: • limiting the maximum value that can be earned; • deferring the value in shares over a period of up to 5 years, which helps ensure that the performance earning the award remains sustainable and thereby discourages short-term behaviours; • linking any reward to objectives that contribute to the agreed strategy of the Company; • reducing the awards or cancelling them if the behaviours giving rise to the awards are inappropriate; and • reducing the awards or cancelling them, if it appears that the criteria on which the award was based do not reflect the underlying performance of the Company. • Shareholders were given full information on the potential values which could be earned under the MIP at its inception, and the proposed renewal of the MIP retains the same limits, balances and phased reward structure. There is full and transparent retrospective annual reporting disclosure of targets and the degree to which they were achieved. In addition, all the checks and balances set out above under Risk are disclosed as part of the Policy. • The MIP clearly rewards the successful implementation of the strategy. Deferral and measurement of performance over a number of years, ensures that the Executive Directors have a strong incentive to ensure that good performance is sustainable over the long term. Poor performance cannot be rewarded due to the Committee’s overriding discretion to depart from the formulaic outcomes under the MIP if they do not reflect underlying business performance. • A key tenet of the Marshalls culture is a focus on long-term sustainable performance. This is reflected directly in the type of performance conditions used in the MIP which assess sustainable performance using a variety of non-financial and financial measures. • The focus on share ownership and long-term sustainable performance is also a key part of the Company’s culture. In addition, the measures used in the MIP directly support the implementation of the strategy. Marshalls plc Annual Report and Accounts 2019 65 Corporate governance Remuneration Committee Report continued Remuneration Policy continued Changes to the Policy The 2020 Remuneration Policy set out below has not materially changed from the current Policy approved in 2017, other than to ensure full compliance with the UK Code. The proposed changes include alignment of pension contributions for new Executive Director appointments with the pension contribution applicable to the wider workforce, (and a commitment to do so for incumbent Executive Directors by the end of 2022), introduction of a post-cessation shareholding requirement and enhancement of malus and clawback triggers to align with best practice. The following table sets out the key remuneration elements of the UK Code and how the new Remuneration Policy complies: Key remuneration element of the 2018 UK Corporate Governance Code Alignment with our proposed new Remuneration Policy 5-year period between the date of grant and realisation for equity incentives • The MIP Element B meets this requirement. Phased release of equity awards • The MIP ensures the phased release of equity awards through annual rolling vesting. Discretion to override formulaic outcomes • The Remuneration Policy and MIP rules contain the ability to override formulaic outcomes and apply discretion where deemed necessary. Post-cessation shareholding requirement • We have introduced a 2-year post cessation shareholding requirement. Pension alignment • The employer pension contribution for new Executive Directors is reduced to align with the majority employee contribution, and for the incumbent Executive Directors will be reduced to align with the majority workforce contribution by the end of 2022. Extended malus and clawback • Malus and clawback triggers enhanced to align with the FRC’s Guidance on Board Effectiveness. Operation of the new Policy The Committee’s policy is to target a remuneration package that is at around median, for median performance, and in the upper quartile for exceptional performance, and which is closely linked with the Company’s strategic objectives. In setting all elements of remuneration the Committee is advised by independent consultants and periodically uses data from external research into the salaries and benefits paid by companies of a comparable size and complexity to the Company. The aim of the Policy is to attract, retain and continue to motivate talented Executive Directors while aligning remuneration with shareholder interests and with the achievement of strategic performance objectives. This is achieved by balancing a basic fixed package, which is periodically benchmarked against a comparator group, with the opportunity to achieve upper quartile remuneration from a combination of stretching but achievable incentives. The Terms of Reference for the Committee also include the responsibility for setting the policy on incentive reward for senior employees, in particular those who could have a material impact on the risk profile of the Group. The Committee has, in the design and application of the Company’s variable performance related incentive plan, incorporated risk adjustment mechanisms to encourage consistent and sustainable levels of Company performance and to ensure, when selecting performance conditions and the level of challenge within those conditions, that they support the long-term future of the Company. In reviewing its policy and determining remuneration the Committee also considers the wider economic conditions and pay and reward packages elsewhere in its sector and within the business. 66 Marshalls plc Annual Report and Accounts 2019 Corporate governance 2020 Policy table Element Purpose and how it supports the strategy Operation Maximum Fixed remuneration Salary Base salary recognises the market value of the Executive’s role, skills, responsibilities, performance and experience. Pension To enable Executive Directors to make appropriate provision for retirement. Benefits The Company is required to provide benefits in order to be competitive and to ensure it is able to recruit and retain Executive Directors. An Executive Director’s base salary is set on appointment and reviewed annually or when there is a change in position or responsibility. When determining an appropriate level of salary, the Committee considers: • general salary rises for employees; • remuneration practices within the Group; Typically, the base salaries of Executive Directors in post at the start of the Policy period and who remain in the same role throughout the Policy period will be increased by a similar percentage to the average annual percentage increase in salaries of other UK employees in the Group. The exceptions to this rule may be where: • any change in scope, role and responsibilities; • the general performance of the Group; • the experience of the relevant Director; • the economic environment; and • whether a benchmarking exercise is appropriate (using salaries within the ranges paid by the companies in the comparator groups for remuneration benchmarking). • an individual’s package is below market level and a decision is taken to increase base pay to reflect proven competence in the role; or • there is a material increase in scope or responsibility in the individual’s role. The Committee ensures that maximum salary levels are positioned in line with companies of a similar size and validated against industry / sector peers, so that they are competitive. The Committee intends to review the comparators periodically and may add or remove companies as it considers appropriate. Any changes to the comparator groups will be explained in the report on the implementation of Remuneration Policy in the following financial year. The maximum Company contribution or pension allowance is 20% of salary for incumbent Executive Directors; however, this will be reduced to align with the majority contribution to employees by the end of 2022. For any new Executive Director appointments, the maximum employer pension contribution or allowance will be in line with the majority contribution to UK employees. The maximum is the cost of providing the relevant benefits as described. Individuals who are recruited or promoted to the Board may, on occasion, have their salaries set below the targeted policy level until they become established in their role. In such cases subsequent increases in salary may be higher than the general rises for employees until the target positioning is achieved. Executive Directors are entitled to join the defined contribution scheme operated by Marshalls. The Company contributes at an agreed percentage of basic salary. Executive Directors may take a pension allowance in place of the Company’s contribution to the Scheme. Pension allowances are excluded for the purposes of calculating any other element of remuneration based on a percentage of salary. Benefits include car or car allowance, health insurance, life assurance and membership of the Group’s employee share plans (the Executive Directors will also be eligible to participate in any other all employee plan operated by the Company from time to time). The Committee recognises the need to maintain suitable flexibility in the benefits provided to ensure it is able to support the objective of attracting and retaining personnel in order to deliver the Group strategy. Additional benefits may therefore be offered such as relocation allowances on recruitment. Marshalls plc Annual Report and Accounts 2019 67 Corporate governance Remuneration Committee Report continued Remuneration Policy continued 2020 Policy table continued Element Purpose and how it supports the strategy Operation Variable performance-based remuneration Management Incentive Plan (“MIP”) Element A Enabling the successful implementation of Group strategy through setting relevant targets to measure Executive Director performance. Aligns the interests of Executives with shareholders and contributes to the retention of key individuals by ensuring that Executives take part of their annual bonus in shares or share-linked units rather than cash. MIP Element B To link variable pay to achievement of annual financial and business objectives. To promote long-term shareholding in the Company and strengthen alignment between interests of Executive Directors and senior managers and those of shareholders. Annual performance conditions and targets are set at the beginning of the Plan year by reference to financial, strategic and operational objectives by the Remuneration Committee. As well as determining the performance conditions, targets and relative weighting, the Committee will also determine, within the approved range, the level of target bonus at the beginning of the Plan year. Upon assessment of performance by the Committee, a contribution will be made by the Company into the participant’s Plan Account and 50% of the cumulative balance will be paid in cash. Any remaining balance will be converted into shares or share-linked units. 100% of the balance in the final year of the Plan will normally be settled in the form of shares transferred or allotted to the participant. During the Plan period, 50% of the retained balance is at risk of forfeiture based on a minimum performance measure determined annually by the Committee. Full details of the relevant targets and their weighting, and how they have been measured, will be reported in the Remuneration Report for the relevant financial year. The Committee may award dividend equivalents on shares or share-linked units held under the Plan to Plan participants to the extent that they vest. Annual performance conditions and targets are set by reference to financial, strategic and operational objectives by the Remuneration Committee. Awards are granted retrospectively in shares based on the achievement of performance targets for the relevant year. Awards vest (subject to continued employment) 3 years from grant. Sale restrictions apply to Awards that have vested: normally vested awards may not be sold for a further 2 years after vesting or post cessation of employment. There is a financial underpin which, if not achieved over the 3-year vesting period, results in the loss of up to 50% of unvested awards. Details of the performance conditions, targets and their level of satisfaction for the year being reported on will be set out in the Remuneration Report for the relevant financial year. The Committee may award dividend equivalents on shares or share-linked units held under the Plan to Plan participants to the extent that they vest. 68 Marshalls plc Annual Report and Accounts 2019 Maximum Performance conditions Maximum 150% of salary An award under the Plan is subject to satisfying relevant performance conditions and Threshold 0% Target 50% Maximum 100% Threshold 0% Target 50% Maximum 100% targets determined annually by the Remuneration Committee by reference to financial and non-financial objectives that are closely linked to the strategy of the business and may also contain individual performance objectives, measured over a period of one financial year. A minimum of 50% of the bonus is based on financial performance measures. The Committee is of the opinion that given the commercial sensitivity arising in relation to the detailed financial targets used for the bonus, disclosing precise targets for the Plan in advance would not be in shareholder interests. Targets, performance achieved and awards made will be published at the end of the performance period so shareholders can fully assess the basis for any pay-outs under the Plan. The Committee retains the discretion to: • change the performance measures and targets and the weighting attached to the performance measures and targets part-way through a performance year if there is a significant and material event which causes the Committee to believe the original measures, weightings and targets are no longer appropriate; and • make downward or upward adjustments to the amount of bonus contribution earned resulting from the application of the performance measures, if the Committee believes that the bonus outcomes are not a fair and accurate reflection of business performance. Any adjustments or discretion applied by the Committee will be fully disclosed in the following year’s Remuneration Report. The Plan contains malus and clawback provisions. targets determined annually by the Remuneration Committee by reference to financial and non-financial objectives that are closely linked to the strategy of the business and may also contain individual performance objectives, measured over a period of one financial year. The Committee takes the same view on commercial sensitivity as for Element A of the MIP. The discretions set out above for Element A also apply to Element B. Any adjustments or discretion applied by the Committee will be fully disclosed in the following year’s Remuneration Report. The Plan contains malus and clawback provisions. Maximum 100% of salary An award under the Plan is subject to satisfying relevant performance conditions and Corporate governance Remuneration Policy continued 2020 Policy table continued Variable performance-based remuneration (“MIP”) Element A implementation of Group strategy through setting relevant targets to measure Executive Director performance. Aligns the interests of Executives with shareholders and contributes to the retention of key individuals by ensuring that Executives take part of their annual bonus in shares or share-linked units rather than cash. beginning of the Plan year by reference to financial, strategic and operational objectives by the Remuneration Committee. As well as determining the performance conditions, targets and relative weighting, the Committee will also determine, within the approved range, the level of target bonus at the beginning of the Plan year. Upon assessment of performance by the Committee, a contribution will be made by the Company into the participant’s Plan Account and 50% of the cumulative balance will be paid in cash. Any remaining balance will be converted into shares or share-linked units. 100% of the balance in the final year of the Plan will normally be settled in the form of shares transferred or allotted to the participant. During the Plan period, 50% of the retained balance is at risk of forfeiture based on a minimum performance measure determined annually by the Committee. Full details of the relevant targets and their weighting, and how they have been measured, will be reported in the Remuneration Report for the relevant financial year. The Committee may award dividend equivalents on shares or share-linked units held under the Plan to Plan participants to the extent that they vest. and strengthen alignment between interests of Executive Directors and senior managers and those of shareholders. Sale restrictions apply to Awards that have vested: normally vested awards may not be sold for a further 2 years after vesting or post cessation of employment. There is a financial underpin which, if not achieved over the 3-year vesting period, results in the loss of up to 50% of unvested awards. Details of the performance conditions, targets and their level of satisfaction for the year being reported on will be set out in the Remuneration Report for the relevant financial year. The Committee may award dividend equivalents on shares or share-linked units held under the Plan to Plan participants to the extent that they vest. Element Purpose and how it supports the strategy Operation Maximum Performance conditions Management Incentive Plan Enabling the successful Annual performance conditions and targets are set at the Maximum 150% of salary Threshold 0% Target 50% Maximum 100% MIP Element B To link variable pay to achievement of annual financial and business objectives. Annual performance conditions and targets are set by reference to financial, strategic and operational objectives by the Remuneration Committee. To promote long-term achievement of performance targets for the relevant year. Awards shareholding in the Company vest (subject to continued employment) 3 years from grant. Awards are granted retrospectively in shares based on the Maximum 100% of salary Threshold 0% Target 50% Maximum 100% An award under the Plan is subject to satisfying relevant performance conditions and targets determined annually by the Remuneration Committee by reference to financial and non-financial objectives that are closely linked to the strategy of the business and may also contain individual performance objectives, measured over a period of one financial year. A minimum of 50% of the bonus is based on financial performance measures. The Committee is of the opinion that given the commercial sensitivity arising in relation to the detailed financial targets used for the bonus, disclosing precise targets for the Plan in advance would not be in shareholder interests. Targets, performance achieved and awards made will be published at the end of the performance period so shareholders can fully assess the basis for any pay-outs under the Plan. The Committee retains the discretion to: • change the performance measures and targets and the weighting attached to the performance measures and targets part-way through a performance year if there is a significant and material event which causes the Committee to believe the original measures, weightings and targets are no longer appropriate; and • make downward or upward adjustments to the amount of bonus contribution earned resulting from the application of the performance measures, if the Committee believes that the bonus outcomes are not a fair and accurate reflection of business performance. Any adjustments or discretion applied by the Committee will be fully disclosed in the following year’s Remuneration Report. The Plan contains malus and clawback provisions. An award under the Plan is subject to satisfying relevant performance conditions and targets determined annually by the Remuneration Committee by reference to financial and non-financial objectives that are closely linked to the strategy of the business and may also contain individual performance objectives, measured over a period of one financial year. The Committee takes the same view on commercial sensitivity as for Element A of the MIP. The discretions set out above for Element A also apply to Element B. Any adjustments or discretion applied by the Committee will be fully disclosed in the following year’s Remuneration Report. The Plan contains malus and clawback provisions. Marshalls plc Annual Report and Accounts 2019 69 Corporate governance Remuneration Committee Report continued Remuneration Policy continued Minimum shareholding requirement The minimum shareholding requirements for Executive Directors, is 200 per cent of base salary. Executive Directors are required to retain 50 per cent of the post-tax number of vested shares from the Company incentive plans until the minimum shareholding requirement is met and maintained. Adherence to these guidelines is a condition of continued participation in the incentive arrangements. This policy ensures that the interests of Executive Directors and those of shareholders are closely aligned. The Committee retains the discretion to increase the minimum shareholding requirements. On cessation of employment, Executive Directors are required to retain their minimum shareholding requirement immediately prior to departure for one year and to retain 50 per cent of this minimum shareholding for a further year. Where their actual shareholding at departure is below the minimum shareholding requirement the Executive Director’s actual shareholding is required to be retained on the same terms and for the same periods. Malus and clawback Malus is the adjustment of Company Element A contributions or the balance in a participant’s Element A Plan Account or unvested Element B awards because of the occurrence of one or more circumstances listed below. The adjustment may result in the value being reduced to nil. Clawback is the recovery of payments made under Element A of the MIP or vested Element B awards as a result of the occurrence of one or more circumstances listed below. Clawback may apply to all or part of a participant’s payment under Element A of the MIP or an Element B award and may be affected, among other means, by requiring the transfer of shares, payment of cash or reduction of awards or bonuses. The circumstances in which malus and clawback could apply are as follows: • discovery of a material misstatement resulting in an adjustment in the audited accounts of the Group or any Group company; • if the assessment of any performance condition or condition in respect of a Company Element A contribution or Element B award was based on error, or inaccurate or misleading information; • the discovery that any information used to determine the Company Element A contribution or Element B award was based on error, or inaccurate or misleading information; • action or conduct of a participant which amounts to fraud or gross misconduct; • a material failure of risk management; • corporate failure; or • events or the behaviour of a participant have led to the censure of a Group company by a regulatory authority or have had a significant detrimental impact on the reputation of any Group company provided that the Board is satisfied that the relevant participant was responsible for the censure or reputational damage and that the censure or reputational damage is attributable to the participant. Element A Element B Malus Clawback Up to the date of a payment under the Plan To the end of the 3-year vesting period 2 years post the date of any payment under the Plan 2 years post vesting The Committee believes that the rules of the Plan provide sufficient powers to enforce malus and clawback where required. 70 Marshalls plc Annual Report and Accounts 2019 Corporate governance Total remuneration opportunity In future years, the total remuneration opportunity under the Policy for each of the Executive Directors at 4 different levels of performance is shown below: CEO CFO Outperformance plus 50% share price appreciation Outperformance plus 50% share price appreciation 29% Outperformance 33% Target 35% 40% 24% 12% 2,125 29% Outperformance 27% 1,874 33% Target 35% 40% 24% 12% 1,315 27% 1,160 50% 30% 20% 1,248 50% 30% 20% 773 Below threshold 100% 622 Below threshold 100% 385 0 500 1,000 1,500 2,000 2,500 0 500 1,000 1,500 Salary, benefits and pension MIP Element A MIP Element B Proportion due to share price growth £’000 £’000 Notes: a) Base salary and pension are effective from 1 January 2020. b) Benefits information is taken from the single figure remuneration table in the 2019 Annual Remuneration Report. The benefits value reflects a fully expensed company car, medical insurance and any other taxable benefits. c) Achievement of target will result in 50 per cent of the annual award under the MIP. d) The minimum assumes a performance that fails to meet the threshold for Element A and Element B so is the level below which no variable pay under the MIP is earned. e) The maximum represents the full 250 per cent of salary potential under the MIP. f) The maximum + 50 per cent share price increase represents the full 250 per cent of salary potential under the MIP, as well as the maximum value assuming a 50 per cent increase in share price for MIP Element B awards. Pay at risk The charts below set out the single figure for each Executive Director based on whether the elements remain "at risk". For example: • payment / vesting is subject to continuing employment for a period; • performance conditions have to still be satisfied; and • elements are subject to malus or clawback for a period, over which the Company can recover sums paid or withhold vesting. Figures have been calculated based on target performance (fixed elements plus 50 per cent of the maximum MIP). The charts have been based on the same assumptions as set out for the illustrations of the application of the total remuneration opportunity under the new Policy. At risk Salary £388,000 £310,000 Pension and benefits £75,000 CEO 50+ CFO At risk Salary £501,000 £626,000 Pension and benefits £121,00050+ Consideration of Remuneration Policy for other employees The Committee takes into account pay and reward packages of the UK workforce as a whole and of other groups of employees in applying its Policy and determining the remuneration of the Executive Directors. Senior management participates in the MIP. The performance criteria for awards under the MIP and the holding and vesting periods are the same for senior management as for the Executive Directors, with varying percentages of salary dependent on seniority and the strategic impact of the role. For other tiers of management and below, the Company operates annual and long-term incentive arrangements using criteria that may be job specific and which also link with Company or individual performance. In general, salary increases for the Executive Directors will be in line with the average rise for UK employees. The Committee has arrangements in place to receive and review the views of the Company’s employees on Executive remuneration and the application of the Remuneration Policy by means of regular meetings with employee groups attended by the designated Non-Executive Director for workforce engagement, periodic surveys and detailed half yearly reports from the Group HR Director to the Committee. These are regularly and openly communicated to the Board. In setting the Policy, the Company has not used any remuneration comparison measurements. Marshalls plc Annual Report and Accounts 2019 71 Corporate governance 40 + 10 + I 40 + 10 + I Remuneration Committee Report continued Remuneration Policy continued Recruitment Policy The remuneration of any new Executive Director will be determined in accordance with the principles set out in the Remuneration Policy. The Committee is mindful of the need to avoid paying more than it considers necessary to secure a preferred candidate of the appropriate calibre and with the experience needed for the role. In setting the remuneration for new recruits, the Committee will have regard to guidelines and shareholder sentiment regarding one-off or enhanced short-term or long-term incentive payments as well as giving consideration to the appropriateness of any performance measures associated with an award. The Company’s detailed policy when setting remuneration for the appointment of new Executive Directors is summarised below: Remuneration element Recruitment policy Salary, benefits and pension These will be set in line with the policy for existing Executive Directors, save that the employer pension contributions for new appointments will be aligned with the range of pension contribution applicable to the wider UK workforce. MIP Maximum participation will be set in line with the Company’s policy for existing Executive Directors and will not exceed 250% of salary. Maximum variable remuneration The maximum variable remuneration which may be granted is 250% of salary. “Buyout” of incentives forfeited on cessation of employment Relocation policies Where the Committee determines that the individual circumstances of recruitment justify the buyout of any elements of a previous employment package, the equivalent value of any incentives that will be forfeited on cessation of an Executive Director’s previous employment will be calculated taking into account the following: • the proportion of the performance period completed on the date of the Executive Director’s cessation of employment; • the performance conditions attached to the vesting of these incentives and the likelihood of them being satisfied; and • any other terms and conditions having a material effect on their value (“lapsed value”). The Committee may then grant up to the same value as the lapsed value, where possible, under the Company’s incentive plan. To the extent that it was not possible or practical to buy out the lapsed value within the terms of the Company’s existing incentive plan, a bespoke arrangement would be used. In instances where the new Executive Director is required to relocate or spend significant time away from their normal residence, the Company may provide one-off compensation to reflect the cost of relocation for the Executive Director. The level of the relocation package will be assessed on a case-by-case basis but will take into consideration any cost of living differences / housing allowance and schooling. No relocation allowances will apply for a period greater than 2 years. Where an existing employee is promoted to the Board, the Policy set out above would apply from the date of promotion but there would be no retrospective application of the Policy in relation to subsisting incentive awards or remuneration arrangements. Accordingly, prevailing elements of the remuneration package for an existing employee would be honoured and form part of the ongoing remuneration of the person concerned. These would be disclosed to shareholders in the Remuneration Report for the relevant financial year. The Company’s policy when setting fees for the appointment of new Non-Executive Directors is to apply the policy which applies to current Non-Executive Directors. Directors’ service contracts Element Term Date of contract / appointment Executive Directors Non-Executive Directors Martyn Coffey September 2013 Jack Clarke October 2014 Vanda Murray May 2018 Graham Prothero May 2017 Angela Bromfield October 2019 Janet Ashdown March 2015 (renewed in March 2018) Tim Pile October 2010 (renewed in 2013, 2016 and May 2019) Notice period in months Company Director 12 (6) 12 (6) 6 (6) 6 (6) 6 (6) 6 (6) 6 (6) In accordance with Policy, Executive Directors’ service contracts do not contain liquidated damages clauses, nor any contractual arrangements that would guarantee a pension with limited or no abatement on severance or early retirement or providing for compensation for loss of office or employment that occurs because of a takeover bid. The maximum notice period for an Executive Director is 12 months. 72 Marshalls plc Annual Report and Accounts 2019 Corporate governance Executive Directors are permitted to hold one external plc Board appointment, and may retain any remuneration received in that capacity. Non-Executive Directors, including the Chair, are appointed under letters of appointment, usually for a term of 3 years. Either the Company or the Non-Executive Director may terminate the appointment before the end of the current term on 6 months’ notice. If the unexpired term is less than 6 months, notice does not need to be served. No compensation is payable if a Non-Executive Director is required to stand down. All Directors are subject to annual re-election. Policy on termination payments When considering compensation for loss of office, the Committee will always seek to minimise the cost to the Company and apply mitigation to any payment. Compensation for loss of office can only be paid if consistent with the Policy or otherwise with shareholder approval by Ordinary Resolution. Recruitment element Treatment on cessation of employment General The Committee will honour Executive Directors’ contractual entitlements. If a contract is to be terminated, the Committee will determine such mitigation as it considers fair and reasonable in each case. Service contracts do not contain liquidated damages clauses. There are no contractual arrangements that would guarantee a pension with limited or no abatement on severance or early retirement. There is no agreement between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid. The Committee reserves the right to make additional payments where such payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation), or by way of settlement or compromise of any claim arising in connection with the termination of an Executive Director’s office or employment. Salary, benefits and pension These will be paid over the notice period. The Company has discretion to make a lump sum payment in lieu. Incentive Schemes Good leaver reason(1) Other reason Discretion For the year of cessation Other leavers: No Company bonus contribution payable for year of cessation. Good leavers: Performance conditions will be measured at the normal measurement date. The Company bonus contribution will normally be pro-rated for the period worked during the financial year. The Remuneration Committee has the following elements of discretion: • to determine that an Executive is a good leaver. It is the Remuneration Committee’s intention to only use this discretion in circumstances where there is an appropriate business case which will be explained in full to shareholders; and • to determine whether to pro-rate the Company bonus contribution. The Remuneration Committee’s normal policy is that a variable bonus will be pro-rated depending on the proportion of the measurement / vesting period in which the Executive remained in employment. It is the Remuneration Committee’s intention to use discretion not to pro-rate in circumstances where there is an appropriate business case which will be explained in full to shareholders. Deferred balances in participant’s Element A plan account MIP Element A Good leavers: The balance in the participant’s Element A Plan Account will be payable on cessation of employment. Other leavers: The balance in the participants’ Element A Plan Account will be forfeited on cessation of employment. The Remuneration Committee has the following elements of discretion: • to determine that an Executive is a good leaver (subject to the principles set out above); and • to determine whether to pro-rate the balance of the participant’s Element A Plan Account payable on cessation. A participant’s Element A Plan Account balance reflects prior year achievement, so, subject to any malus or clawback, the Remuneration Committee’s normal policy is that it will not pro-rate. The Remuneration Committee will determine whether to pro-rate based on the circumstances of the Executive’s departure. Marshalls plc Annual Report and Accounts 2019 73 Corporate governance Remuneration Committee Report continued Remuneration Policy continued Policy on termination payments continued Recruitment element Treatment on cessation of employment Incentive Schemes Good leaver reason(1) Other reason Discretion For the year of cessation MIP Element B Good leavers: MIP B awards are normally subject to the Executive being on the payroll and not having an agreed leaving date as at the date of grant (as these awards relate to the previous year). The Remuneration Committee has discretion to make a MIP B award during the year of cessation, in which case performance conditions are measured at the normal measurement date and would normally be pro-rated. Subsisting awards Good leavers: Pro-rated to time and performance in respect of each subsisting award and subject to the satisfaction of the financial underpin on vesting. Sale restrictions will normally continue to apply for 2 years post-cessation, or from vesting (if earlier). Other leavers: No award for year of cessation. The Remuneration Committee has the following elements of discretion: • to determine that an individual is a good leaver in accordance with the principles set out previously; and • to determine whether to make an award or to pro-rate the award by reference to the period during which the Executive remained in employment. The Remuneration Committee’s normal policy is that it will pro-rate for time. It is the Remuneration Committee’s intention to use discretion to not pro-rate only in circumstances where there is an appropriate business case which will be explained in full to shareholders. Other leavers: Lapse of any unvested awards. Vested awards will continue to be subject to the sale restrictions. The Remuneration Committee has the following elements of discretion: • to determine that an individual is a good leaver. It is the Remuneration Committee’s intention to only use this discretion in circumstances where there is an appropriate business case which will be explained in full to shareholders; • to vest the award at the end of the original deferral period or at the date of cessation. The Remuneration Committee will make this determination depending on the type of good leaver reason resulting in the cessation; and • to determine whether to pro-rate the maximum number of shares to the time from the date of grant to the date of cessation. The Remuneration Committee’s normal policy is that it will pro-rate awards for time. It is the Remuneration Committee’s intention to use discretion to not pro-rate only in circumstances where there is an appropriate business case which will be explained in full to shareholders. It should be noted that the performance targets for subsisting awards will already have been satisfied at the date of grant. Other contractual obligations There are no contractual obligations to participants in relation to the incentive schemes other than those set out above. The MIP is a discretionary incentive scheme. (1) A good leaver reason is defined as cessation by reason of death, ill health, injury or disability, redundancy, retirement, the employing company ceasing to be a Group company, the transfer of employment to a company which is not a Group company, or otherwise at the discretion of the Committee (as described above). Cessation of employment in circumstances other than those set out above is cessation for other reasons. 74 Marshalls plc Annual Report and Accounts 2019 Corporate governance Change of control Element A of the MIP For the year of the change of control Impact Discretion Performance conditions will be measured at the date of the change of control. The Company bonus contribution will normally be pro-rated to the date of the change of control. The Remuneration Committee has discretion to determine whether to pro- rate the Company bonus contribution to time. The Remuneration Committee’s normal policy is that it will pro-rate for time. It is the Remuneration Committee’s intention to use discretion to not pro-rate in circumstances where there is an appropriate business case which will be explained in full to shareholders. Element A of the MIP Deferred balances in participant’s Element A Plan Account The balance in the participant’s Element A Plan Account will be payable on the change of control. Element B of the MIP For the year of the change of control Element B of the MIP Subsisting awards on a change of control Performance conditions will be measured at the date of the change of control. The award will normally be pro-rated to the date of the change of control and will vest on grant. The sale restrictions will not apply. Awards will vest on a change of control subject to the satisfaction of the financial underpin on vesting. Sale restrictions will not apply. The Remuneration Committee has the following elements of discretion: • to determine whether the payment of the balance of the participant’s Element A Plan Account should be in cash or shares or a combination of both; and • to determine whether to pro-rate the balance of the participant’s Element A Plan Account payable on change of control. The Remuneration Committee’s normal policy is that it will not pro-rate. The Remuneration Committee will determine whether to pro-rate based on the circumstances of change of control. It should be noted that the deferred balances in a participant’s Element A Plan Account relate to bonuses earned based on the satisfaction of performance conditions in previous financial years. The Remuneration Committee has the following elements of discretion: • to determine whether to pro-rate the award to time. The Remuneration Committee’s normal policy is that it will pro-rate for time. It is the Remuneration Committee’s intention only to use discretion to not pro-rate in circumstances where there is an appropriate business case which will be explained in full to shareholders; and • to determine to pay cash in lieu of shares. The Remuneration Committee has the following elements of discretion: • to determine whether to pro-rate the maximum number of shares to the time from the date of grant to the date of the change of control. The Remuneration Committee’s normal policy is that it will not pro-rate. The Remuneration Committee will determine whether to pro-rate based on the circumstances of change of control; and • to determine to pay cash in lieu of shares. It should be noted that the Element B awards that are outstanding would have been made following satisfaction of performance targets for previous years. Discretion The Committee has discretion in several areas of Policy. The Committee may also exercise operational and administrative discretions under relevant plan rules approved by shareholders as set out in those rules. In addition, the Committee has the discretion to amend policy with regard to minor or administrative matters where it would be, in the opinion of the Committee, disproportionate to seek or await shareholder approval. Marshalls plc Annual Report and Accounts 2019 75 Corporate governance Remuneration Committee Report continued Remuneration Policy continued Consideration of shareholder views The Committee regularly consults with shareholders on Executive remuneration. The Remuneration Committee gave shareholders the opportunity to comment on the 2020 Policy before its finalisation. The Committee is committed to consulting in advance with shareholders before making any material changes to any element of Executive remuneration. Chair and Non-Executive Directors’ remuneration policy Element Fees Purpose and how it supports the strategy Operation Maximum Annual fee to attract and retain experienced and skilled Non-Executive Directors with the necessary experience and expertise to advise and assist with establishing and monitoring the strategic objectives of the Company. Fees reflect the time commitment and responsibilities of the roles. The Board is responsible for setting the remuneration of the Non-Executive Directors. The Remuneration Committee is responsible for setting the Chair’s fees. Non-Executive Directors are paid an annual fee. There are additional fees for the SID role and chairing Committees and the Company retains the flexibility to pay fees for the membership of Committees. The Chair does not receive any additional fees for membership of Committees. Fees are reviewed annually based on equivalent roles in the comparator group used to review salaries paid to the Executive Directors. Non-Executive Directors and the Chair do not participate in any variable remuneration or benefits arrangements. The fees for Non-Executive Directors and the Chair are broadly set at a competitive level against the comparator group. In general, the level of fee increase for the Non-Executive Directors and the Chair will be set taking account of any change in responsibility and salary increases for UK employees generally. The Company will pay reasonable expenses incurred by the Non-Executive Directors and Chair in the performance of their duties and may settle any tax incurred in relation to these. Fairness, diversity and wider workforce considerations Introduction This section of the Remuneration Report deals with the following: • The Committee’s approach to the review of wider workforce pay policies and how it has taken these into consideration in setting remuneration; • The alignment of the incentives operated by the Company with its culture and strategy; • General pay and conditions in the Company; • Gender and diversity; and • Comparison metrics relating to Executive and employee remuneration. Process The Committee fulfils its’ responsibility for the oversight and review of wider workforce pay, policies and incentives through a formal process. Reporting is prepared on a six monthly basis to show details of all elements of remuneration for all members of the workforce (excluding temporary and agency staff and consultants). The reports include data on: • Salary and salary increases: • General positioning of remuneration packages (benchmarking); • Bonus (total eligible population, target and maximum range, performance conditions, payment method, scope for discretion / recovery under malus and clawback provisions); • Sales and commission plans; • Long-term incentive plans (total eligible population, target and maximum range, performance conditions, payment method, scope for discretion / recovery under malus and clawback provisions, vesting and holding periods); and • Pension schemes and other benefits (defined contribution plan, total eligible population, Company contribution and employee contribution). This information is used to inform the overall Reward Strategy and action plans for the wider UK workforce. As Senior Independent Director, Chair of the Remuneration Committee and designated Non-executive Director for workforce engagement, Janet Ashdown attends employee forums within a planned engagement framework. This forum, the Employee Voice Group (“EVG”), meets on at least a quarterly basis and provides valuable input into new policy development around a range of topics including reward and remuneration policy. The meetings are chaired by the Group Human Resources Director and attended by a mixed group of colleagues from across the different parts of the Group. Other Non-Executive Directors may also attend EVG meetings. 76 Marshalls plc Annual Report and Accounts 2019 Corporate governance The Committee also receives feedback from employee surveys and the Executive Roadshows which are a series of regular site visits made by the Executive Directors and senior management. The Committee has the authority to ask for additional information from the Company in order to carry out its responsibilities. The levels of remuneration and the packages offered vary across the Company depending on the employee’s level of seniority and role. The Committee, when conducting its review, is paying particular attention to: • whether the element of remuneration is consistent with the Company remuneration principles; • whether incentive structures are designed in a way that promotes the Company’s strategy, values and culture; • if there are differences in remuneration, whether, they are objectively justifiable; and • whether the approach seems fair and equitable in the context of other employee packages. The Committee uses its review of the wider workforce remuneration and incentives to inform the approach applied to the remuneration of the Executive Directors and senior management. In particular, the Committee is focused on whether, within the framework set out above, the approach to the remuneration of the Executive Directors and senior management is consistent with that applied to the wider workforce. Progress during 2019 During 2019, the Committee conducted its first full audit of wider workforce pay and conditions. The Committee has a clear strategy in place to develop this process and rectify any disparities revealed as a result of the review over the coming years. Overview of findings The key findings of the Committee’s review for 2019 were as follows: • Average salary increases for employees across the Company are being applied on an equitable and objective basis. The average rise of 3.3 per cent for 2019 was the same as that applied to the salaries of the Executive Directors, consistent with Policy. The exception to this approach (as explained for the 2020 CEO changes in the Chair’s Annual Statement) would be the same throughout the Company, with the opportunity to address any material discrepancy between pay and the role being carried out. • The incentive scheme structures that apply to colleagues below Executive Director level, are all designed and operate in accordance with the Company remuneration principles, and general performance targets for incentive schemes apply the same rigorous performance criteria. In particular, the incentive schemes for senior management do not motivate irresponsible behaviours, use the same strategic KPIs as those reported for Executive Directors and include both financial and non-financial measures with sustainability and employee well-being measurements. • In line with the Company’s wider policy on pay, all employees are eligible for enrolment in a defined contribution pension arrangement. The current basic contribution (4 per cent employer, 4 per cent employee for the Marshalls Group) is being increased by 1 per cent (employer and employee) in April 2020. There are incumbent Director and senior manager packages with a higher employer pension; however it is expected that the pension contribution for new Executive Directors and senior management in future will be aligned with the pension contribution applicable to the wider workforce. • The benefits structure includes pension and life assurance cover (for death in service) to all Group employees. The minimum lump sum benefit for death in service has increased to £50,000 with effect from 1 January 2019. Other benefits such as private medical cover and health screening are offered according to the level of seniority of the role in line with market practice. In summary, the Committee is satisfied that the approach to remuneration across the wider workforce is consistent with the Company’s Remuneration Policy and the wider principles of fairness and sustainability that are fundamental to the Group’s culture. Further, in the Committee’s opinion the approach to Executive remuneration aligns with wider Company pay policy and there are no anomalies specific to the Executive Directors. The Company expects to develop its engagement and communication channels in relation to remuneration during 2020, and to report in more detail to shareholders on how this has been achieved. Marshalls plc Annual Report and Accounts 2019 77 Corporate governance Remuneration Committee Report continued Fairness, diversity and wider workforce considerations continued Overview of findings continued • The majority of our employees are able to share in the success of the Company through incentive compensation. In line with market practice the level of incentive compensation and whether it is paid solely in cash or in a mixture of cash and deferred shares depends on the level of seniority of the employee. The incentive approach applied to the Executive Directors aligns with the wider Company policy on incentives, which is to associate a higher percentage of at-risk performance pay with the seniority of the role, and to increase the amount of incentive deferred, provided in equity and / or measured over the longer term for roles with greater seniority. • The following table shows the cascade of incentives throughout the Company: Level (number) Executive Directors (2) Executive Committee (7) Senior management (12) Employees in BSP (69) Employees in other job related bonus or commission schemes (409) Participation in Element A of the MIP (percentage range) Participation in Element B of the MIP (percentage range) Participation in other bonus or commission plans 150% of salary 100% of salary 45% to 120% of salary 30% to 70% of salary 45% to 55% of salary 30% to 35% of salary X X X 15% to 45% +5% bonus shares Sales bonuses Participation in all-employee equity plans (Sharesave / SPP) In summary the Committee is satisfied that the approach to remuneration across the Company is consistent with the Company’s principles of remuneration. Further, in the Committee’s opinion the approach to Executive remuneration aligns with wider Company pay policy and there are no anomalies specific to the Executive Directors. Widening employee share ownership Equity participation is offered to all employees of the Company through the Share Purchase Plan and SAYE schemes and to managers and the Executives through the MIP or the BSP, each of which involves the award of shares. It is the Company’s policy to allow employees to share in Company success by means of equity participation. Employees can become shareholders through employee share plans including: Bonus Share Plan The Bonus Share Plan approved in 2015 provides the opportunity for participants to earn “free” bonus shares of up to 5 per cent of salary, which vest after 3 years subject to performance conditions and continued employment; performance conditions are usually aligned with those set for the MIP. Sharesave Scheme / Share Purchase Plan Marshalls launched a Sharesave / SAYE Scheme in 2015 to encourage wider ownership of Marshalls plc shares across the entire workforce, so that the employees are able to participate in the Group’s success in a way that aligns their interests with those of shareholders. The 2015 SAYE Scheme matured in December 2018 resulting in 640 employees exercising their option to acquire shares from their savings fund at a discounted share price of £2.91 and a total of 728,492 shares being issued to employees. The Share Purchase Plan is an “evergreen” scheme under which employees may purchase shares in the market on a monthly basis out of gross salary, another way of incentivising investment by employees in the Company’s shares. The Group intends to launch another SAYE scheme for employees in 2020. 78 Marshalls plc Annual Report and Accounts 2019 Corporate governance Real Living Wage employer Marshalls is proud to be a Real Living Wage employer, underscoring its commitment to its employees. Marshalls achieved living wage accreditation in 2018 and has maintained its status throughout 2019. Fairness throughout our supply chain From real living wages in the UK to the elimination of child labour in India, we believe that what is good for society is good for business. Our approach to labour rights is driven by the ETI Base Code, which we adopted in 2005. To ensure that the Base Code principles are embedded within operations and supply chains, we employ social auditors in India, China and Vietnam, which regularly carry out checks and audits to ensure that the Base Code is being upheld and to report any concerns or violations so that we can take swift action should we need to. Marshalls also works closely with external organisations to ensure our business and supply chain operates to identify and eliminate slavery in all its forms under the principles now embodied in the Modern Slavery Act 2015. Our Modern Slavery Statement can be found on the Company’s website (www.marshalls.co.uk/our-policies). Marshalls was the first company in its sector to belong to the ETI and is committed to the ETI Base Code. Pay comparisons CEO ratio The ratio of CEO pay (based on the single total figure of remuneration) to that of UK employees for the last 2 years, in the table below. The calculation has been performed using the methodology in Option A of the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) in line with best practice and is based on the total single figure of remuneration. Financial year 2019 2018 CEO pay ratio Employee salary Employee total pay and benefits 25th percentile 50th percentile 75th percentile CEO salary £’000 25th percentile £’000 50th percentile £’000 75th percentile £’000 77.6:1 60.6:1 51.0:1 58:1 44:1 37:1 460 445 22 27 36 35 40 42 CEO total pay and benefits £’000 2,215 1,602 25th percentile £’000 50th percentile £’000 75th percentile £’000 28 28 36 36 43 43 The 25th, 50th and 75th percentiles have been calculated using actual pay for the year ended 31 December 2019, increased where appropriate to give full time equivalent remuneration for part time workers or those working only part of the year. To give context to this ratio, we have included below a chart tracking CEO pay and average employee pay since Martyn Coffey’s appointment alongside Marshalls’ TSR performance over the same period. The Remuneration Committee has always been committed to ensuring that CEO reward is commensurate with performance. The chart shows a clear alignment between shareholder returns and CEO single figure pay. The CEO single figure for 2013 was affected by the retiring CEO’s 2012 and 2013 LTIP awards vesting early on a pro-rata basis owing to his good leaver status. Shareholders expect the CEO to have a significant proportion of pay based on performance and paid in shares. It is this element of the package which provides the volatility in CEO remuneration and the variations in the ratio. The Committee is satisfied that the underlying picture does not show a divergence trend between the CEO remuneration and employees generally, i.e. excluding share price volatility, the relationship with employee pay is consistent. This is supported by the percentage change in CEO remuneration table in the next section. Ratio of single figure total remuneration to average employee 25.2x 50.1x 37.5x 48.9x 2014 2015 2016 2017 2018 31.9x 2019 42.4x • Our CEO pay is made up of a higher proportion of performance related incentives than that of our employees, in line with the expectations of our shareholders. This introduces a higher degree of variability in CEO pay each year which affects the ratio. • The value of long-term incentives which measure performance over 3 years is disclosed in pay in the year it vests; this affects historical years up to 2017. This increases the CEO pay in that year, again impacting the ratio for that year. • Long-term incentives are provided in shares, and therefore an increase in share price during any deferral or vesting period magnifies the impact of a long-term incentive award in the year in which it vests. The high ratio in 2013 reflects the early vesting of long-term incentive awards held by the previous CEO, Graham Holden, on his retirement. • We recognise that the ratio is driven by the different structure of the pay of our CEO versus that of our employees, as well as the make-up of our workforce. This ratio varies between businesses even in the same sector. What is important from our perspective is that this ratio is influenced only by the differences in structure, and not by divergence in fixed pay between the CEO and wider workforce. • Where the base structure of remuneration is similar, for example on comparison between the Executive Committee pay and that of the CEO, the ratio is much more stable over time. Marshalls plc Annual Report and Accounts 2019 79 Corporate governance Remuneration Committee Report continued Fairness, diversity and wider workforce considerations continued CEO / average pay against TSR 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0 2014 2015 2016 2017 2018 2019 — CEO single figure — Average pay — Total shareholder return Percentage change in CEO’s remuneration The table below shows how the percentage change in the CEO’s salary, benefits and bonus between 2018 and 2019 compares with the percentage change in the average of each of those components of pay for the UK-based employees of the Group as a whole. Salary £’000 2019 460 2018 445 100,071 94,758 2,744 36.5 2,639 35.9 Percentage change (Note a) % 3.3 5.6 4.0 1.6 Taxable benefits £’000 Percentage change Bonus (Note b) £’000 Percentage change 2019 33 2,703 319 8.5 2018 32 2,190 320 6.8 % 3.1 23.4 (0.3) 23.8 2019 1,039 6,868 783 8.8 2018 715 6,389 890 7.2 % 45.3 7.5 (12.0) 22.2 CEO pay UK total pay Number of employees Average per employee Notes: a) Martyn Coffey’s salary was increased on 1 January 2019 by 3.3 per cent, the same percentage increase as given to the workforce as a whole. b) The bonus is the non-deferred amount earned for the relevant year taken from the single figure remuneration table on page 84. c) A 3.3 per cent increase was awarded to the workforce on 1 January 2019. The table above shows, however, that the average salary increase per employee for 2019 was slightly lower. This was due to variations in overtime in the current year and specific variations relating to the impact and timing of leavers and new starters. d) The table above shows that the average bonus per employee increased by 22.3 per cent in 2019 compared with the prior year. e) UK employees have been used as the number of overseas employees is not significant (71) and pay and conditions in the non-UK locations (Belgium, China, USA and Dubai) are different from those prevailing in the UK. 80 Marshalls plc Annual Report and Accounts 2019 Corporate governance CEO pay in the last 10 years This table shows how pay for the CEO role has changed in the last 10 years: Year £’000 Single figure remuneration % of maximum annual bonus earned % of maximum LTIP / MIP awards vesting Notes: 2010 2011 2012 2013 (Note b) 2014 2015 2016 2017 2018 2019 671 752 938 3,143 1,101 2,064 1,913 2,383 1,602 2,213 38.6% 78.1% 33.0% 63.6% 99.3% 100% 96.9% 100% 98% 99.6% – – – 63.0% – 100% 100% 100% 98% 99.6% a) The years up to 2013 show the previous CEO’s (Graham Holden’s) remuneration. b) The 2013 single figure is made up of the previous CEO’s base salary and benefits up to 10 October 2013 and Martyn Coffey’s proportionate entitlement to salary, benefits and annual bonus for his period of service in 2013. It also includes the various incentive payments that crystallised as a result of Graham Holden being a “good leaver” by reason of retirement in 2013 (see 2013 Remuneration Report for full details). Total shareholder return 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018 Dec 2019 — Marshalls plc — FTSE 250 Index — FTSE Small Cap Index This chart shows the Group’s total shareholder return (“TSR”) performance compared to (i) the FTSE Small Cap Index and (ii) the FTSE 250. TSR is defined as share price growth plus reinvested dividends. Marshalls plc was a constituent of the FTSE Small Cap Index for the period from January 2009 to August 2015 and became a constituent of the FTSE 250 in August 2015. This chart shows the value at 31 December 2019 of £100 invested in Marshalls plc on 1 January 2009 compared with the value of £100 invested in (i) the FTSE Small Cap Index and (ii) the FTSE 250. The other plotted points are the intervening financial year ends. Marshalls’ TSR performance improved by 89.7 per cent in 2019, compared with a rise of 18.8 per cent in the FTSE Small Cap Index and a rise of 28.9 per cent in the FTSE 250 in 2019. Marshalls plc Annual Report and Accounts 2019 81 Corporate governance Remuneration Committee Report continued Fairness, diversity and wider workforce considerations continued Gender balance and pay On the snapshot date of 5 April 2019 the Group’s total workforce (excluding Edenhall), comprised 2,580 employees with the following gender balance: Total workforce Senior managers1 Directors Male 2,183 7 4 Female 397 2 2 1 Senior managers are defined according to the UK Code and comprise the Executive Committee and the Company Secretary. Our gender pay gap disclosure is based on amounts paid in the April 2019 payroll. The gender bonus gap is based on incentives paid in the year to 31 March 2019. Our disclosures are made pursuant to the UK Government Equalities legislation. The 2 main employer entities in the Group during 2019 were Marshalls Group Limited, which employs the vast majority of employees, and Marshalls plc. CPM Group Limited was acquired in October 2017 and all employees were transferred to Marshalls Group Limited in 2018. Due to technical differences in the pay structure of CPM employees, they remained on the CPM PAYE tax reference until the end of the 2018 / 2019 tax year so disclosed their gender pay ratios separately in April 2019. For April 2020 and beyond, former employees of CPM Group Limited will be included in the Group reporting. The charts below show the consolidated results for the Marshalls Group (including Marshalls plc) and separately for Marshalls Group Limited and CPM Group Limited to provide a more accurate overview. Edenhall, acquired in December 2018, remained a separate employer until June 2019 at which time its employees transferred to Marshalls Group Limited. However, as Edenhall employed fewer than 250 employees there is no requirement to report in 2019. The former Edenhall employees will be included in the 2020 disclosures for Marshalls Group Limited. There was an improvement in the consolidated mean gender pay gap from 15.7 per cent in 2018 to 4.3 per cent and in the median gender pay gap from 21.8 per cent in 2018 to 17.0 per cent. We have also seen an improvement in the mean bonus gender pay gap from 79.1 per cent in 2018 to 71.4 per cent and the median bonus gender pay gap from 73.9 per cent in 2018 to 67.0 per cent. Our gender split analysis shows that almost 85 per cent of our workforce are male and 15 per cent female, which is typical of the manufacturing and construction sector generally. Whilst the proportion of female workers to male workers has slightly decreased since 2018 the number of women who are paid in the upper quartile increased from 12.6 per cent in 2018 to 14.5 per cent. As the gender pay gap figures show, in 2019 the median average bonus value for male workers reduced and the median bonus value for female workers increased. These results correlate with a number of concerted initiatives introduced in 2019 to attract and retain more women into more senior positions. We have introduced enhancements to our occupational maternity pay and have introduced flexible working arrangements in areas of our business where there is a high concentration of female workers. The introduction of new recruitment practices has also allowed us to increase our focus on diversity and inclusion. We anticipate this continuing in 2020 as we further develop our talent strategies. We have also refreshed our total reward strategy in the year. The focus of this strategy is to modernise and enhance our reward offering, giving greater transparency and flexibility to colleagues. We believe that this will also assist us in attracting and retaining diverse talent and will further improve gender imbalances. 2019 results Marshalls Group Limited CPM Group Limited Consolidated (Marshalls plc and Marshalls Group Limited) 2018 results Marshalls Group Limited CPM Group Limited Consolidated (Marshalls plc and Marshalls Group Limited) Mean gender pay gap Median gender pay gap Mean bonus gender pay gap Median bonus gender pay gap 14.6% 11.3% 4.3% 15.2% 20.6% 15.7% 18.7% 14.1% 17.0% 21.2% 23.1% 21.8% 63.7% 52.4% 71.4% 85.0% 69.3% 79.1% 48.6% 54.8% 67.% 20.0% 69.7% 73.9% 82 Marshalls plc Annual Report and Accounts 2019 Corporate governance Upper quartile Upper middle quartile Lower middle quartile 85+ 89+ 96+ F 96+ 88+ F 90+ 70+ F 72+ Consolidated Male 88% Consolidated Male 70% Consolidated Male 85% Consolidated Male 96% Female 15% Female 12% Female 4% Female 30% Lower quartile Marshalls Group Limited Marshalls Group Limited Marshalls Group Limited Marshalls Group Limited Male 89% Female 11% Male 96% Female 4% Male 90% Female 10% Male 72% Female 28% The same factors are relevant on bonus outcomes. Across our consolidated workforce more women than men participate in a bonus scheme; however, the predominance of men in senior roles carrying higher base pay means that we are also reporting a gender pay gap in mean and median bonus. Percentage receiving bonus Consolidated Marshalls Group Limited Mean bonus gap Consolidated Marshalls Group Limited Median bonus gap Consolidated Marshalls Group Limited Male Female 29.7% 16.1% 41.6% 40.5% 71% 80% 67% 50% Equality and diversity initiatives The Group has policies that promote equality and diversity in the workforce as well as prohibiting discrimination in any form. We are committed to promoting equality and preventing discrimination at work. We recognise that everyone is different and we are passionate about creating an inclusive environment, where everyone can contribute their best work and develop to their full potential. The Group’s Code of Conduct clearly states its commitment to these principles and requires a similar commitment from its business partners. Initiatives and progress during 2019 include: • The appointment of Angela Bromfield as Non-Executive Director further improved gender balance at Board level. • We have updated and relaunched the Group’s Diversity and Inclusion Policy and ensured that briefs for recruitment aim to attract a diverse range of applicants. • We have updated the Group’s Code of Conduct which is currently being launched to all employees, suppliers and stakeholders. • Marshalls has signed the Social Mobility Pledge which represents our commitment to: — partnership – partnering with schools and colleges to provide coaching through careers advice and mentoring people from disadvantaged backgrounds or circumstances; — access – providing structured work experience and apprenticeship opportunities; and — recruitment – promoting policies that do not distinguish on grounds of background. • We have launched a Women’s Talent Network that meets quarterly to support diversity in the workplace and provide development opportunities. Marshalls plc Annual Report and Accounts 2019 83 Corporate governance15 + I 4 + I 12 + I 30 + I 11 + 4 + 10 + 28 + F Remuneration Committee Report continued Annual Remuneration Report This report covers the reporting period from 1 January 2019 to 31 December 2019 and explains how the Remuneration Policy has been implemented. Comparative figures for the 2018 financial year have also been provided. Single total figure of remuneration in 2019 – Executive Directors (audited) Fixed £’000 Performance related £’000 Annual bonus Long-term incentives Salary Other benefits Salary supplement in lieu of pension MIP Element A MIP Element B MIP Element B Total 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 460 302 762 445 292 737 33 13 46 32 13 45 92 60 89 58 810 531 152 147 1,341 497 326 823 229 150 379 218 143 361 Note a Note b Note c 589 386 975 Note d 2018 321 184 2019 2018 2,213 1,602 1,442 1,016 505 3,655 2,618 Martyn Coffey Jack Clarke Total Notes: a) Benefits are car / car allowance, fuel / fuel allowance, private medical insurance and travel and accommodation expenses. b) c) All Directors received salary supplement in lieu of contributions into the Group’s pension scheme throughout the year. No Director had any entitlement under the defined benefit section of the pension scheme and no additional benefit was received as a result of early retirement. The annual bonus column shows 50 per cent of the total bonus contribution earned under the MIP Element A in respect of 2019 performance, and 50 per cent of the total value of Element B shares awarded which are deferred but are not subject to further performance conditions (other than continued employment). The remaining 50 per cent in respect of 2019 Element A is deferred into shares in the MIP account which are subject to performance and employment-based forfeiture for a further holding period. The remaining 50 per cent of 2019 Element B shares is subject to performance and employment-based forfeiture for a 3-year deferred period. These deferred elements will be disclosed in the long-term incentives column when the conditions are satisfied. The deferred shares in relation to both Element A and Element B may change in value during the holding period depending on Marshalls’ share price. d) The long-term incentives column shows the aggregate value of sums released from MIP account balances from earlier years that are no longer subject to deferral and forfeiture risk. Setting pay in context The following graphs illustrate the relationship between total expenditure on remuneration and other disbursements from profit over the past 3 years. The 4 elements represent the most significant outgoings for the Company during the financial year. In addition to staff pay and shareholder distributions, capital investment and taxation are shown for the following reasons: • investment – the Company’s strategy is to increase capital investment to take advantage of market demand and in order to ensure that the business grows in a sustainable manner with a corresponding long-term benefit for all stakeholders; and • tax – the Company is a UK taxpayer and feels that it is beneficial to demonstrate to all its stakeholders its total UK tax contribution. The most significant elements of the Company’s UK tax contribution are VAT, employer’s NI, corporation tax, fuel duty and aggregates levy. As profitability increases, corporation tax will also increase. In 2019 the Group was re-accredited with the Fair Tax Mark. Relative importance of spend on pay (percentage change) Staff pay (£’m) +7.5% 105.4 98.0 82.0 Distributions to shareholders (£’m) +13.5% 29.2 24.1 Capital investment (£’m) -21.8% Tax (£’m) +12.2% 33.2 29.2 93.6 83.4 22.9 74.4 18.9 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 84 Marshalls plc Annual Report and Accounts 2019 Corporate governance Outcomes of incentive schemes in 2019 (audited) See page 59 for details of the satisfaction of the performance conditions under the MIP for 2019. MIP awards 2019 Element A Plan Accounts Opening balance (number of shares) (Note a) 2019 contribution (% of salary earned) Value 2019 element released (Note b) Closing balance (deferred into shares) Number of shares represented by closing balance (Note c) Element B Number of shares awarded Percentage of salary Value EPS forfeiture threshold (Note d) Notes: Martyn Coffey Jack Clarke 111,194 149% £687,147 £809,622 £809,621 98,546 72,940 149% £450,752 £531,092 £531,092 64,644 Martyn Coffey Jack Clarke 55,759 99% 36,576 99% £458,098 £300,502 18.95p 18.95p a) 50 per cent of the earned Element A award is released to the participant as annual bonus; the remaining 50 per cent is deferred into the participant’s MIP account and converted into shares. The previously deferred proportion of the 2018 Element A award was converted into shares by reference to the mid-market average value for the 30-day period ending on 31 December 2018. Dividends paid during the year are also added to the carried-forward plan account. The chart above shows the resulting closing balance value calculated by reference to the mid-market average value for the 30-day period ended 31 December 2019 and adding the value of dividends of 16.7 pence per share paid during 2019. b) The earned Element A award for 2019 is added to the individual’s plan account, and 50 per cent of the resulting balance is released to the participant as an annual bonus; the remaining 50 per cent is deferred into the participant’s MIP account and converted into shares. The deferral is repeated in each subsequent year up to the final year. In the final year, subject to any forfeiture provisions, 100 per cent of any balance in the MIP account is released. c) The carried-forward balance is converted back into shares by reference to the mid-market average value for the 30-day period ended 31 December 2019 (821.56 pence). d) If the actual EPS falls below the forfeiture threshold over the 3 years before vesting, 50 per cent of the balance of the award is forfeited. Once Element B shares have vested, they must normally be held for a further 2 years. Element B shares lapse on cessation of employment except in “good leaver” circumstances, in which case they vest on leaving and must be held for 2 years from the date of leaving. Single total figure of remuneration: Non-Executive Directors (audited) Non-Executive Directors do not participate in any of the Company’s incentive arrangements. Their fees are reviewed periodically and were last reviewed in October 2019. The Chair’s fees are set by the Committee; other Non-Executive Directors’ fees are set by the Board as a whole. The Non-Executive Directors reclaim travel and accommodation expenses incurred in the performance of their duties, and where this is a taxable benefit it is shown below as a grossed-up taxable amount. Committee fees £’000 Expenses £’000 Board fee £’000 2019 170 2018 106 2019 — 2018 — Vanda Murray Chair and Chair of Nomination Committee (from 9 May 2018) Janet Ashdown Senior Independent Director, Chair of Remuneration Committee and member of Audit and Nomination Committees Tim Pile Member of Audit, Remuneration and Nomination Committees Graham Prothero Chair of Audit Committee and member of Remuneration and Nomination Committees Angela Bromfield Member of Audit, Remuneration and Nomination Committees (from 1 October 2019) Andrew Allner (retired 9 May 2018) Total 48 47 15 48 48 46 46 12 — — 326 55 300 — 8 — — 23 8 — 7 — — 15 2019 2018 6 1 2 2 — — 11 1 1 1 1 — 1 5 Total £’000 2019 176 2018 107 64 56 50 58 47 54 12 — — 360 56 320 Marshalls plc Annual Report and Accounts 2019 85 Corporate governance Remuneration Committee Report continued Annual Remuneration Report continued Statement of implementation of Remuneration Policy in the following financial year (2020) See pages 62 and 77. Payments to past Directors / payments for loss of office There were no payments to past Directors. There were no payments to Directors or former Directors for loss of office. Directors’ shareholdings and share interests The following table sets out, in respect of each of the Directors: • the number of shares the Director holds unconditionally; and • the number of shares subject to unvested incentive awards as at 31 December 2019. Shareholding requirement Number of shares required (Note a) % of salary Beneficially owned Number of shares (Note b) Shares that will vest following 2019 results (Note c) Deferred and contingent share interests (Note e) Deferred shares (Note d) Total interests in shares (including contingent interests) Number of shares Number of shares Number of shares Number of shares 200 200 106,997 70,188 385,039 100,668 149,802 98,266 125,646 82,420 224,192 147,064 884,679 428,418 — — — — — — — — — — 15,000 11,210 44,740 2,417 — — — — — — — — — — — — — — — — 15,000 11,210 44,740 2,417 — Director Executive Martyn Coffey Jack Clarke Non-Executive Vanda Murray Janet Ashdown Tim Pile Graham Prothero Angela Bromfield Notes: a) The closing price on 31 December 2019 of 860.0 pence per share has been used to measure the number of shares required. b) c) d) e) As at the date of this report the number of shares beneficially owned by Martyn Coffey was 385,039 and by Jack Clarke was 100,668. Changes were due to share purchases under the Share Purchase Plan and changes to their “persons closely associated”. This comprises Element B awards granted in March 2017 (based on 2016 performance) that will vest 3 years from grant (i.e. March 2020) before deduction of any tax and NIC. This must be held for a minimum of 2 further years. This column includes the 50 per cent proportion of share interests awarded in 2017, 2018 and 2019 under Element B of the MIP in the form of nil-cost options or conditional shares that may be exercised after the 3-year deferral period but where vesting is only dependent on continuing employment throughout the 3-year deferral period with no other performance conditions. This column comprises share interests awarded under the MIP (Element A deferred shares and Element B deferred shares) that remain subject to a financial performance condition as well as to continued employment over the relevant deferral period. 50 per cent of Element A awards and 100 per cent of Element B awards shown in this column may be forfeited if the financial condition is not satisfied. f) Share interests under Element A and Element B of the MIP are calculated by reference to the mid-market average value for the 30-day period ended 31 December 2019 (821.56 pence). g) The table above includes the interests of “persons closely associated” as defined under the Financial Services and Markets Act (Market Abuse) Regulations 2016. It should be noted that both Executive Directors have met their minimum shareholding requirements. Janet Ashdown Chair of the Remuneration Committee 12 March 2020 86 Marshalls plc Annual Report and Accounts 2019 Corporate governance Directors’ Report – Other Regulatory Information The information required by the Listing Rules (DTR 4.1.8R) is contained in the Strategic Report and the Directors’ Report. Marshalls plc is registered with company number 5100353. The Directors of the Company are listed on pages 42 and 43. Political donations: The Group made no donations during the year to any political party or political organisation or to any independent election candidate, whether in the European Union or elsewhere (2018: £nil). Risk management: The Group’s risk management objectives, its approach to managing risk generally and its use of financial instruments are described in the Strategic Report on pages 24 to 29. Further details of the Group’s risk management in relation to financial risks and its use of financial instruments to mitigate such risks are set out in Note 18 on pages 124 to 129. Greenhouse gas emissions: The Group’s CO2 (greenhouse gas) emissions in 2019 are disclosed in the Strategic Report on page 40. Employees: Details of how the Directors have engaged with employees are set out on pages 37 and 49. Further information is provided in relation to the engagement channels used and the outcomes from the engagement. The Company’s policies in relation to disabled employees and employee involvement and communication are explained in the Strategic Report on page 36. Stakeholders: Details of how the Directors have developed relationships with customers, suppliers and other stakeholder groups are set out on page 49, along with engagement channels used. Additional details of the Group’s stakeholder engagement strategy is explained on pages 18 and 19. The statement by the Directors in relation to their strategy duly in accordance with S172(1) Companies Act 2006 is found on page 19. Corporate governance: Details of how the Group complies with the UK Corporate Governance Code are set out on pages 44 to 49. Post-balance sheet events of importance since 31 December 2019: There have been no important events affecting the Group since the end of the financial year. Research and development: Activity and likely future developments for the business are described in the Strategic Report on pages 2 to 41. Dividends The Board is recommending a final dividend of 9.65 pence (2018: 8.00 pence) per share which, together with the interim dividend of 4.70 pence (2018: 4.00 pence) per share, makes a combined dividend of 14.35 pence (2018: 12.00 pence) per share. The Board is also recommending payment of a supplementary dividend of 4.00 pence per share, which is discretionary and non-recurring. Payment of the final dividend and the supplementary dividend, if approved at the Annual General Meeting, will be made on 30 June 2020 to shareholders registered at the close of business on 5 June 2020. The ex-dividend date will be 4 June 2020. The dividend paid in the year to 31 December 2019 and disclosed in the Consolidated Income Statement is 16.70 pence (2018: 14.80 pence) per share, being the previous year’s final dividend of 8.00 pence (2018: 6.80 pence) per share, the interim dividend of 4.70 pence (2018: 4.00 pence) per share in respect of the year ended 31 December 2019 and the prior year supplementary dividend of 4.00 pence per share. The 2018 final and supplementary dividends were paid on 28 June 2019 and the 2019 interim dividend was paid on 4 December 2019. Share capital and authority to purchase shares The Company’s share capital at 1 January 2020 was 200,052,157 Ordinary Shares of 25 pence. This represented an increase of 58,724 Ordinary Shares during the year ended 31 December 2019 following the issue of shares to participants exercising their Sharesave options during 2019. Sharesave allotments were made for cash based on an exercise price of £2.91 per share and pre-emption rights were disapplied under the authority granted at the 2018 AGM. Details of the share capital are set out in Note 22 on page 134. The Ordinary Shares of the Company carry equal rights to dividends, voting and return of capital on the winding up of the Company, as set out in the Company’s Articles of Association. There are no restrictions on the transfer of securities in the Company and there are no restrictions on any voting rights or deadlines, other than those prescribed by law, nor is the Company aware of any arrangement between holders of its shares which may result in restrictions on the transfer of securities or voting rights, nor any arrangement whereby a shareholder has waived or agreed to waive dividends (other than the EBT – see below). The Marshalls plc Employee Benefit Trust (“EBT”) holds shares for the purposes of satisfying future awards that may vest under the Company’s share-based incentive schemes. The EBT may purchase shares in the Company from time to time to satisfy awards granted to Directors and senior Executives subject to the achievement of performance targets under the Company’s incentive schemes. At 31 December 2019 the EBT held 1,689,986 Ordinary Shares in the Company (2018: 1,736,213 shares) in respect of future incentive awards under the Company’s employee share schemes. Details of outstanding awards are set out in Note 19 on pages 131 and 132. The EBT has waived its right to receive dividends on shares that it holds beneficially in respect of future awards. The Trustee of the EBT exercises any voting rights on such shares in accordance with the Directors’ recommendations. UK-based employees of the Group with more than 6 months’ service may participate in the Marshalls plc Share Purchase Plan during any offer period. Employees purchase Ordinary Shares in the Company with their pre-tax salary. The shares are purchased in the market and then held in trust by Yorkshire Building Society. Employees receive dividends on these shares and may give voting instructions to the Trustee. At the Annual General Meeting in May 2019 shareholders gave authority to the Directors to purchase up to 29,886,875 shares, representing approximately 14.99 per cent of the Company’s issued share capital in the Company, in the market during the period expiring at the next Annual General Meeting at a price to be determined within certain limits. No Ordinary Shares in the Company were purchased during the year or between 31 December 2019 and 12 March 2020 under this authority, which will expire at the 2020 Annual General Meeting. The Directors will seek to renew the authority at that meeting. Marshalls plc Annual Report and Accounts 2019 87 Corporate governance Directors’ Report – Other Regulatory Information continued Contracts of significance and related parties There were no contracts of significance between any member of the Group and (a) any undertaking in which a Director has a material interest, or (b) a controlling shareholder (other than between members of the Group). There have been no related party transactions between any member of the Group and a related party since the publication of the last Annual Report. There are a number of agreements that take effect, alter or terminate upon a change of control of the Group. None of these are considered to be significant in terms of their likely impact on the business of the Group as a whole. Articles of Association The Company’s Articles of Association give powers to the Board to appoint Directors. Newly appointed Directors are required to retire and submit themselves for re-election by shareholders at the first Annual General Meeting following their appointment. The Board of Directors may exercise all the powers of the Company, subject to the provisions of relevant laws and the Company’s Memorandum and Articles of Association. These include specific provisions and restrictions regarding the Company’s power to borrow money. Powers relating to the issuing and buying back of shares are included in the Articles of Association and such authorities are renewed by shareholders each year at the Annual General Meeting. The Articles of Association may be amended by Special Resolution of the shareholders. The Group has granted indemnities to its Directors to the extent permitted by law (which one qualifying party indemnities of Section 236 of the Companies Act 2006) and these remained in force during the year in relation to certain losses and liabilities that the Directors may incur to third parties in the course of action as Directors or employees of the Company, any subsidiary or associated company, or as a Director of the pension scheme trustee board. Neither the liability insurance nor the indemnities provide cover in the event of proven fraudulent or dishonest activity. The Group has not indemnified any Director under the indemnities currently in place. Directors’ interests Details of Directors’ remuneration, their interests in the share capital of the Company and the share-based payment awards are contained in the Remuneration Committee Report on pages 55 to 86. Listing Rule requirements The applicable requirements of Listing Rule 9.8.4R in respect of long-term incentive schemes (pages 131 and 132) and contracts of significance (page 87) are included in this Annual Report. Substantial shareholdings The Company has no controlling shareholder. As at 12 March 2020, the Company had been notified, in accordance with DTR 5, of the following disclosable interests of 3 per cent or more in its voting rights: Aberdeen Standard Investments Majedie Asset Management Royal London Asset Management BlackRock JP Morgan Asset Management Vanguard Group Montanaro Investment Managers Lansdowne Partners RWC Partners As at 12 March 2020 % As at 31 December 2019 % 12.71 7.02 5.17 4.76 4.44 4.11 3.90 3.83 3.16 11.89 7.83 4.93 4.52 5.33 4.03 3.80 2.09 2.97 The Directors’ Report, comprising the Strategic Report, the Corporate Governance Report and the Reports of the Audit, Remuneration and Nomination Committees, has been approved by the Board and signed on its behalf by: Cathy Baxandall Group Company Secretary 12 March 2020 88 Marshalls plc Annual Report and Accounts 2019 Corporate governance Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements The Directors are responsible for preparing the Annual Report and the Group and Parent Company Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company Financial Statements for each financial year. Under that law they are required to prepare the Group Financial Statements in accordance with IFRSs as adopted by the European Union and Article 4 of the IAS Regulation, and have elected to prepare the Parent Company Financial Statements in accordance with UK Accounting Standards, including FRS 101 “Reduced Disclosure Framework”. Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company Financial Statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • for the Group Financial Statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • for the Parent Company Financial Statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Parent Company Financial Statements; and • prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. In preparing the Group Financial Statements, IAS 1 requires that Directors: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and • make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy, at any time, the financial position of the Parent Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement of the Directors on the Annual Report and Accounts The Directors who held office at the date of approval of this Directors’ Report and whose names and functions are listed on pages 40 and 41 confirm that, to the best of each of their knowledge: • the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; • the Strategic Report contained in this Annual Report includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face; and • the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. Disclosure of information to the auditor The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s Auditor is unaware, and each Director has taken all the steps that he / she ought to have taken as a Director to make himself / herself aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information. Marshalls plc Annual Report and Accounts 2019 89 Corporate governance Statement of Directors’ Responsibilities continued in respect of the Annual Report and the Financial Statements Going concern The Directors have adopted the going concern basis in preparing these Financial Statements in accordance with the Financial Reporting Council’s “Guidance on Risk Management, Internal Control and Related Financial and Business Reporting”, issued in September 2014. The Directors considered that it was appropriate to do so, having reviewed any uncertainties that may affect the Company’s ability to continue as a going concern for at least the next 12 months from the date these Financial Statements were approved. Cautionary statement and Directors’ liability This Annual Report 2019 has been prepared for, and only for, the members of the Company, as a body, and no other persons. Neither the Company nor the Directors accept or assume any liability to any person to whom this Annual Report is shown or into whose hands it may come except to the extent that such liability arises and may not be excluded under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with Section 90A of the Financial Services and Markets Act 2000. This Annual Report contains certain forward-looking statements with respect to the Group’s financial condition, results, strategy, plans and objectives. These statements are not forecasts or guarantees of future performance and involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed, implied or forecast by these forward-looking statements. All forward-looking statements in this Annual Report are based on information known to the Group as at the date of this Annual Report and the Group has no obligation publicly to update or revise any forward-looking statements, whether as a result of new information or future events. Nothing in this Annual Report should be construed as a profit forecast. Annual General Meeting The Notice convening the Annual General Meeting to be held at Landscape House, Premier Way, Lowfields Business Park, Elland HX5 9HT, together with explanatory notes on the resolutions to be proposed, is contained in a circular to be sent to shareholders with this Annual Report. By Order of the Board: Cathy Baxandall Group Company Secretary 12 March 2020 90 Marshalls plc Annual Report and Accounts 2019 Corporate governance Independent Auditor’s Report to the members of Marshalls plc Report on the audit of the Financial Statements 1. Opinion In our opinion: • the Financial Statements of Marshalls plc (the “Parent Company”) and its subsidiaries (the “Group”) give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2019 and of the Group’s profit for the year then ended; • the Group Financial Statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; • the Parent Company Financial Statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and • the Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulation. We have audited the Financial Statements which comprise: • the Consolidated Income Statement; • the Consolidated Statement of Comprehensive Income; • the Consolidated and Parent Company Balance Sheets; • the Consolidated and Parent Company Statements of Changes in Equity; • the Consolidated Cash Flow Statement; and • the related Notes 1 to 44. The financial reporting framework that has been applied in the preparation of the Group Financial Statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company Financial Statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting Practice). 2. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (“FRC’s”) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 3. Summary of our audit approach Key audit matters The key audit matters that we identified in the current year were: • the valuation of the inventory provision; and • revisions to provisional fair value adjustments on the Edenhall Group acquisition in 2018. Within this report, key audit matters are identified as follows: Increased level of risk Similar level of risk Decreased level of risk Materiality Scoping The materiality that we used for the Group Financial Statements was £3.5 million which was determined on the basis of 5 per cent of profit before tax. Full scope audits were performed on all UK components. This accounts for 96 per cent of Group revenue, 100 per cent of Group net assets and 100 per cent of profit before tax generated by profit making entities. Significant changes in our approach We have refined our key audit matter in relation to the acquisition accounting of Edenhall Group to be the revisions during the year to the provisional fair values recognised at 31 December 2018. We no longer have a key audit matter in relation to the acquisition of the CPM Group in 2017 as all fair value adjustments were finalised in 2018. There have been no other significant changes to our audit approach since the prior year. Marshalls plc Annual Report and Accounts 2019 91 Corporate governance Independent Auditor’s Report continued to the members of Marshalls plc 4. Conclusions relating to going concern, principal risks and viability statement 4.1 Going concern We have reviewed the Directors’ Statement in Note 1 to the Financial Statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s and Company’s ability to continue to do so over a period of at least 12 months from the date of approval of the Financial Statements. We considered as part of our risk assessment the nature of the Group, its business model and related risks including where relevant the impact of Brexit, the requirements of the applicable financial reporting framework and the system of internal control. We evaluated the Directors’ assessment of the Group’s ability to continue as a going concern, including challenging the underlying data and key assumptions used to make the assessment, and evaluated the Directors’ plans for future actions in relation to their going concern assessment. We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit. 4.2 Principal risks and Viability Statement Based solely on reading the Directors’ Statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the Directors’ assessment of the Group’s and the Company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to: • the disclosures on pages 26 to 29 that describe the principal risks, procedures to identify emerging risks, and an explanation of how these are being managed or mitigated; • the Directors’ confirmation on page 26 that they have carried out a robust assessment of the principal and emerging risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; or • the Directors’ explanation on page 25 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We are also required to report whether the Directors’ Statement relating to the prospects of the Group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. Going concern is the basis of preparation of the Financial Statements that assumes an entity will remain in operation for a period of at least 12 months from the date of approval of the Financial Statements. We confirm that we have nothing material to report, add or draw attention to in respect of these matters. Viability means the ability of the Group to continue over the time horizon considered appropriate by the Directors. We confirm that we have nothing material to report, add or draw attention to in respect of these matters. 5. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 92 Marshalls plc Annual Report and Accounts 2019 Corporate governance 5. Key audit matters continued 5.1 Valuation of the inventory provision Key audit matter description How the scope of our audit responded to the key audit matter The Group is primarily involved in the manufacture and sale of landscape and natural stone products, selling to Public Sector, Commercial and Domestic end users. It records inventory at the lower of cost and net realisable value, carrying a large amount of inventories in order to meet customer needs on demand. The Group offers a wide range of non-perishable products that are manufactured and subsequently stored in large quantities at various locations, and therefore carries a high level of inventories at any given point. A risk exists that the sales prices of inventories, particularly those which are aged or in excess of specific customer requirements, may need to be discounted before they can be sold. The risk of discounting, combined with potential costs to move the inventories to a location where demand exists, may result in the inventories being sold at below cost. The Directors are responsible for making judgements surrounding the future recoverability of stock values based on the ageing and state of the stock compared to the sales potential. Given the level of judgement involved, we have also identified this as a potential fraud risk area. The carrying value of the Group’s inventory is £89.2 million (2018: £84.4 million), as disclosed in Note 12 to the Financial Statements, and this is noted as an area considered by the Audit Committee in its report on page 54. We have: • obtained an understanding of the relevant controls relating to management’s processes to record inventory provisions; • tested the relevant controls relating to the stock database; • attended inventory counts at key locations and considered any signs of damage / obsolescence which would indicate or requirement for a provision; • used data analytics to compare product lines’ recoverable value to its cost value; and • assessed the adequacy of provisions recorded, including where relevant the impact of Brexit uncertainties on the market and therefore potential sales prices to be achieved. Key observations Based on our procedures the results of our testing were satisfactory. We concur with the basis of valuation of inventory and are satisfied that the level of inventory provisions is appropriate. 5.2. Revisions to provisional fair value adjustments on the Edenhall Group acquisition Key audit matter description How the scope of our audit responded to the key audit matter The Group acquired Edenhall Limited on 12 December 2018. The acquisition was accounted for in accordance with the requirements of IFRS 3 “Business Combinations” and this required judgement to be applied in the determination of fair value adjustments to the net assets within the acquired business. IFRS 3 allows an adjustment to be made to the fair values of the net assets acquired within the 12 months post acquisition and revisions to provisional fair values require management judgement. The primary revisions made during the hindsight period relate to legal and regulatory costs associated with health and safety remediation costs and property costs. This has been identified as a potential risk of fraud given the level of management judgement required to determine the revised fair values. As disclosed in Note 24 to the Financial Statements, revisions to provisional fair value adjustments made on the Edenhall acquisition were £6.2 million in accruals and provisions resulting in totals of £10.7 million (2018: £4.6 million). This matter is discussed by the Audit Committee on page 54. We have: • obtained an understanding of relevant controls relating to management’s processes; • tested the significant revisions to provisional fair value adjustments in relation to health and safety remediation costs by agreeing to third party cost estimates or actual costs incurred for similar work performed on other Marshall’s sites; • agreed the value of future property costs to third party surveyor reports; • reviewed the scope, competency and independence of the specialists utilised by management to quantify future property costs to understand the work completed; and • reviewed regulatory requirements and lease agreements to ensure that the obligations to perform the remediation work exist. Key observations Based on our procedures we concur that the judgements made by management to revise fair values on acquisition are reasonable. Marshalls plc Annual Report and Accounts 2019 93 Corporate governance Independent Auditor’s Report continued to the members of Marshalls plc 6. Our application of materiality 6.1 Materiality We define materiality as the magnitude of misstatement in the Financial Statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the Financial Statements as a whole as follows: Materiality £3.5 million (2018: £3.1 million). £1.4 million (2018: £1.0 million). Group Financial Statements Parent Company Financial Statements Basis for determining materiality Rationale for the benchmark applied 5 per cent (2018: 5 per cent) of pre-tax profit. In our professional judgement, profit before tax is the principal benchmark within the Financial Statements that is relevant to users of the Financial Statements when assessing performance of the Group. 0.5 per cent (2018: 0.5 per cent) of net assets which has been capped at 40 per cent (2018: 40 per cent) of Group materiality. As a holding company, net assets are considered to be the primary benchmark. PBT £68 million 96+4+I PBT Group materiality £3.5 million Component materiality range £0.3 million to £2.3 million Group materiality Audit Committee reporting threshold £0.17 million 6.2. Performance materiality We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the Financial Statements as a whole. Group performance materiality was set at 70 per cent of Group materiality for the 2019 audit (2018: 70 per cent). In determining performance materiality, we considered the following factors: a. the quality of the control environment; b. no history of uncorrected misstatements in prior periods; and c. our assessment of the engagement risk. 6.3. Error reporting threshold We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £171,000 (2018: £147,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the Financial Statements. 7. An overview of the scope of our audit 7.1. Identification and scoping of components Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement both at the Group and component level. The Group and Parent Company audits are performed at the Group’s head office in Elland, West Yorkshire. The Group audit team performed the entire audit of the UK components of the Group. The UK components accounted for 96 per cent (2018: 95 per cent) of Group revenue, 100 per cent (2018: 99 per cent) of Group net assets and 100 per cent (2018: 100 per cent) of Group profit before tax generated by profit making entities. Marshalls NV accounts for the remaining revenue and net assets of the Group but are not regarded as significant components for our Group audit. At the Group level, we also tested the consolidation process. The Group audit team carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining component not subject to audit. 94 Marshalls plc Annual Report and Accounts 2019 Corporate governance 7. An overview of the scope of our audit continued 7.1. Identification and scoping of components continued Profit before tax generated by profit making entities Revenue Net assets 96+ Review at Group level Full audit scope 4%100+ Review at Group level 0%100+ Review at Group level Full audit scope Full audit scope 100% 96% 100% 0% 7.2. Our consideration of the control environment IT systems To support the audit testing performed we have involved our IT specialists to consider the relevant IT systems used by the Group to generate information which supports the amount recognised in the Financial Statements. In order to evaluate the IT environment of the Group we have obtained an understanding of relevant IT systems and the automated controls within these systems. In evaluating the IT environment, we have: • tested the IT systems within the main finance IT system. This is used for the entity’s financial reporting process and houses all finance, payroll and HR modules. We have also tested the data warehouse system which houses the stock database; • tested general IT controls for each of these systems: Access Security (joiners, movers, leavers (“JML”), passwords, privileged access and user access reviews (“UARs”)), change management (change process and segregation of duties) and batch jobs (access to amend, and monitoring of batch jobs); • performed sample testing, where applicable, in order to determine operating effectiveness (JML, UARs, change management and batch job monitoring); and • taken reliance on all IT controls associated with these systems. Controls reliance In addition to our substantive testing performance during our audit we obtained an understanding of the relevant controls on key business cycles. In the current year we have taken controls reliance over the revenue and customer rebates business cycles as these are key accounts that impact the Group profit. We have obtained an understanding of the relevant controls in relation to revenue and customer rebates then tested these relevant controls. 8. Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report, other than the Financial Statements and our Auditor’s Report thereon. Our opinion on the Financial Statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the Financial Statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Financial Statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the Financial Statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. Marshalls plc Annual Report and Accounts 2019 95 Corporate governance 4 + I I I Independent Auditor’s Report continued to the members of Marshalls plc 8. Other information continued In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that: • Fair, balanced and understandable – the statement given by the Directors that they consider the Annual Report and Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit Committee reporting – the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or • Directors’ Statement of compliance with the UK Corporate Governance Code – the parts of the Directors’ Statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the Auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. We have nothing to report in respect of these matters. 9. Responsibilities of Directors As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error. In preparing the Financial Statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. 10. Auditor’s responsibilities for the audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Financial Statements. Details of the extent to which the audit was considered capable of detecting irregularities, including fraud and non-compliance with laws and regulations, are set out below. A further description of our responsibilities for the audit of the Financial Statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s Report. 11. Extent to which the audit was considered capable of detecting irregularities, including fraud We identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, and then design and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. 11.1. Identifying and assessing potential risks related to irregularities In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following: • the nature of the industry and sector, control environment and business performance including the design of the Group’s remuneration policies, key drivers for Directors’ remuneration, bonus levels and performance targets; • results of our enquiries of management, internal audit and the Audit Committee about their own identification and assessment of the risks and irregularities; • any matters we identified having obtained and reviewed the Group’s documentation of their policies and procedures relating to: — identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance; — detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; and — the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations. The matters were discussed among the engagement team and involving relevant internal specialists, including tax, pensions, IT, regarding how and where fraud might occur in the Financial Statements and any potential indicators of fraud. As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the following areas: valuation of the inventory provision and revisions to provisional fair value adjustments on the Edenhall Group acquisition. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override. We also obtained an understanding of the legal and regulatory frameworks that the Group operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the Financial Statements. The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules, pensions legislation and tax legislation. As a result of performing the above, we identified the valuation of inventory provision and revisions to provisional fair value adjustments on the Edenhall acquisition as key audit matters related to the potential risk of fraud. The key audit matters section of our report explains the matter in more detail and also describes the specific procedures we performed in response to those key audit matters. 96 Marshalls plc Annual Report and Accounts 2019 Corporate governance 11. Extent to which the audit was considered capable of detecting irregularities, including fraud continued 11.1. Identifying and assessing potential risks related to irregularities continued In addition to the above, our procedures to respond to risks identified included the following: • reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the Financial Statements; • enquiring of management, the Audit Committee and in-house and external legal counsel concerning actual and potential litigation and claims; • performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; • reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC; and • in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. Report on other legal and regulatory requirements 1. Opinions on other matters prescribed by the Companies Act 2006 In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and the Directors’ Report for the financial year for which the Financial Statements are prepared is consistent with the Financial Statements; and • the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report. 2. Matters on which we are required to report by exception 2.1. Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company Financial Statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. 2.2. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. 3. Other matters 3.1. Auditor tenure Following the recommendation of the Audit Committee, we were appointed by the Audit Committee on 20 May 2015 to audit the Financial Statements for the year ending 31 December 2015 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 5 years, covering the years ending 31 December 2015 to 31 December 2019. 3.2. Consistency of the audit report with the additional report to the Audit Committee Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK). 4. Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an Auditor’s Report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Christopher Robertson (Senior statutory auditor) for and on behalf of Deloitte LLP Statutory Auditor Manchester, United Kingdom 12 March 2020 Marshalls plc Annual Report and Accounts 2019 97 Corporate governance Consolidated Income Statement for the year ended 31 December 2019 Revenue Net operating costs Operating profit Financial expenses Financial income Profit before tax Income tax expense Profit for the financial year Profit for the year Attributable to: Equity shareholders of the Parent Non-controlling interests Earnings per share Basic Diluted Dividend Pence per share Dividends declared All results relate to continuing operations. Notes 2 3 2 5 5 2 6 7 7 8 8 2019 £’000 541,832 (468,151) 73,681 (3,835) 7 69,853 (11,942) 57,911 58,240 (329) 57,911 29.36 29.14 16.70p 33,113 2018 £’000 490,988 (426,154) 64,834 (1,904) 5 62,935 (11,307) 51,628 51,958 (330) 51,628 26.29p 26.08p 14.80p 29,250 98 Marshalls plc Annual Report and Accounts 2019 Financial statements Consolidated Statement of Comprehensive Income for the year ended 31 December 2019 Profit for the financial year Other comprehensive income / (expense) Items that will not be reclassified to the Income Statement: Remeasurements of the net defined benefit asset Deferred tax arising Total items that will not be reclassified to the Income Statement Items that are or may in the future be reclassified to the Income Statement: Effective portion of changes in fair value of cash flow hedges Fair value of cash flow hedges transferred to the Income Statement Deferred tax arising Exchange difference on retranslation of foreign currency net investment Exchange movements associated with borrowings designated as a hedge against net investment Foreign currency translation differences – non-controlling interests Total items that are or may be reclassified subsequently to the Income Statement Other comprehensive income for the year, net of income tax Total comprehensive income for the year Attributable to: Equity shareholders of the Parent Non-controlling interests Notes 19 21 21 23 2019 £’000 57,911 2,847 (484) 2,363 231 113 (58) 992 (869) (42) 367 2,730 60,641 61,012 (371) 60,641 2018 £’000 51,628 9,985 (1,698) 8,287 528 (668) 27 (208) 199 (35) (157) 8,130 59,758 60,123 (365) 59,758 Marshalls plc Annual Report and Accounts 2019 99 Financial statements Consolidated Balance Sheet at 31 December 2019 Assets Non-current assets Property, plant and equipment Right-of-use assets Intangible assets Employee benefits Deferred taxation assets Current assets Inventories Trade and other receivables Cash and cash equivalents Derivative financial instruments Total assets Liabilities Current liabilities Trade and other payables Corporation tax Short-term lease liabilities Interest-bearing loans and borrowings Non-current liabilities Long-term lease liabilities Interest-bearing loans and borrowings Provisions Deferred taxation liabilities Total liabilities Net assets Equity Capital and reserves attributable to equity shareholders of the Parent Called-up share capital Share premium account Own shares Capital redemption reserve Consolidation reserve Hedging reserve Retained earnings Equity attributable to equity shareholders of the Parent Non-controlling interests Total equity * The comparatives have been restated as a result of a reassessment of the fair value of assets and liabilities acquired (Note 24). Approved at a Directors’ meeting on 12 March 2020. On behalf of the Board: Martyn Coffey Chief Executive Jack Clarke Finance Director The Notes on pages 104 to 138 form part of these Consolidated Financial Statements. 100 Marshalls plc Annual Report and Accounts 2019 Notes 2019 £’000 2018 * £’000 9 10 11 19 21 12 13 14 18 15 17 16 17 16 20 21 22 23 195,554 40,014 95,799 15,721 2,947 192,061 – 95,802 13,516 1,406 350,035 302,785 89,238 69,418 53,258 620 212,534 562,569 121,379 11,234 9,736 20,000 162,349 32,224 51,274 2,649 18,307 104,454 266,803 295,766 50,013 24,482 (1,391) 75,394 (213,067) 559 359,053 295,043 723 295,766 84,361 80,430 45,709 276 210,776 513,561 128,533 9,683 – 2,974 141,190 – 80,168 7,935 17,553 105,656 246,846 266,715 49,998 24,326 (888) 75,394 (213,067) 273 329,585 265,621 1,094 266,715 Financial statements Consolidated Cash Flow Statement for the year ended 31 December 2019 Cash flows from operating activities Profit for the financial year Income tax expense Profit before tax Adjustments for: Depreciation Amortisation Gain on sale of property, plant and equipment Equity settled share-based payments Financial income and expenses (net) Operating cash flow before changes in working capital Decrease / (increase) in trade and other receivables Increase in inventories (Decrease) / increase in trade and other payables Operational restructuring costs paid Acquisition costs paid Cash generated from operations Financial expenses paid Income tax paid Net cash flow from operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Financial income received Acquisition of subsidiary undertaking Acquisition of property, plant and equipment Acquisition of intangible assets Net cash flow from investing activities Cash flows from financing activities Proceeds from issue of share capital Payments to acquire own shares Payment in respect of share-based payment awards Repayment of borrowings following acquisition of subsidiaries (Decrease) / increase in borrowings Cash payment for the principal portion of lease liabilities Equity dividends paid Net cash flow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of exchange rate fluctuations Cash and cash equivalents at the end of the year Notes 6 9, 10 11 3 3 24 2019 £’000 57,911 11,942 69,853 27,771 2,423 (306) 3,024 3,828 106,593 10,645 (5,262) (10,151) (1,109) (375) 100,341 (3,193) (9,023) 88,125 523 7 – (20,488) (2,420) (22,378) 225 (1,470) – – (10,927) (12,723) (33,203) (58,098) 7,649 45,709 (100) 53,258 2018 £’000 51,628 11,307 62,935 14,199 1,759 (738) 1,434 1,899 81,488 (6,927) (4,314) 6,009 (1,244) (594) 74,418 (1,308) (9,855) 63,255 1,637 5 (11,726) (27,296) (1,995) (39,375) 1,784 (1,210) (3,683) (4,742) 39,101 (101) (29,250) 1,899 25,779 19,845 85 45,709 Marshalls plc Annual Report and Accounts 2019 101 Financial statements Consolidated Statement of Changes in Equity for the year ended 31 December 2019 Attributable to equity holders of the Company Share capital £’000 Share premium account £’000 Capital Own shares £’000 redemption Consolidation reserve £’000 reserve £’000 Hedging reserve £’000 Retained earnings £’000 Non- controlling interests £’000 Total £’000 Total equity £’000 Current year At 1 January 2019 Effect of initial application of IFRS 16 (Note 1) 49,998 24,326 (888) 75,394 (213,067) 273 329,585 265,621 1,094 266,715 – – – – – – (1,842) (1,842) – (1,842) At 1 January 2019 – as restated 49,998 24,326 (888) 75,394 (213,067) 273 327,743 263,779 1,094 264,873 Total comprehensive income for the year Profit for the financial year attributable to equity shareholders of the Parent Other comprehensive income / (expense) Foreign currency translation differences Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to the Income Statement Deferred tax arising Defined benefit plan actuarial gain Deferred tax arising Total other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners Share-based payments Deferred tax on share-based payments Corporation tax on share-based payments Dividends to equity shareholders Shares issued Purchase of own shares Disposal of own shares Total contributions by and distributions to owners Total transactions with owners of the Company – – – – – – – – – – – – – 15 – – 15 15 – – – – – – – – – – – – – – – – – – – – – – – – – – 156 54 – – (1,470) 913 156 (503) 156 (503) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 58,240 58,240 (329) 57,911 – 123 123 231 113 (58) – – – 2,847 2,847 (484) (484) 231 113 (58) – – (42) 81 – – – – – 231 113 (58) 2,847 (484) 286 2,486 2,772 (42) 2,730 286 60,726 61,012 (371) 60,641 – – – 3,024 3,024 1,219 1,219 457 457 – – – 3,024 1,219 457 – (33,203) (33,203) – (33,203) – – – – – 225 (1,470) (913) – – – – 225 (1,470) – – (29,416) (29,748) – (29,748) 286 31,310 31,264 (371) 30,893 At 31 December 2019 50,013 24,482 (1,391) 75,394 (213,067) 559 359,053 295,043 723 295,766 102 Marshalls plc Annual Report and Accounts 2019 Financial statements Prior year At 1 January 2018 Total comprehensive income for the year Profit for the financial year attributable to equity shareholders of the Parent Other comprehensive income / (expense) Foreign currency translation differences Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to the Income Statement Deferred tax arising Defined benefit plan actuarial gain Deferred tax arising Total other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners Share-based payments Deferred tax on share-based payments Corporation tax on share-based payments Dividends to equity shareholders Shares issued Purchase of own shares Disposal of own shares Total contributions by and distributions to owners Total transactions with owners of the Company Attributable to equity holders of the Company Share capital £’000 Share premium account £’000 Capital Own shares £’000 redemption Consolidation reserve £’000 reserve £’000 Hedging reserve £’000 Retained earnings £’000 Non- controlling interests £’000 Total £’000 Total equity £’000 49,845 22,695 (2,359) 75,394 (213,067) 386 303,274 236,168 1,459 237,627 – – – – – – – – – – – – – – – – – – – – – – – – – – 153 1,631 – – – – – – – – – – – – – – – – – – (1,210) 2,681 153 1,631 1,471 153 1,631 1,471 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 51,958 51,958 (330) 51,628 – (9) (9) (35) (44) 528 (668) 27 – – – – – 528 (668) 27 9,985 9,985 (1,698) (1,698) – – – – – 528 (668) 27 9,985 (1,698) (113) 8,278 8,165 (35) 8,130 (113) 60,236 60,123 (365) 59,758 – – – (2,249) (2,249) (171) (171) 426 426 – – – (2,249) (171) 426 – (29,250) (29,250) – (29,250) – – – – – (2,681) 1,784 (1,210) – – – – 1,784 (1,210) – – (33,925) (30,670) – (30,670) (113) 26,311 29,453 (365) 29,088 At 31 December 2018 49,998 24,326 (888) 75,394 (213,067) 273 329,585 265,621 1,094 266,715 Marshalls plc Annual Report and Accounts 2019 103 Financial statements Notes to the Consolidated Financial Statements 1 Accounting policies Significant accounting policies Marshalls plc (the “Company”) is a public company limited by shares, incorporated in the United Kingdom under the Companies Act, and is registered in England and Wales. The Consolidated Financial Statements of the Company for the year ended 31 December 2019 comprise the Company and its subsidiaries (together referred to as the “Group”). The Consolidated Financial Statements were authorised for issue by the Directors on 12 March 2020. The Company’s registered address is Landscape House, Premier Way, Lowfields Business Park, Elland HX5 9HT. The following paragraphs summarise the significant accounting policies of the Group, which have been applied consistently in dealing with items which are considered material in relation to the Group’s Consolidated Financial Statements. The Consolidated Financial Statements have been prepared in accordance with IFRSs as adopted for use in the EU and therefore the Group Financial Statements comply with Article 4 of the EU IAS Regulations. The Group has applied all accounting standards and interpretations issued by the IASB and International Financial Reporting Committee relevant to its operations and which are effective in respect of these Financial Statements. Adoption of new standards in 2019 The Group has applied IFRS 16 “Leases” with effect from 1 January 2019. The impact of adoption is set out below. Other than in respect of IFRS 16, the accounting policies have been applied consistently throughout the Group for the purpose of the Consolidated Financial Statements. The accounting policies are set out on the Company’s website. IFRS 16 “Leases” IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and are replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets. The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as for the impact of lease modifications, amongst others. The classification of cash flows is affected because operating lease payments under IAS 17 are presented as operating cash flows, whereas, under the IFRS 16 model, the lease payments are split into a principal and an interest portion which are presented as financing and operating cash flows respectively. Depreciation of the right-of-use asset is recognised in the Income Statement on a straight line basis, with interest recognised on the lease liability. In adopting IFRS 16 from 1 January 2019, the Group has applied the modified retrospective transition approach and not restated comparative amounts for the year ended 31 December 2018. Right-of-use assets of £45,022,000 and lease liabilities of £46,520,000 were recognised as at 1 January 2019. For certain leases the Group has elected to measure the right-of-use asset as if IFRS 16 had been applied since the start of the lease, but using the incremental borrowing rate at 1 January 2019, with the difference between the right-of-use asset and the lease liability taken to retained earnings. In other cases, the Group has elected to measure right-of-use assets at the amount of the lease liability on adoption (adjusted for any lease prepayments or accrued lease expenses, onerous lease provisions and leased assets which have subsequently been sub-leased). The Group has elected to adopt the following practical expedients on transition: • where an onerous lease provision is in existence, to utilise this provision to reduce the right-of-use asset value rather than undertaking an impairments review; • to use hindsight in determining the lease term; • to exclude initial direct costs from the measurement of the right-of-use asset; and • to apply the portfolio approach where a group of leases has similar characteristics. The Group’s leases principally comprise commercial vehicles and trailers, fork-lift trucks, motor vehicles, certain property assets and fixed plant. Short-term leases, with a duration of less than 12 months, have been accounted for in accordance with the recognition exemption in IFRS 16 and hence related payments are expensed as incurred. The Group also made use of the option to apply the recognition exemption for low value assets (with a value of less than the equivalent of $5,000), which means that related payments have been expensed as incurred. Expenses for short-term and low value assets amounted to £555,000 in the year ended 31 December 2019. 104 Marshalls plc Annual Report and Accounts 2019 Financial statements 1 Accounting policies continued Significant accounting policies continued Adoption of new standards in 2019 continued IFRS 16 “Leases” continued Financial impact of IFRS 16 (a) Impact on transition On transition to IFRS 16, the Group recognised additional right-of-use assets and additional lease liabilities, recognising the difference in retained earnings. The impact on transition is summarised below: Right-of-use assets Lease liabilities Retained earnings Deferred tax Reclassification of prepayments and accruals Reclassification of finance lease assets Reclassification of finance lease liabilities 1 January 2019 £’000 45,022 (46,520) 1,842 415 (3) (1,697) 941 — Included in the transition values for right-of-use assets and lease liabilities are £1,697,000 and £941,000 respectively in relation to previously recognised finance leases under IAS 17. The net asset value in respect of these items was £756,000. Of the total right-of-use assets of £46,719,000 recognised at 1 January 2019, £20,910,000 related to leases of property and £25,809,000 to leases of plant and machinery. The table below presents a reconciliation from operating lease commitments disclosed at 31 December 2018 to lease liabilities recognised at 1 January 2019. Operating lease commitments disclosed under IAS 17 at 31 December 2018 Exclusion of service / maintenance elements of a contract from the lease liability Effect of discounting Finance lease liabilities recognised under IAS 17 at 31 December 2018 Lease liabilities recognised at 1 January 2019 £’000 66,508 (8,934) (11,995) 941 46,520 The lease liabilities were discounted at the incremental borrowing rate at 1 January 2019. The weighted average discount rate applied was 2.9 per cent. The incremental borrowing rate is calculated as the rate of interest which the Group would have been able to borrow for a similar term with a similar security of funds necessary to obtain a similar asset in a similar market. (b) Impact for the period In terms of the Income Statement impact, the application of IFRS 16 resulted in a decrease in other operating expenses and an increase in depreciation and interest expense compared to IAS 17. During the year ended 31 December 2019, in relation to leases under IFRS 16, the Group recognised the following amounts in the Consolidated Income Statement. Depreciation Interest expense Other lease payments including short-term and low value lease expenses The reconciliation of the Income Statement is as follows: Revenue Net operating costs Operating profit Finance charges (net) Profit before tax Income tax Profit after tax £’000 12,868 1,342 555 14,765 December 2018 £’000 490,988 (426,154) 64,834 (1,899) 62,935 (11,307) 51,628 Pre-IFRS 16 December 2019 £’000 541,832 (469,252) 72,580 (2,486) 70,094 (11,942) 58,152 Impact of IFRS 16 £’000 – 1,101 1,101 (1,342) (241) – (241) As reported December 2019 £’000 541,832 (468,151) 73,681 (3,828) 69,853 (11,942) 57,911 Marshalls plc Annual Report and Accounts 2019 105 Financial statements Notes to the Consolidated Financial Statements continued 1 Accounting policies continued Significant accounting policies continued Adoption of new standards in 2019 continued IFRS 16 “Leases” continued Financial impact of IFRS 16 (c) Impact on the Cash Flow Statement Under IFRS 16 the cash payments for leasing are presented within financing activities and amount to £12,723,000 in the Consolidated Cash Flow Statement. Under IAS 17 operating lease payments were presented as operating cash outflows. The impact on the Consolidated Cash Flow Statement for the year ended 31 December 2019 has been to increase net cash flow from operating activities to £88,125,000. On a pre-IFRS 16 basis net cash flows from operating activities would have been £75,712,000 (2018: £63,255,000). (d) Impact on the Balance Sheet Property, plant and equipment Right-of-use assets Deferred taxation assets Net impact on total assets Interest-bearing loans and borrowings Lease liabilities Deferred taxation liabilities Net impact on total liabilities Impact on retained earnings Impact on net assets (e) Impact on financial metrics Profit before tax (£’000) EBITDA (£’000) EPS (pence) Net debt (£’000) ROCE (%) Net debt:EBITDA Gearing (%) Notes 9 10 21 16 17 21 Pre-IFRS 16 December 2019 £’000 196,989 – 2,550 199,539 71,912 – 18,307 90,219 361,137 297,850 Pre-IFRS 16 December 2019 70,094 90,115 29.48 18,654 23.7 0.2 6.3 Impact of IFRS 16 £’000 (1,435) 40,014 397 38,976 (638) 41,960 – 41,322 (2,084) (2,084) Impact of IFRS 16 (241) 13,760 (0.12) 41,322 (2.3) 0.4 14.0 As reported December 2019 £’000 195,554 40,014 2,947 238,515 71,274 41,960 18,307 131,541 359,053 295,766 As reported December 2019 69,853 103,875 29.36 59,976 21.4 0.6 20.3 December 2018 £’000 192,061 – 1,406 193,467 83,142 – 17,553 100,695 329,585 266,715 December 2018 62,935 80,792 26.29 37,433 21.9 0.5 14.0 The following other standards, interpretations and amendments to existing standards became effective on 1 January 2019 and have not had a material impact on the Group: • IFRC 23 “Uncertainty over Income Tax Treatments”, effect from 1 January 2019; • Amendments to IFRS 9 “Prepayment Features with Negative Compensation”, effective from 1 January 2019; • Amendments to IAS 28 “Long-term Interests in Associates and Joint Ventures”, effective from 1 January 2019; • Amendments to IAS 19 “Plan Amendment, Curtailment or Settlement”, effective from 1 January 2019; and • Annual Improvements to IFRS Standards 2015-2017 Cycle, effective from 1 January 2019. The following other standards, interpretations and amendments to existing standards have been issued but were not mandatory for accounting periods beginning 1 January 2019 and are not expected to have a material impact on the Group. • Amendments to IFRS 3: “Definition of a Business”, effective from 1 January 2020 (not yet endorsed by the EU); • Amendments to References to the Conceptual Framework in IFRS Standards, effective from 1 January 2020 (not yet endorsed by the EU); • Amendments to IAS 1 and IAS 8 “Definition of Material”, effective from 1 January 2020 (not yet endorsed by the EU); • IFRS 17 “Insurance Contracts”, effective from 1 January 2021; • Amendments to IFRS 10 and IAS 28 "Sale or Contribution of Assets between an Investor and its Associate or Joint Venture", effective date deferred indefinitely; • Annual Improvements to IFRS Standards 2018 – 2020 cycle (not yet endorsed by the EU); and • “Interest Rate Benchmark Reform (amendments to IFRS 9, IAS 39 and IFRS 7)”, effective from 1 January 2020. Other than in respect of IFRS 16 “Leases”, the Directors do not expect that the adoption of the standards listed above will have a material impact on the Financial Statements of the Group in future periods. 106 Marshalls plc Annual Report and Accounts 2019 Financial statements 1 Accounting policies continued Significant accounting policies continued (a) Statement of compliance The Group Consolidated Financial Statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the European Union (“adopted IFRSs”). The Parent Company has elected to prepare its Financial Statements in accordance with FRS 101 and these are presented on pages 139 to 146. (b) Basis of preparation The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic Report on pages 2 to 41. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also set out in the Strategic Report. In addition, Note 18 includes the Group’s policies and procedures for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk. Details of the Group’s funding position are set out in Note 16 and are subject to normal covenant arrangements. The Group’s on-demand overdraft facility is reviewed on an annual basis and the current arrangements were renewed and signed on 6 August 2019. In the opinion of the Directors there are sufficient unutilised facilities held which mature after 12 months. The Group’s performance is dependent on economic and market conditions, the outlook for which is difficult to predict. Based on current expectations, the Group’s cash forecasts continue to meet half year and year-end bank covenants and there is adequate headroom which is not dependent on facility renewals. The Directors believe that the Group is well placed to manage its business risks successfully. Accordingly, they continue to adopt the going concern basis in preparing the Consolidated Financial Statements. The Consolidated Financial Statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments and liabilities for cash settled share-based payments. The accounting policies have been applied consistently throughout the Group for the purposes of these Consolidated Financial Statements and are also set out on the Company’s website (www.marshalls.co.uk/investor/financial-performance). The Consolidated Financial Statements are presented in Sterling, rounded to the nearest thousand. Sterling is the currency of the primary economic environment in which the Group operates. The preparation of Financial Statements in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These are set out in Note 30 on page 138. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of adopted IFRSs that have a significant effect on the Consolidated Financial Statements and estimates with a significant risk of material adjustment in the next year are discussed in Note 30. (c) Basis of consolidation (i) Subsidiaries Subsidiaries (which are set out in detail in Note 34 on pages 143 and 144) are entities controlled by the Company. Control is achieved when the Company: • has power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to 1 or more of the 3 elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it considers that it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including: • the size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; • potential voting rights held by the Company, other vote holders or other parties; • rights arising from other contractual arrangements; and • any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, the results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from the date the Company gains control until the date when the Company ceases to control the subsidiary. Marshalls plc Annual Report and Accounts 2019 107 Financial statements Notes to the Consolidated Financial Statements continued 1 Accounting policies continued Significant accounting policies continued (c) Basis of consolidation continued (ii) Associates (equity-accounted investees) Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 per cent of the voting power of another entity. Associates are accounted for using the equity method (equity-accounted investees) and are recognised initially at cost. The Group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The Consolidated Financial Statements include the Group’s share of the income and expenses and equity movements of equity-accounted investees, after adjustment to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an equity-accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to £nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. (iii) Transactions eliminated on consolidation Intra-group balances, and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the Consolidated Financial Statements. (iv) Non-controlling interests Non-controlling interests in subsidiaries are identified separately from the Group’s equity therein. Those interests of non-controlling shareholders that are present ownership interests, entitling their holders to a proportionate share of net assets, are initially measured at the non-controlling interests’ proportionate share of the acquiree’s identifiable net assets. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at the initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance. (d) Foreign currency transactions Transactions in foreign currencies are translated to Sterling at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the Consolidated Income Statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. For the purposes of presenting Consolidated Financial Statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. (e) Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange, fuel pricing and interest rate risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for speculative purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised at fair value and transaction costs are recognised in the Income Statement when incurred. The gain or loss on remeasurement to fair value is recognised immediately in the Consolidated Income Statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged (see accounting policy (f)). Classification and measurement The classification of financial assets is based both on the business model within which the asset is held and the contractual cash flow characteristics of the asset. There are 3 principal classification categories for financial assets that are debt instruments: (i) amortised cost; (ii) fair value through other comprehensive income (“FVTOCI”); and (iii) fair value through profit or loss (“FVTPL”). Equity investments in scope of IFRS 9 are measured at fair value with gains and losses recognised in profit or loss unless an irrevocable election is made to recognise gains or losses in other comprehensive income. Under IFRS 9, derivatives embedded in financial assets are not bifurcated but instead the whole hybrid contract is assessed for classification. Under IFRS 9, financial assets can be designated as at FVTPL to mitigate an accounting mismatch. In respect to classification and measurement of financial liabilities, changes in the fair value of a financial liability designated as at FVTPL due to credit risk are presented in other comprehensive income unless such presentation would create or enlarge an accounting mismatch in profit or loss. The change in the classification and measurement of listed redeemable notes has not had a material impact on the Group Financial Statements. Impairment Credit losses and expected credit losses are recognised in accordance with IFRS 9. The amount of expected credit losses is updated at each reporting date. The IFRS 9 impairment model has been applied to the Group’s financial assets that are debt instruments measured at amortised cost or FVTOCI as well as the Group’s finance lease receivables, contract assets and issued financial guarantee contracts. The Group has applied the simplified approach to recognise lifetime expected credit losses for its trade receivables, finance lease receivables and contracts assets as required or permitted by IFRS 9. The loss allowance for these assets as at 1 January 2019 was not significantly different to that under IAS 39. 108 Marshalls plc Annual Report and Accounts 2019 Financial statements 1 Accounting policies continued Significant accounting policies continued (f) Hedging The Group has elected to apply the IFRS 9 hedge accounting requirements because they align more closely with the Group’s risk management policies. An assessment of the Group’s hedging relationships under IAS 39 was performed and it was determined that the relationships will qualify as continuing hedging relationships under IFRS 9. (i) Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset. For cash flow hedges, other than those covered by the preceding policy statement, the associated cumulative gain or loss is removed from equity and recognised in the Consolidated Income Statement in the same period or periods during which the hedged forecast transaction affects the income or expense. The ineffective part of any gain or loss is recognised immediately in the Consolidated Income Statement. When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship, but the hedged forecast transaction is still expected to occur, it no longer meets the criteria for hedge accounting. The cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised immediately in the Consolidated Income Statement and cash flow hedge accounting is discontinued prospectively. (ii) Economic hedges Where a derivative financial instrument is used to hedge economically the foreign exchange exposure of a recognised monetary asset or liability, no hedge accounting is applied and any gain or loss on the hedging instrument is recognised in the Consolidated Income Statement. (g) Property, plant and equipment (i) Owned assets Items of property, plant and equipment are stated at cost less accumulated depreciation (see (iii) below) and impairment losses (see accounting policy (m)). The cost of self-constructed assets includes the cost of materials and direct labour and an appropriate proportion of directly attributable production overheads. Certain items of property, plant and equipment that had been revalued to fair value on or prior to 1 January 2004, the date of transition to adopted IFRSs, are measured on the basis of deemed cost, being the revalued amount at the date of that revaluation. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. (ii) Subsequent costs The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied within the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in the Consolidated Income Statement as an expense as incurred. (iii) Depreciation Depreciation is charged to the Consolidated Income Statement on a straight line basis over the estimated useful lives of each part of an item of property, plant and equipment. Depreciation on quarries is based on estimated rates of extraction. This is based on a comparison between the volume of relevant material extracted in any given period and the volume of relevant material available for extraction. Depreciation on leased assets is charged over the shorter of the lease term and their useful economic life. Freehold land is not depreciated. The rates are as follows: Freehold and long leasehold buildings Short leasehold property Fixed plant and equipment Mobile plant and vehicles Quarries – – – – – 2.5 per cent to 5 per cent per annum over the period of the lease 3.3 per cent to 25 per cent per annum 14 per cent to 30 per cent per annum based on rates of extraction The residual values, useful economic lives and depreciation methods are reassessed annually. Assets under construction are not depreciated until they are ready for use. Marshalls plc Annual Report and Accounts 2019 109 Financial statements Notes to the Consolidated Financial Statements continued 1 Accounting policies continued Significant accounting policies continued (g) Property, plant and equipment continued (iii) Depreciation continued Site preparation costs associated with the development of new stone reserves are capitalised. These costs would include: • costs of clearing the site (including internal and outsourced labour in relation to site workers); • professional fees (including fees relating to obtaining planning consent); • purchase, installation and assembly of any necessary extraction equipment; and • costs of testing whether the extraction process is functioning properly (net of any sales of test products). Depreciation commences when commercial extraction commences and is based on the rate of extraction. In accordance with IAS 37, provision is made for quarry restoration where a legal or constructive obligation exists, it is probable that an outflow of economic benefits will occur and the financial cost of restoration work can be reliably measured. The lives of quarries are almost always long and it is difficult to estimate the length with any precision. The majority of quarry restoration work is undertaken while extracting minerals from new areas (backfilling) and therefore work can be completed without additional cost. As a result of the particular characteristics of the Group’s quarries, the IAS 37 criteria have not been met to date based on the assets so far acquired and, therefore, no provisions have been recognised. (h) Intangible assets (i) Goodwill All business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. For acquisitions on or after 1 January 2004, the Group measures goodwill at the acquisition date as: • the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; plus • the fair value of the existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in the Consolidated Income Statement. Costs relating to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. On a transaction-by-transaction basis, the Group elects to measure non-controlling interests either at their fair value or at their proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the acquisition date. In respect of business acquisitions that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets and contingent liabilities acquired. The classification and accounting treatment relating to the acquisition of Edenhall Holdings Limited on 11 December 2018 was adjusted in preparing the Group’s opening IFRS balance sheet at 1 January 2019. Further details of this business combination are included in Note 24. In respect of acquisitions prior to 1 January 2004, goodwill is included on the basis of its deemed cost, which represents the amount recorded under the Group’s previous accounting framework. The classification and accounting treatment of business combinations that occurred prior to 1 January 2004 were not adjusted in preparing the Group’s opening IFRS balance sheet at 1 January 2004. Goodwill is subsequently stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units and is tested annually for impairment (see accounting policy (m)). In respect of equity-accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee. In respect of acquisitions where there is a contingent consideration element, an accrual is created for the estimated amount payable if it is probable that an outflow of economic benefits will be required to settle the obligation and this can be measured reliably. (ii) Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the Consolidated Income Statement as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process meets the recognition criteria for development expenditure as set out in IAS 38 “Intangible Assets”. The expenditure capitalised includes all directly attributable costs, from the date which the intangible asset meets the recognition criteria, necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Other development expenditure is recognised in the Consolidated Income Statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation (see (v) overleaf) and impairment losses (see accounting policy (m)). 110 Marshalls plc Annual Report and Accounts 2019 Financial statements 1 Accounting policies continued Significant accounting policies continued (h) Intangible assets continued (iii) Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (see (v) below) and impairment losses (see accounting policy (m)). Expenditure on internally generated goodwill and brands is recognised in the Consolidated Income Statement as an expense as incurred. (iv) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (v) Amortisation Amortisation is charged to the Consolidated Income Statement on a straight line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill is systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The rates applied are as follows: Customer and supplier relationships Patents, trademarks and know-how Development costs Software – – – – 5 to 20 years 2 to 20 years 10 to 20 years 5 to 10 years (i) Trade and other receivables Trade and other receivables are stated at initial recognition, at their transaction price (as defined in IFRS 15) if the trade receivables do not contain a significant financially component in accordance with IFRS 15 (or when the entity applies the practical expedient in accordance with paragraph 63 of IFRS 15). (j) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs to completion and of selling expenses. The cost of inventories is based on the first-in, first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity, which were incurred in bringing the inventories to their present location and condition. (k) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the Consolidated Cash Flow Statement. (l) Assets classified as held for sale Assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and expected to be completed within 1 year from the date of classification, and the asset is available for immediate sale in its present condition. (m) Impairment (i) Impairment review The carrying amounts of the Group’s assets, other than inventories (see accounting policy (j)), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the Consolidated Income Statement. Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash generating units and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis. A cash generating unit is the group of assets identified on acquisition that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of assets or cash generating units is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. (ii) Reversals of impairments An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Marshalls plc Annual Report and Accounts 2019 111 Financial statements Notes to the Consolidated Financial Statements continued 1 Accounting policies continued Significant accounting policies continued (n) Share capital (i) Share capital Share capital is classified as equity if it is non-redeemable and any dividends are discretionary, or if it is redeemable but only at the Company’s option. Dividends on share capital classified as equity are recognised as distributions within equity. Non-equity share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders or if dividend payments are not discretionary. Dividends thereon are recognised in the Consolidated Income Statement as a financial expense. (ii) Dividends Dividends on non-equity shares are recognised as a liability and accounted for on an accruals basis. Equity dividends are recognised as a liability in the period in which they are declared (appropriately authorised and no longer at the discretion of the Company). (o) Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the Consolidated Income Statement over the period of the borrowings on an effective interest basis. (p) Pension schemes (i) Defined benefit schemes The net obligation in respect of the Group’s defined benefit pension scheme is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted. The discount rate is the yield at the balance sheet date on AA credit-rated corporate bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. If the calculation results in a surplus, the resulting asset is measured at the present value of any economic benefits available in the form of refunds from the plan, or reductions in future contributions to the plan. The present value of these economic benefits is discounted by reference to market yields at the balance sheet date on high quality corporate bonds. When the benefits of the scheme are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the Income Statement in the period of the scheme amendment. Actuarial gains and losses that arise in calculating the Group’s obligation in respect of a plan are recognised immediately within the Consolidated Statement of Comprehensive Income. (ii) Defined contribution schemes Obligations for contributions to defined contribution schemes are recognised as an expense in the Income Statement as incurred. (q) Share-based payment transactions The Group enters into equity settled share-based payment transactions with its employees. In particular, annual awards are made to employees under the Company’s Management Incentive Plan (“MIP”). The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. Where appropriate, the fair value of the options granted is measured using the Black-Scholes option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. Current tax relief is available as shares vest based on the value at the date of vesting. A deferred tax asset is recognised at grant date based on the number of shares expected to be issued, at the value at which they are expected to be issued, proportioned in line with the vesting period. (r) Own shares held by the Employee Benefit Trust Transactions of the Group-sponsored Employee Benefit Trust are included in the Group Financial Statements. In particular, the Trust’s purchases of shares in the Company are debited directly to equity. (s) Provisions A provision is recognised in the Consolidated Balance Sheet when the Group has a present legal or constructive obligation as a result of a past event, it can be measured reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for. (t) Trade and other payables Trade and other payables are stated at initial recognition, at their fair value and subsequently at amortised cost. (u) Revenue Revenue from the sale of goods is recognised in the Consolidated Income Statement upon the despatch of goods, when the performance obligations to customers have been satisfied. Revenue represents the invoiced value of sales to customers less returns, allowances, rebates and value added tax. 112 Marshalls plc Annual Report and Accounts 2019 Financial statements 1 Accounting policies continued Significant accounting policies continued (u) Revenue continued Revenue is recorded typically on despatch of the Group’s products, when performance obligations to customers are satisfied. Products are usually delivered using the Group’s fleet of delivery vehicles. Amounts due from customers are payable by customers on standard credit terms and there is no significant financing component or variable consideration within amounts due from customers. There are no significant obligations arising in relation to returns, refunds, warranties or similar obligations. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due or the possible return of goods or continuing management involvement with the goods. (v) Expenses (i) Operating lease payments Payments made under operating leases are recognised in the Consolidated Income Statement on a straight line basis over the term of the lease. Lease incentives received are recognised in the Consolidated Income Statement over the life of the lease. (ii) Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (iii) Financial expenses Net financial expenses comprise interest on obligations under the defined benefit pension scheme, the expected return on scheme assets under the defined benefit pension scheme, interest payable on borrowings (including finance leases) calculated using the effective interest rate method, dividends on non-equity shares, interest receivable on funds invested, dividend income, foreign exchange gains and losses and gains and losses on hedging instruments that are recognised in the Consolidated Income Statement (see accounting policy (f)). (w) Income tax Income tax on the profit or loss for the year comprises current and deferred taxation. Income tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised directly in other comprehensive income or in equity, in which case it is recognised accordingly. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred taxation is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred taxation provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that are expected to apply when the temporary difference reverses, based on rates that have been enacted or substantively enacted at the balance sheet date. A deferred taxation asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred taxation assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. (x) Segment reporting IFRS 8 “Operating Segments” requires operating segments to be identified on the basis of discrete financial information about components of the Group that are regularly reviewed by the Group’s Chief Operating Decision Maker (“CODM”) to allocate resources to the segments and to assess their performance. As far as Marshalls is concerned, the CODM is regarded as being the Executive Directors. The Directors have concluded that the Group’s Landscape Products business is a single reportable segment, which includes the UK operations of the Marshalls Landscape Products hard landscaping business, servicing both the UK Domestic and the Public Sector and Commercial end markets. Financial information for Landscape Products is now reported to the Group’s CODM for the assessment of segment performance and to facilitate resource allocation. (y) Alternative performance measures The Group uses alternative performance measures (“APMs”) which are not defined or specified under IFRS. The Group believes that these APMs, which are not considered to be a substitute for IFRS measures, provide additional helpful information. APMs are consistent with how business performance is planned, reported and assessed internally by management and the Board and provide more meaningful comparative information. Like-for-like revenue growth Management uses like-for-like revenue growth as it provides a consistent measure of the percentage increase / decrease in revenue year on year, excluding the effect of acquisitions. Reported revenue Edenhall post-acquisition revenue Like-for-like revenue 2019 £’000 541,832 (35,489) 506,343 2018 £’000 490,988 (675) 490,313 Increase % 10% 3% Marshalls plc Annual Report and Accounts 2019 113 Financial statements Notes to the Consolidated Financial Statements continued 1 Accounting policies continued Significant accounting policies continued (y) Alternative performance measures continued EBITA and EBITDA EBITA represents earnings before interest, tax and the amortisation of intangibles. This is a component of the ROCE calculation. EBITDA is calculated by adding back depreciation to EBITA. EBITDA Depreciation EBITA Amortisation of intangible assets Operating profit As reported 2019 £’000 Pre-IFRS 16 2019 £’000 Pre-IFRS 16 2018 £’000 103,875 (27,771) 76,104 (2,423) 73,681 90,115 (15,112)* 75,003 (2,423) 72,580 80,792 (14,199) 66,593 (1,759) 64,834 Increase % 29% 14% * Pre-IFRS 16 depreciation of £15,112,000 comprises depreciation of £14,903,000 in respect of tangible fixed assets (Note 3) and £209,000 relating to assets previously classified as finance leases but now reclassified as right-of-use assets. ROCE Reported ROCE is defined as EBITA divided by shareholders’ funds plus cash / net debt. EBITA Shareholders’ funds Net debt Reported ROCE As reported 2019 £’000 76,104 295,766 59,976 355,742 21.4% Pre-IFRS 16 2019 £’000 75,003 297,850 18,654 316,504 23.7% Pre-IFRS 16 2018 £’000 66,593 266,715 37,433 304,148 21.9% ROCE on a like-for-like basis (excluding the impact of acquisitions) includes adjustments to report the calculation on a basis that eliminates the impact of the acquisition of Edenhall in 2018. This ensures comparability with the prior year period. Reported EBITA Post-acquisition EBIT Amortisation of intangible assets in year of acquisition Acquisition costs Adjusted EBITA Shareholders’ funds Net debt Impact on net debt arising from the acquisitions in the year As adjusted ROCE on a like-for-like basis (excluding the impact of acquisitions) 2019 £’000 76,104 – – – 76,104 295,766 59,976 355,742 – 355,742 21.4% 2018 £’000 66,593 (21) 17 375 66,964 266,715 37,433 304,148 (16,468) 287,680 23.3% Net debt Net debt comprises cash at bank and in hand, bank loans and leasing liabilities. An analysis of net debt is provided in Note 25. IFRS 16 transition The financial impact of the transition to IFRS 16 is set out on pages 104 to 106. Disclosures required under IFRS are referred to as either on a post-IFRS 16 basis or on a reported basis. Disclosures referred to on a pre-IFRS 16 basis are restated to those that applied before the adoption of IFRS 16 and are used throughout this Annual Report to show a like-for-like comparison with prior year periods. 114 Marshalls plc Annual Report and Accounts 2019 Financial statements 1 Accounting policies continued Significant accounting policies continued (y) Alternative performance measures continued The ratio of operating cash flow to EBITDA The ration of operating cash flow to EBITDA is calculated on a pre-IFRS 16 basis as set out below: Net cash flows from operating activities Net financial expenses paid Taxation paid Operating cash flow EBITDA Ratio of operating cash flow to EBITDA 2 Segmental analysis Segment revenues and results Total revenue Inter-segment revenue External revenue Segment operating profit Unallocated administration costs Operating profit Finance charges (net) Profit before tax Taxation Profit after tax Pre-IFRS 2019 £’000 75,712 1,851 9,023 86,586 90,115 96.1% 2019 2018 Landscape Products £’000 413,484 (362) 413,122 71,663 Other £’000 132,453 (3,743) 128,710 6,719 Landscape Products £’000 398,128 (228) 397,900 68,418 Other £’000 96,943 (3,855) 93,088 2,095 Total £’000 545,937 (4,105) 541,832 78,382 (4,701) 73,681 (3,828) 69,853 (11,942) 57,911 2018 £’000 63,255 1,308 9,855 74,418 80,792 92.1% Total £’000 495,071 (4,083) 490,988 70,513 (5,679) 64,834 (1,899) 62,935 (11,307) 51,628 The Group has 2 customers which each contributed more than 10 per cent of total revenue in the current and prior year. The Landscape Products reportable segment operates a national manufacturing plan that is structured around a series of production units throughout the UK, in conjunction with a single logistics and distribution operation. A national planning process supports sales to both of the key end markets, namely the UK Domestic and Public Sector and Commercial end markets and the operating assets produce and deliver a range of broadly similar products that are sold into each of these end markets. Within the Landscape Products operating segment the focus is on one integrated production, logistics and distribution network supporting both end markets. Included in “Other” are the Group’s Landscape Protection, Mineral Products, Edenhall, Premier Mortars and International operations, which do not currently meet the IFRS 8 reporting requirements. The accounting policies of the Landscape Products operating segment are the same as the Group’s accounting policies. Segment profit represents the profit earned without allocation of certain central administration costs that are not capable of allocation. Centrally administered overhead costs that relate directly to the reportable segment are included within the segment’s results. Segment assets Fixed assets, right-of-use assets and inventory: Landscape Products Other Total segment fixed assets, right-of-use assets and inventory Unallocated assets Consolidated total assets 2019 £’000 2018 * £’000 232,539 92,267 324,806 237,763 562,569 201,489 74,933 276,422 237,139 513,561 * The comparatives have been restated as a result of a reassessment of the fair value of assets and liabilities acquired (Note 24). For the purpose of monitoring segment performance and allocating resources between segments, the Group’s CODM monitors the tangible fixed assets, right-of-use assets and inventory. Assets used jointly by reportable segments are not allocated to individual reportable segments. Marshalls plc Annual Report and Accounts 2019 115 Financial statements Notes to the Consolidated Financial Statements continued 2 Segmental analysis continued Other segment information Landscape Products Other Geographical destination of revenue United Kingdom Rest of the world Depreciation and amortisation Fixed asset and right-of-use asset additions 2019 £’000 21,603 8,591 30,194 2018 £’000 13,251 2,707 15,958 2019 £’000 24,550 5,027 29,577 2019 £’000 514,905 26,927 541,832 2018 £’000 21,060 6,256 27,316 2018 £’000 467,032 23,956 490,988 The Group’s revenue is subject to seasonal fluctuations resulting from demand from customers. In particular, demand is higher in the summer months. The Group manages the seasonal impact through the use of a seasonal working capital facility. 3 Net operating costs Raw materials and consumables Changes in inventories of finished goods and work in progress Personnel costs (Note 4) Depreciation of property, plant and equipment Depreciation of right-of-use assets Amortisation of intangible assets Own work capitalised Other operating costs Operational restructuring costs Acquisition costs Operating costs Other operating income Net gain on asset and property disposals Net operating costs 2019 £’000 198,124 847 128,221 14,903 12,868 2,423 (4,216) 116,135 1,396 – 470,701 (2,244) (306) 468,151 2018 £’000 172,175 6,267 116,588 14,199 – 1,759 (3,340) 120,187 1,244 375 429,454 (2,562) (738) * 426,154 * This reflects the proceeds of the sale of a domain name and is net of associated digital strategy costs. In the prior year, operating costs were expensed in accordance with the requirements of IAS 17. For the period ended 31 December 2019, leasing expenses for short-term leases as well as leases of low value assets remain within leasing costs, because the Group has applied the recognition exemption for those contracts provided by IFRS 16. Right-of-use assets are depreciated over the lease term. Net operating costs include: Auditor’s remuneration (see below) Short-term and low value lease costs Operating leasing costs Hire of plant and machinery Research and development costs In respect of the year under review, Deloitte LLP carried out work in relation to: Audit of Financial Statements of Marshalls plc Audit of Financial Statements of subsidiaries of the Company Half yearly review of Marshalls plc Other assurance services 116 Marshalls plc Annual Report and Accounts 2019 2019 £’000 248 555 – 3,214 5,535 2019 £’000 30 198 20 – 248 2018 £’000 247 – 12,522 4,838 4,927 2018 £’000 30 173 20 24 247 Financial statements 4 Personnel costs Personnel costs (including amounts charged in the year in relation to Directors): Wages and salaries Social security costs Share-based payments Contributions to defined contribution pension scheme Included within net operating costs (Note 3) Personnel costs relating to restructuring (Note 3) Total personnel costs Remuneration of Directors: Salary Other benefits MIP Element A bonus MIP Element B bonus Amounts receivable under the MIP at the end of the first cycle Salary supplement in lieu of pension Non-Executive Directors’ fees and fixed allowances 2019 £’000 2018 £’000 104,338 12,367 3,024 8,492 128,221 1,076 129,297 2019 £’000 762 46 1,341 379 975 152 360 4,015 97,417 10,341 1,789 7,041 116,588 634 117,222 2018 £’000 737 45 823 362 505 147 320 2,939 The aggregate of emoluments and amounts receivable under the MIP of the highest paid Director was £2,213,000 (2018: £1,602,000), including a salary supplement in lieu of pension of £92,000 (2018: £89,000). There are no Directors to whom retirement benefits are accruing in respect of qualifying services. As set out in the Annual Remuneration Report on page 84, the Executive Directors receive a salary supplement in lieu of pension equal to their contractual entitlement of 20 per cent of basic salary. Further details of Directors’ remuneration, share options, long-term incentive plans and Directors’ pension entitlements are disclosed in the Remuneration Committee Report on pages 55 to 86. The average monthly number of persons employed by the Group during the year was: Continuing operations 5 Financial expenses and income (a) Financial expenses Net interest expense on defined benefit pension scheme Interest expense on bank loans, overdrafts and loan notes Interest expense on lease liabilities (b) Financial income Interest receivable and similar income Net interest expense on the defined benefit pension scheme is disclosed net of Company recharges. 2019 Number 2,816 2019 £’000 542 1,951 1,342 3,835 2018 Number 2,640 2018 £’000 496 1,403 5 1,904 7 5 Marshalls plc Annual Report and Accounts 2019 117 Financial statements Notes to the Consolidated Financial Statements continued 6 Income tax expense Current tax expense Current year Adjustments for prior years Deferred taxation expense Origination and reversal of temporary differences: Current year Adjustments for prior years Total tax expense Reconciliation of effective tax rate Profit before tax Tax using domestic corporation tax rate Impact of capital allowances in excess of depreciation Short-term timing differences Adjustment to tax charge in prior year Expenses not deductible for tax purposes Corporation tax charge for the year Impact of capital allowances in excess of depreciation Short-term timing differences Pension scheme movements Other items Adjustment to tax charge in prior year Impact of the change in the rate of corporation tax on deferred taxation Total tax charge for the year 2019 £’000 13,214 (1,577) 11,637 556 (251) 2018 £’000 11,269 (934) 10,335 921 51 11,942 11,307 2018 % 100.0 19.0 (0.6) 0.9 (1.5) (1.4) 16.4 (0.2) 1.8 (0.2) 0.5 0.1 (0.4) 18.0 2018 £’000 62,935 11,957 (402) 595 (934) (881) 10,335 (130) 1,139 (101) 300 51 (287) 11,307 2019 % 100.0 19.0 (0.7) 0.6 (2.3) 0.1 16.7 0.9 – (0.2) 0.4 (0.4) (0.3) 17.1 2019 £’000 69,853 13,272 (523) 386 (1,577) 79 11,637 648 – (109) 261 (251) (244) 11,942 The net amount of deferred taxation debited to the Consolidated Statement of Comprehensive Income in the year was £542,000 (2018: £1,671,000). The majority of the Group’s profits are earned in the UK with the standard rate of corporation tax being 19 per cent for the year to 31 December 2019. Capital allowances are tax reliefs provided in law for the expenditure the Group makes on fixed assets. The rates are determined by Parliament annually, and spread the tax relief due over a number of years. This contrasts with the accounting treatment for such spending, where the expenditure on fixed assets is treated as an investment with the cost then being spread over the anticipated useful life of the asset, and / or impaired if the value of such assets is considered to have reduced materially. The different accounting treatment of fixed assets for tax and accounting purposes is one reason why the taxable income of the Group is not the same as its accounting profit. During the year ended 31 December 2019 the capital allowances due to the Group exceeded the depreciation charge for the year. Short-term timing differences arise on items such as depreciation in stock and share-based payments because the treatment of such items is different for tax and accounting purposes. These differences usually reverse in the years following those in which they arise, as is reflected in the deferred tax charge in the Financial Statements. Adjustments to tax charges arising in earlier years arise because the tax charge to be included in a set of accounts has to be estimated before those Financial Statements are finalised. Such charges therefore include some estimates that are checked and refined before the Group’s corporation tax returns for the year are submitted to HM Revenue & Customs, which may reflect a different liability as a result. Some expenses incurred may be entirely appropriate charges for inclusion in the Financial Statements but are not allowed as a deduction against taxable income when calculating the Group’s tax liability for the same accounting period. Examples of such disallowable expenditure include business entertainment costs and some legal expenses. The prior year adjustment in corporation tax includes the reversal of some tax provisions made on acquisition of subsidiaries in 2017 and 2018 which are no longer required. As can be seen from the tax reconciliation, the process of adjustment that can give rise to current year adjustments to tax charges arising in previous periods can also give rise to revisions in prior year deferred tax estimates. This is why the current year adjustments to the current year charge for capital allowances and short-term timing differences are not exactly replicated in the deferred taxation charge for the year. The Group’s overseas operations comprise a manufacturing operation in Belgium and sales and administration offices in the USA, China and Dubai. The sales of these units, in total, were less than 5 per cent of the Group’s turnover in the year ended 31 December 2019. In total, the trading profits were not material and no tax was due. 118 Marshalls plc Annual Report and Accounts 2019 Financial statements 7 Earnings per share Basic earnings per share of 29.36 pence (2018: 26.29 pence) per share is calculated by dividing the profit attributable to Ordinary Shareholders for the financial year, after adjusting for non-controlling interests, of £58,240,000 (2018: £51,958,000) by the weighted average number of shares in issue during the period of 198,346,723 (2018: 197,669,293). Profit attributable to Ordinary Shareholders Profit for the financial year Loss attributable to non-controlling interests Profit attributable to Ordinary Shareholders Weighted average number of Ordinary Shares Number of issued Ordinary Shares Effect of shares transferred into Employee Benefit Trust Weighted average number of Ordinary Shares at the end of the year 2019 £’000 57,911 329 58,240 2018 £’000 51,628 330 51,958 2019 Number 200,052,157 (1,705,434) 2018 Number 199,419,571 (1,750,278) 198,346,723 197,669,293 Diluted earnings per share of 29.14 pence (2018: 26.08 pence) per share is calculated by dividing the profit for the financial year, after adjusting for non-controlling interests, of £58,240,000 (2018: £51,958,000) by the weighted average number of shares in issue during the period of 198,346,723 (2018: 197,669,293) plus potentially dilutive shares of 1,496,678 (2018: 1,548,929), which totals 199,843,401 (2018: 199,218,222). Weighted average number of Ordinary Shares (diluted) Weighted average number of Ordinary Shares Potentially dilutive shares Weighted average number of Ordinary Shares (diluted) 2019 Number 2018 Number 198,346,723 197,669,293 1,496,678 1,548,929 199,843,401 199,218,222 8 Dividends After the balance sheet date a final dividend of 9.65 pence (2018: 8.00 pence) per qualifying Ordinary Share was proposed by the Directors. In addition a supplementary dividend of 4.00 pence (2018: 4.00 pence) per qualifying Ordinary Share was proposed by the Directors. These dividends have not been provided for and there are no income tax consequences. The total dividends proposed in respect of the year are as follows: 2019 supplementary 2019 final 2019 interim 2018 supplementary 2018 final 2018 interim The following dividends were approved by the shareholders and recognised in the year: 2019 interim 2018 supplementary 2018 final 2018 interim 2017 supplementary 2017 final 2019 £’000 7,934 19,142 9,323 36,399 2019 £’000 9,323 7,930 15,860 33,113 Pence per qualifying share 4.00 9.65 4.70 18.35 4.00 8.00 4.00 16.00 Pence per qualifying share 4.70 4.00 8.00 16.70 4.00 4.00 6.80 14.80 2018 £’000 7,930 15,860 7,906 31,696 2018 £’000 7,906 7,905 13,439 29,250 The Board recommends a 2019 final dividend of 9.65 pence per qualifying Ordinary Share (amounting to £19,142,000), alongside a supplementary dividend of 4.00 pence per qualifying Ordinary Share (amounting to £7,934,000), to be paid on 30 June 2020 to shareholders registered at the close of business on 5 June 2020. Marshalls plc Annual Report and Accounts 2019 119 Financial statements Notes to the Consolidated Financial Statements continued 9 Property, plant and equipment Cost At 1 January 2018 Exchange differences Additions Acquisition of subsidiary Reclassification Disposals At 31 December 2018* At 1 January 2019 Exchange differences Additions Reclassified as right-of-use assets Disposals At 31 December 2019 Depreciation and impairment losses At 1 January 2018 Depreciation charge for the year Exchange differences Disposals At 31 December 2018 At 1 January 2019 Depreciation charge for the year Exchange differences Reclassified as right-of-use assets Disposals At 31 December 2019 Net book value At 1 January 2018 At 31 December 2018* At 31 December 2019 Land and buildings £’000 Quarries £’000 Plant, machinery and vehicles £’000 Total £’000 93,656 23,464 346,869 463,989 124 7,053 3,962 (1,744) (313) 102,738 102,738 (472) 3,326 – (167) – 3,481 – 1,744 – 28,689 28,689 – 390 (402) – 88 14,787 8,139 – (445) 369,438 369,438 (379) 17,278 (2,072) (2,034) 212 25,321 12,101 – (758) 500,865 500,865 (851) 20,994 (2,474) (2,201) 105,425 28,677 382,231 516,333 38,826 1,756 4 (13) 40,573 40,573 1,927 (15) – (167) 8,406 228 – – 8,634 8,634 349 – – – 247,664 12,215 84 (366) 259,597 259,597 12,627 (294) (777) (1,675) 294,896 14,199 88 (379) 308,804 308,804 14,903 (309) (777) (1,842) 42,318 8,983 269,478 320,779 54,830 62,165 63,107 15,058 20,055 19,694 99,205 109,841 112,753 169,093 192,061 195,554 * The comparatives have been restated as a result of a reassessment of the fair value of assets and liabilities acquired (Note 24). Mineral reserves and associated land have been separately disclosed under the heading of “Quarries”. At 31 December 2018, the carrying amount of tangible fixed assets included £402,000 of land assets and £1,295,000 of plant and machinery held under finance leases. These have been reclassified as right-of-use assets on transition to IFRS 16. Group cost of land and buildings and plant and machinery includes £178,000 (2018: £1,926,000) and £3,385,000 (2018: £16,779,000) respectively for assets in the course of construction. Capital commitments Capital expenditure that has been contracted for but for which no provision has been made in the Consolidated Financial Statements Depreciation charge The depreciation charge is recognised in the following line items in the Consolidated Income Statement: Net operating costs (Note 3) 120 Marshalls plc Annual Report and Accounts 2019 2019 £’000 2018 £’000 3,868 4,635 2019 £’000 14,903 2018 £’000 14,199 Financial statements 10 Right-of-use assets Cost New leases recognised Reclassification of finance lease assets At 1 January 2019 Additions At 31 December 2019 Depreciation and impairment losses At 1 January 2019 Depreciation change for the year At 31 December 2019 Net book value At 1 January 2019 At 31 December 2019 Land and buildings Plant and equipment £’000 £'000 Total £’000 20,508 402 20,910 74 20,984 – 2,057 2,057 20,910 18,927 24,514 1,295 25,809 6,089 31,898 – 10,811 10,811 25,809 21,087 2019 £’000 12,868 2019 £’000 1,764 45,022 1,697 46,719 6,163 52,882 – 12,868 12,868 46,719 40,014 2018 £’000 – 2018 £’000 – Depreciation charge The depreciation charge is recognised in the following line items in the Consolidated Income Statement: Net operating costs (Note 3) Lease commitments Lease commitments that have been contracted for but have not yet commenced 11 Intangible assets Cost At 1 January 2018 Additions Recognised on acquisition of subsidiary At 31 December 2018* At 1 January 2019 Additions At 31 December 2019 Amortisation and impairment losses At 1 January 2018 Amortisation for the year At 31 December 2018 At 1 January 2019 Amortisation for the year At 31 December 2019 Carrying amounts At 1 January 2018 At 31 December 2018* At 31 December 2019 Goodwill £’000 Customer relationships £’000 Supplier relationships £’000 and Development costs £’000 know-how £’000 Software £’000 Total £’000 Patents, trademarks 1,629 1,760 159 14,360 94,639 67,817 1,419 18,190 87,426 8,914 – 3,897 12,811 87,426 12,811 – – – – 1,629 1,629 – – – 1,760 1,760 – 87,426 12,811 1,629 1,760 8,912 – 8,912 8,912 – 8,912 58,905 78,514 2,331 670 3,001 3,001 1,060 4,061 6,583 9,810 78,514 8,750 857 103 960 960 103 1,063 772 669 566 1,432 42 1,474 1,474 42 1,516 328 286 244 – – 159 159 – 159 109 8 117 117 8 1,995 3,414 – 22,087 16,355 120,140 16,355 120,140 2,420 2,420 18,775 122,560 8,938 936 22,579 1,759 9,874 24,338 9,874 1,210 24,338 2,423 125 11,084 26,761 50 42 34 5,422 72,060 6,481 95,802 7,691 95,799 * The comparatives have been restated as a result of a reassessment of the fair value of assets and liabilities acquired (Note 24). Marshalls plc Annual Report and Accounts 2019 121 Financial statements Notes to the Consolidated Financial Statements continued 11 Intangible assets continued All goodwill has arisen from business combinations. The carrying amount of goodwill is allocated across cash generating units (“CGUs”) and these CGUs are independent sources of income streams and represent the lowest level within the Group at which the associated goodwill is monitored for management purposes. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value-in-use calculations and at both 31 December 2019 and 31 December 2018 the full amount of goodwill in the Group Balance Sheet related to the Landscape Products CGU. The goodwill arising on the acquisition of Edenhall is included within the Landscape Products CGU. These calculations use cash flow projections based on a combination of individual financial 3-year forecasts, containing assumptions for revenue growth and operational gearing, and appropriate long-term growth rates of 2.6 per cent. The long-term growth rate assumption reflects the long-term average growth rate for the UK economy. To prepare value-in-use calculations, the cash flow forecasts are discounted back to present value using an appropriate market-based discount rate. The pre-tax discount rate used to calculate the value in use was 7.4 per cent (2018: 8.2 per cent). The Directors have reviewed the recoverable amounts of the CGUs, and considered possible impacts from Brexit and other principal risks and uncertainties, and do not consider that any reasonable change in the assumptions would give rise to the need for further impairment. Included in software additions is £1,438,000 (2018: £915,000) of own work capitalised. Amortisation charge The amortisation charge is recognised in the following line items in the Consolidated Income Statement: Net operating costs (Note 3) 12 Inventories Raw materials and consumables Finished goods and goods for resale 2019 £’000 2,423 2019 £’000 19,956 69,282 89,238 2018 £’000 1,759 2018 £’000 15,925 68,436 84,361 Inventories stated at a net realisable value less than cost at 31 December 2019 amounted to £3,465,000 (2018: £3,420,000). The write down of inventories made during the year amounted to £1,151,000 (2018: £1,024,000). There were £201,000 reversals of inventory write downs made in previous years in 2019 (2018: £nil). 13 Trade and other receivables Trade receivables Other receivables Prepayments and accrued income 2019 £’000 48,039 12,123 9,256 69,418 2018 £’000 58,056 14,940 7,434 80,430 Included within other receivables is a reimbursement asset of £5,142,000 (2018: £9,418,000) which is held in escrow in relation to the acquisitions of CPM Group Limited and Edenhall Holdings Limited (Note 24). Ageing of trade receivables Neither impaired nor past due Not impaired but overdue by less than 30 days Not impaired but overdue by between 30 and 60 days Not impaired but overdue by more than 60 days 2019 £’000 24,484 15,282 2,938 5,335 48,039 2018 £’000 25,822 20,952 4,148 7,134 58,056 There were no receivables due after more than 1 year (2018: £nil). All amounts disclosed above are considered recoverable and are disclosed net of a provision for expected credit losses of £533,000 (2018: £716,000). This provision has been determined using a lifetime expected credit loss calculation. Assumptions made regarding the recoverability of balances have been determined with reference to past default experiences in line with our policies and understanding. Balances are only written off if deemed irrecoverable after all credit control procedures have been exhausted. 14 Cash and cash equivalents Bank balances Cash in hand Cash and cash equivalents in the Consolidated Cash Flow Statement 122 Marshalls plc Annual Report and Accounts 2019 2019 £’000 53,242 16 53,258 2018 £’000 45,694 15 45,709 Financial statements 15 Trade and other payables Current liabilities Trade payables Taxation and social security Other payables Accruals * The comparatives have been restated as a result of a reassessment of the fair value of assets and liabilities acquired (Note 24). All trade payables are due in 6 months or less. 16 Loans Current liabilities Bank overdrafts Bank loans Finance lease liabilities Non-current liabilities Bank loans Finance lease liabilities Bank loans The bank loans are secured by intra-group guarantees with certain subsidiary undertakings. Finance lease liabilities Less than 1 year 1 to 2 years 2 to 5 years In more than 5 years 17 Lease liabilities Analysed as: Amounts due for settlement within 12 months (shown under current liabilities) Amounts due for settlement after 12 months Less than 1 year 1 to 2 years 2 to 5 years In more than 5 years Minimum lease payments £’000 335 299 363 40 1,037 Minimum lease payments £’000 10,835 8,322 12,469 21,225 52,851 2019 £’000 2018 * £’000 54,920 12,718 26,692 27,049 121,379 2019 £’000 – 20,000 – 20,000 51,274 – 51,274 59,354 11,894 23,868 33,417 128,533 2018 £’000 2,673 – 301 2,974 79,528 640 80,168 2018 Interest £’000 Principal £’000 34 30 31 1 96 31 December 2019 £’000 9,736 32,224 41,960 2019 Interest £’000 1,099 1,476 2,080 6,236 10,891 301 269 332 39 941 1 January 2019 £’000 11,523 34,997 46,520 Principal £’000 9,736 6,846 10,389 14,989 41,960 Marshalls plc Annual Report and Accounts 2019 123 Financial statements Notes to the Consolidated Financial Statements continued 17 Lease liabilities continued As at 31 December 2019, the total minimum lease payments (above) comprised property of £30,323,000 and plant, machinery and vehicles of £22,528,000. Certain leased properties have been sublet by the Group. Sublease payments of £214,068 (2018: £207,779) are expected to be received during the following financial year. An amount of £229,034 (2018: £211,164) was recognised as income in the Consolidated Income Statement within net operating costs in respect of subleases. The Group does not face a significant liquidity risk with regard to its lease liabilities. The interest expense on lease liabilities amounted to £1,342,000 for the year ended 31 December 2019. Lease liabilities are calculated at the present value of the lease payments that are not paid at the commencement date. For the year ended 31 December 2019, the average effective borrowing rate was 2.9 per cent. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. The vast majority of lease obligations are denominated in Sterling. 18 Financial instruments The Group holds and uses financial instruments to finance its operations and to manage its interest rate, liquidity and currency risks. The Group primarily finances its operations using share capital, retained profits and borrowings. The Group’s bank loans are non-equity funding instruments, further details of which are set out on pages 127 and 128. As directed by the Board, the Group does not engage in speculative activities using derivative financial instruments. Group cash reserves are held centrally to take advantage of the most rewarding short-term investment opportunities. Forward foreign currency contracts are used in the management of currency risk. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, foreign currency risk and pricing risk. The Board reviews and agrees the policies for managing each of these risks and they have remained unchanged since 2018. Capital management The Group defines the capital that it manages as its total equity and net debt balances. The Group manages its capital structure in light of current economic conditions and its strategic objectives to ensure that it is able to continue as a going concern whilst maximising the return to stakeholders through the optimisation of debt and equity balances. The Group manages its medium-term bank debt to ensure continuity of funding and the policy is to arrange funding ahead of requirements and to maintain sufficient undrawn committed facilities. A key objective is to ensure compliance with the covenants set out in the Group’s bank facility agreements. From time to time the Group purchases its own shares on the market; the timing of these purchases depends on market prices. Primarily the shares are intended to be used for issuing shares under the Group’s incentive schemes. Buy and sell decisions are made on a specific transaction basis by the Board. There has been no change in the objectives, policies or processes with regard to capital management during the years ended 31 December 2019 and 31 December 2018. Financial risks The Group has exposure to a number of financial risks through the conduct of its operations. Risk management is governed by the Group’s operational policies, guidelines and authorisation procedures, which are outlined in the Strategic Report on pages 2 to 41. The key financial risks resulting from financial instruments are liquidity risk, interest rate risk, credit risk, foreign currency risk and pricing risk. In managing interest rate and currency risks the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates would have an impact on consolidated earnings. For instance, a weakening of Pound Sterling on the foreign currency market would increase the cost of certain raw materials, whereas a strengthening would have the opposite effect. (a) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Board is responsible for ensuring that the Group has sufficient liquidity to meet its financial liabilities as they fall due and does so by monitoring cash flow forecasts and budgets. Cash resources are largely and normally generated through operations and short-term flexibility is achieved by bank facilities. Bank debt is raised centrally and the Group aims to maintain a balance between flexibility and continuity of funding by having a range of maturities on its borrowings. Details of the Group borrowing facilities are provided on pages 127 and 128. (b) Interest rate risk The Group’s policy is to review regularly the terms of its available short-term borrowing facilities and to assess individually and manage each long-term borrowing commitment accordingly. The Group borrows principally at floating rates of interest and, where appropriate, uses interest rate swaps to generate the desired interest rate profile, thereby managing the Group’s exposure to interest rate fluctuations. The Group classifies its interest rate swaps as cash flow hedges and states them at fair value. The fair value of interest rate swaps is £nil (2018: £nil) and is adjusted against the hedging reserve on an ongoing basis. The period that the swaps cover is matched against the debt maturity in order to fix the impact on the Income Statement. During the year £nil (2018: £3,000) has been recognised in other comprehensive income for the year with £nil (2018: £14,000) being reclassified from equity to the Income Statement. The interest rate swaps have been fully effective in the relevant period. With the addition of the fuel hedges (Note 18(e)) and forward contracts this gives a total of £231,000 credit (2018: £528,000 credit) recognised in other comprehensive income for the year with £113,000 credit (2018: £668,000 debit) being reclassified from equity to the Income Statement. 124 Marshalls plc Annual Report and Accounts 2019 Financial statements 18 Financial instruments continued Financial risks continued (b) Interest rate risk continued Sensitivity analysis A change of 100 basis points in interest rates at the balance sheet date would have decreased equity and profit by the amounts shown below. The sensitivity analysis has been undertaken before the effect of tax. The sensitivity analysis of the Group’s exposure to interest rate risk has been determined based on the change taking place at the beginning of the financial year and held constant throughout the reporting period. This analysis assumes that all other variables, in particular foreign currency rates, remain constant and considers the effect of financial instruments with variable interest rates, financial instruments at fair value through profit or loss or available for sale with fixed interest rates and the fixed rate element of interest rate swaps. The analysis was performed on the same basis for 2018. Increase of 100 basis points Decrease of 100 basis points 2019 £’000 (753) 753 2018 £’000 (650) 650 (c) Credit risk Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount and, where appropriate, credit insurance cover is obtained. This provides excellent intelligence to minimise the number and value of bad debts and ultimately provides compensation if bad debts are incurred. An ageing of trade receivables is shown in Note 13 on page 122. Investments are allowed only in liquid securities and only with counterparties that have a credit rating equal to or better than the Group. Transactions involving derivative financial instruments are with counterparties with which the Group has a signed netting agreement as well as sound credit ratings. Given their high credit ratings, management does not expect any counterparty to fail to meet its obligations. At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet. (d) Foreign currency risk The Group is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than Sterling. The currencies giving rise to this risk are primarily Euros and US Dollars. The Group’s policy is to cover all significant foreign currency commitments in respect of trade receivables and trade payables by using forward foreign currency contracts. All the forward exchange contracts have maturities of less than 1 year after the balance sheet date. Where necessary, the forward exchange contracts are rolled over at maturity. The Group classifies its forward exchange contracts as cash flow hedges and states them at fair value. The fair value of forward exchange contracts is £99,000 asset (2018: £30,000 liability) and is adjusted against the hedging reserve on an ongoing basis. During the year £129,000 (2018: £73,000) has been recognised in other comprehensive income for the year with £nil (2018: £nil) being reclassified from equity to the Income Statement. At 31 December 2019 all outstanding forward exchange contracts had a maturity date within 6 months. The foreign currency profile of monetary items was: 2019 2018 Sterling £’000 Euro £’000 US Dollar £’000 AED £’000 Total £’000 Sterling £’000 Euro £’000 US Dollar £’000 AED £’000 Total £’000 Cash and cash equivalents 50,049 839 2,344 26 53,258 43,644 Bank overdrafts Trade receivables Secured bank loans Lease liabilities Trade payables – – 44,553 3,206 (54,500) (16,774) (41,658) (302) – 280 – – 913 – – – (2,673) – 48,039 54,536 3,319 – (71,274) (63,250) (16,278) – (41,960) – – 1,029 123 45,709 – 163 – – – 38 (2,673) 58,056 – (79,528) – – (45,588) (8,091) (1,213) (28) (54,920) (50,114) (8,555) (685) – (59,354) Derivative financial instruments 521 90 9 – 620 306 (24) (6) – 276 Balance sheet exposure (46,623) (21,032) 1,420 (2) (66,237) (17,551) (20,625) 501 161 (37,514) Marshalls plc Annual Report and Accounts 2019 125 Financial statements Notes to the Consolidated Financial Statements continued 18 Financial instruments continued Financial risks continued (d) Foreign currency risk continued A 10 per cent strengthening and weakening of the following currencies against the Pound Sterling at 31 December 2019 would have increased / (decreased) equity and profit or loss by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date. This analysis assumes that all other variables, in particular other exchange rates and interest rates, remain constant. The analysis was performed on the same basis for 2018: 10 per cent strengthening of £ against € 10 per cent weakening of £ against € 10 per cent strengthening of £ against $ 10 per cent weakening of £ against $ 10 per cent strengthening of £ against Dhs 10 per cent weakening of £ against Dhs 2019 £’000 1,843 (1,508) (126) 103 – – 2018 £’000 1,833 (1,500) (45) 36 (14) 12 (e) Pricing risks Where appropriate the Group uses hedging instruments to mitigate the risks of significant forward price rises of fuel in relation to expected consumption. The current hedges held are in place until 31 December 2020. The Group classifies its fuel hedges as cash flow hedges and states them at fair value. The fair value of the fuel hedges is a £521,000 asset (2018: £306,000 asset) and is adjusted against the hedging reserve on an ongoing basis. The period that the fuel hedges cover is matched against future expected purchases in order to fix the impact on the Income Statement. During the year £102,000 (2018: £598,000) has been recognised in other comprehensive income, with £113,000 (2018: £682,000) being reclassified from equity to the Income Statement. The fuel hedges have been fully effective in the period. (f) Other risks Further information about the Group’s strategic and financial risks is contained in the Strategic Report on pages 24 to 29. Effective interest rates and maturity of liabilities At 31 December 2019 there were £41,960,000 (2018: £941,000) of Group borrowings on a fixed rate. The interest rate profile of the financial liabilities is set out below. The tables also disclose cash and cash equivalents in order to reconcile to net debt (Note 25). Fixed or variable rate Effective interest rate % Total £’000 6 months or less £’000 6 – 12 months £’000 1 – 2 years £’000 2 – 5 years £’000 More than 5 years £’000 31 December 2019 Cash and cash equivalents (Note 14) Bank overdrafts (Note 16) Bank loans (Note 16) Lease liabilities (Note 17) Finance lease liabilities (Note 16) Variable Variable Variable Fixed Fixed 1.81 (53,258) (53,258) – 1.81 2.97 – – 71,274 41,960 – – – – – 20,000 39,405 – – 4,363 5,373 6,846 – – – – – 11,869 10,389 – – – – 14,989 – 31 December 2018 Cash and cash equivalents (Note 14) Bank overdrafts (Note 16) Bank loans (Note 16) Lease liabilities (Note 17) Finance lease liabilities (Note 16) 59,976 (48,895) 25,373 46,251 22,258 14,989 Fixed or variable rate Effective interest rate % Total £’000 6 months or less £’000 6 – 12 months £’000 1 – 2 years £’000 2 – 5 years £’000 More than 5 years £’000 Variable Variable Variable Fixed Fixed 1.81 3.0 1.81 – 10.9 (45,709) (45,709) 2,673 79,528 – 941 2,673 – – 135 – – – – – – 19,820 20,000 39,708 – 166 – 269 – 332 37,433 (42,901) 19,986 20,269 40,040 – – – – 39 39 126 Marshalls plc Annual Report and Accounts 2019 Financial statements 18 Financial instruments continued Financial risks continued (f) Other risks continued Effective interest rates and maturity of liabilities continued At 31 December the undiscounted outstanding contractual payments (including interest) of financial liabilities were as follows: Fixed or variable rate Carrying value £’000 Total £’000 6 months or less £’000 6 – 12 months £’000 1 – 2 years £’000 2 – 5 years £’000 More than 5 years £’000 31 December 2019 Bank overdrafts Bank loans Trade payables Lease liabilities Derivative financial assets 31 December 2018 Bank overdrafts Bank loans Trade payables Lease liabilities Finance lease liabilities Derivative financial assets Variable – Variable 71,274 Variable 54,920 Fixed Fixed 41,960 – 72,658 54,920 52,851 – 522 54,920 4,888 (620) (620) (487) – – – 20,369 39,842 11,925 – 5,947 (133) – – 8,322 12,469 21,225 – – – – – – 167,534 179,809 59,843 26,183 48,164 24,394 21,225 Fixed or variable rate Carrying value £’000 Total £’000 6 months or less £’000 6 – 12 months £’000 1 – 2 years £’000 2 – 5 years £’000 More than 5 years £’000 Variable Variable Variable Fixed Fixed Fixed 2,673 79,528 59,354 – 941 (276) 2,673 82,347 59,354 – 1,037 (276) 2,673 595 59,354 – 152 (249) – – – 20,318 20,811 40,623 – – 183 (27) – – 299 – – – 363 – 142,220 145,135 62,525 20,474 21,110 40,986 – – – – 40 – 40 Borrowing facilities The total bank borrowing facilities at 31 December 2019 amounted to £155.0 million (2018: £140.0 million), of which £83.7 million (2018: £60.5 million) remained unutilised. There are additional seasonal bank working capital facilities of £10.0 million available between 1 February and 31 August each year. The undrawn facilities available at 31 December 2019, in respect of which all conditions precedent had been met, were as follows: Committed: Expiring in more than 5 years Expiring in more than 2 years but not more than 5 years Expiring in 1 year or less Uncommitted: Expiring in 1 year or less 2019 £’000 2018 £’000 – 68,726 – 15,000 83,726 25,000 20,292 180 15,000 60,472 On 6 August 2019, the Group renewed its short-term working capital facilities of £25.0 million and took out an additional committed facility of £35.0 million with a 2023 maturity date. The committed facilities are all revolving credit facilities with interest charged at variable rates based on LIBOR. The Group’s bank facilities continue to be aligned with the current strategy to ensure that headroom against available facilities remains at appropriate levels. Marshalls plc Annual Report and Accounts 2019 127 Financial statements Notes to the Consolidated Financial Statements continued 18 Financial instruments continued Borrowing facilities continued The maturity profile of borrowing facilities is structured to provide balanced, committed and phased medium-term debt. The current facilities are set out as follows: Committed facilities Q1: 2024 Q3: 2023 Q3: 2022 Q3: 2021 Q3: 2020 On-demand facilities Available all year Seasonal (February to August inclusive) Facility £’000 25,000 55,000 20,000 20,000 20,000 15,000 10,000 Cumulative facility £’000 25,000 80,000 100,000 120,000 140,000 155,000 165,000 Fair values of financial assets and financial liabilities A comparison by category of the book values and fair values of the financial assets and liabilities of the Group at 31 December 2019 is shown below: 2019 2018* Book amount £’000 Fair value £’000 Book amount £’000 Fair value £’000 Trade and other receivables Cash and cash equivalents Bank overdrafts Bank loans Lease liabilities Finance lease liabilities 60,162 53,258 – (71,274) (41,960) – 60,162 53,258 – (69,936) (52,851) – Trade payables, other payables and provisions (108,621) (108,621) Interest rate swaps, forward contracts and fuel hedges Contingent consideration Financial instrument assets and liabilities – net Non-financial instrument assets and liabilities – net 620 (2,420) 620 (2,420) (110,235) 406,001 295,766 71,710 45,709 (2,673) (77,931) – (1,037) (115,135) 276 (2,420) 71,710 45,709 (2,673) (79,528) – (941) (115,135) 276 (2,420) (83,002) 349,717 266,715 * The comparatives have been restated as a result of a reassessment of the fair value of assets and liabilities acquired (Note 24). Estimation of fair values The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table. Other than contingent consideration, which uses a level 3 basis, all use level 2 valuation techniques. (a) Derivatives Derivative contracts are either marked to market using listed market prices or by discounting the contractual forward price at the relevant rate and deducting the current spot rate. For interest rate swaps, broker quotes are used. (b) Interest-bearing loans and borrowings Fair value is calculated based on the expected future principal and interest cash flows discounted at the market rate of interest at the balance sheet date. (c) Finance lease liabilities The fair value is estimated as the present value of future cash flows, discounted at market interest rates for homogeneous lease agreements. The estimated fair values reflect changes in interest rates. (d) Trade and other receivables / payables For receivables / payables with a remaining life of less than 1 year, the notional amount is deemed to reflect the fair value. All other receivables / payables are discounted to determine the fair value. (e) Contingent consideration The basis of calculating contingent consideration is set out in Note 24 on page 136. (f) Fair value hierarchy The table below analyses financial instruments, measured at fair value, into a fair value hierarchy based on the valuation techniques used to determine fair value. • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. 128 Marshalls plc Annual Report and Accounts 2019 Financial statements 18 Financial instruments continued Borrowing facilities continued Estimation of fair values continued (f) Fair value hierarchy continued • 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). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). 31 December 2019 Derivative financial assets 31 December 2018 Derivative financial assets Level 1 £’000 Level 2 £’000 Level 3 £’000 – – 620 276 – – Total £’000 620 276 19 Employee benefits The Company sponsors a funded defined benefit pension scheme in the UK (the “Scheme”). The Scheme is administered within a trust which is legally separate from the Company. The Trustee Board is appointed by both the Company and the Scheme’s membership and acts in the interest of the Scheme and all relevant stakeholders, including the members and the Company. The Trustee is also responsible for the investment of the Scheme’s assets. The defined benefit section of the Scheme provides pension and lump sums to members on retirement and to dependants on death. The defined benefit section closed to future accrual of benefits on 30 June 2006 with the active members becoming entitled to a deferred pension. Members no longer pay contributions to the defined benefit section. Company contributions to the defined benefit section after this date are used to fund any deficit in the Scheme and the expenses associated with administering the Scheme, as determined by regular actuarial valuations. The Trustee is required to use prudent assumptions to value the liabilities and costs of the Scheme whereas the accounting assumptions must be best estimates. The defined benefit section of the Scheme poses a number of risks to the Company, for example longevity risk, investment risk, interest rate risk, inflation risk and salary risk. The Trustee is aware of these risks and uses various techniques to control them. The Trustee has a number of internal control policies, including a risk register, which are in place to manage and monitor the various risks it faces. The Trustee’s investment strategy incorporates the use of liability-driven investments (“LDIs”) to minimise sensitivity of the actuarial funding position to movements in interest rates and inflation rates. The defined benefit section of the Scheme is subject to regular actuarial valuations, which are usually carried out every 3 years. The next actuarial valuation is expected to be carried out with an effective date of 5 April 2021. These actuarial valuations are carried out in accordance with the requirements of the Pensions Act 2004 and so include deliberate margins for prudence. This contrasts with these accounting disclosures which are determined using best estimate assumptions. A formal actuarial valuation was carried out as at 5 April 2018. The results of that valuation have been projected to 31 December 2019 by a qualified independent actuary. The figures in the following disclosure were measured using the projected unit method. The amounts recognised in the Consolidated Balance Sheet were as follows: Present value of Scheme liabilities Fair value of Scheme assets Net amount recognised at the year end (before any adjustments for deferred tax) 2019 £’000 (353,136) 368,857 15,721 2018 £’000 (330,222) 343,738 13,516 2017 £’000 (350,554) 354,681 4,127 The current and past service costs, settlements and curtailments, together with the net interest expense for the year, are included in the employee benefits expense in the Consolidated Statement of Comprehensive Income. Remeasurements of the net defined benefit surplus are included in other comprehensive income. Net interest expense recognised in the Consolidated Income Statement Remeasurements of the net liability: Return on scheme assets (excluding amount included in interest expense) Loss / (gain) arising from changes in financial assumptions Gain arising from changes in demographic assumptions Experience loss Credit recorded in other comprehensive income Total defined benefit credit 2019 £’000 642 (33,362) 38,367 (13,017) 5,165 (2,847) (2,205) 2018 £’000 596 7,872 (16,326) (1,531) – (9,985) (9,389) Marshalls plc Annual Report and Accounts 2019 129 Financial statements Notes to the Consolidated Financial Statements continued 19 Employee benefits continued The principal actuarial assumptions used were: Liability discount rate Inflation assumption – RPI Inflation assumption – CPI Rate of increase in salaries Revaluation of deferred pensions Increases for pensions in payment: CPI pension increases (maximum 5% p.a.) CPI pension increases (maximum 5% p.a., minimum 3% p.a.) CPI pension increases (maximum 3% p.a.) Proportion of employees opting for early retirement Proportion of employees commuting pension for cash Mortality assumption – before retirement Mortality assumption – after retirement (males) Loading Projection basis Mortality assumption – after retirement (females) Loading Projection basis Future expected lifetime of current pensioner at age 65: Male aged 65 at year end Female aged 65 at year end Future expected lifetime of future pensioner at age 65: Male aged 45 at year end Female aged 45 at year end Changes in the present value of assets over the year Fair value of assets at the start of the year Interest income Return on assets (excluding amount included in net interest expense) Benefits paid Administration expenses Fair value of assets at the end of the year Actual return on assets over the year Changes in the present value of liabilities over the year Liabilities at the start of the year Past service cost Interest cost Remeasurement losses / (gains): Actuarial losses / (gains) arising from changes in financial assumptions Actuarial gains arising from changes in demographic assumptions Experience loss Benefits paid Liabilities at the end of the year 130 Marshalls plc Annual Report and Accounts 2019 2019 £’000 2.10% 2.95% 2.05% n/a 2.10% 2.10% 3.20% 1.90% 0% 80% 2018 £’000 2.75% 3.15% 2.15% n/a 2.15% 2.15% 3.20% 1.95% 0% 50% Same as post retirement Same as post retirement S2PXA tables S2PXA tables 110% 105% Year of birth Year of birth CMI_2018 1.0% CMI_2017 1.0% S2PXA tables S2PXA tables 110% 105% Year of birth Year of birth CMI_2018 1.0% CMI_2017 1.0% 85.6 87.5 86.6 88.7 2019 £’000 86.1 88.0 87.1 89.2 2018 £’000 343,738 354,681 9,228 33,362 (16,457) (1,014) 368,857 42,590 8,729 (7,872) (11,094) (706) 343,738 857 2019 £’000 2018 £’000 330,222 350,554 – 8,856 38,367 (13,017) 5,165 (16,457) (7) 8,626 (16,326) (1,531) – (11,094) 353,136 330,222 Financial statements 19 Employee benefits continued The split of the Scheme’s liabilities by category of membership is as follows: Deferred pensioners Pensioners in payment Average duration of the Scheme’s liabilities at the end of the year (in years) The major categories of Scheme assets are as follows: Return-seeking assets UK equities Overseas equities Other equity type investments Total return-seeking assets Other Insured pensioners Cash Liability-driven investments and bonds Total matching assets Total market value of assets 2019 £’000 185,341 167,795 353,136 18 2018 £’000 182,701 147,521 330,222 18 2019 £’000 2018 £’000 2,019 35,172 34,796 71,987 679 5,161 291,030 296,870 368,857 20,747 9,767 37,976 68,490 760 2,335 272,153 275,248 343,738 The return-seeking assets and LDI assets have quoted prices in active markets. The valuation of the insured pensions has been taken as the value of the corresponding liabilities assessed using the assumptions set out above. The Scheme has no investments in the Company or in property occupied by the Company. The Company expects to pay no contributions to the defined benefit section of the Scheme during the year ended 31 December 2020. Sensitivity of the liability value to changes in the principal assumptions If the discount rate were 0.5 per cent higher / (lower), the defined benefit section Scheme liabilities would decrease by approximately £30.5 million (increase by £31.5 million) if all the other assumptions remained unchanged. If the inflation assumption were 0.1 per cent higher / (lower), the Scheme liabilities would increase by £2.0 million (decrease by £3.4 million). In this calculation all assumptions related to the inflation assumption have been appropriately adjusted, that is salary, the deferred pension and pension in payment increases. The other assumptions remain unchanged. If life expectancies were to increase / (decrease) by 1 year, the Scheme liabilities would increase by £16.3 million (decrease by £15.6 million) if all the other assumptions remained unchanged. Management Incentive Plan (“MIP”) Share-based payment awards have been made during the year in accordance with the rules of the MIP. Full details of the performance criteria and the basis of operation of the MIP are set out in the Remuneration Committee Report on pages 55 to 86. Equity settled awards are settled by physical delivery of shares. The following equity settled awards have been granted: Equity settled awards granted to Directors of Marshalls plc Equity settled awards granted to other employees Equity settled awards granted to Directors of Marshalls plc Equity settled awards granted to other employees Equity settled awards granted to Directors of Marshalls plc Equity settled awards granted to other employees Equity settled awards granted to Directors of Marshalls plc Equity settled awards granted to other employees Number of instruments 235,541 236,092 193,939 207,387 223,795 282,124 161,586 226,654 1,767,118 £’000 Plan year Vesting date 677 679 976 1,051 1,233 1,556 1,327 1,862 9,361 2016 2016 2017 2017 2018 2018 2019 2019 March 2020 March 2020 March 2021 March 2021 March 2022 March 2022 March 2023 March 2023 Marshalls plc Annual Report and Accounts 2019 131 Financial statements Notes to the Consolidated Financial Statements continued 19 Employee benefits continued Sensitivity of the liability value to changes in the principal assumptions continued Management Incentive Plan (“MIP”) continued Analysis of closing balance (deferred into shares): Equity settled awards granted to Directors of Marshalls plc Equity settled awards granted to other employees 2019 2018 £’000 4,217 5,153 9,370 Shares 815,390 948,021 1,763,411 £’000 3,584 4,656 8,240 2019 2018 Outstanding at 1 January Granted Change in value of notional shares Lapsed Element released Value £’000 8,240 3,246 1,602 (168) (3,550) Number of options 2,166,851 395,104 195,052 (54,585) (939,011) Value £’000 10,364 2,896 203 – Shares 943,554 1,223,297 2,166,851 Number of options 2,931,066 648,016 48,293 – (5,223) (1,460,524) Outstanding at 31 December 9,370 1,763,411 8,240 2,166,851 The total expenses recognised for the period arising from share-based payments were as follows: Awards granted and total expense recognised as employee costs 2019 £’000 3,846 2018 £’000 3,349 Further details in relation to the Directors are set out in the Remuneration Committee Report on pages 55 to 86. Included in the total expense of £3,846,000 (2018: £3,349,000) is an amount of £1,696,000 (2018: £2,422,000) which is expected to be settled as interim cash payments under the terms of the Scheme and which has been included within wages and salaries in Note 3 and accruals in Note 15. Employee Bonus Share Plan A Bonus Share Plan was approved by shareholders in May 2015 under which a number of senior management employees were granted performance related bonuses with an element of this bonus being in the form of shares. The bonus performance criteria are the same as those applicable to the MIP awards. The bonus shares take the form of nil-cost options to acquire shares at the end of a 3-year vesting period from the date of grant, and vesting is conditional on continued employment at the end of the vesting period. Awards are made to participants following publication of the Group’s year-end results. In addition, special Bonus Share Awards were granted to qualifying CPM employees following its acquisition on 19 October 2017 and to qualifying Edenhall employees following its acquisition on 11 December 2018. These took the form of nil-cost options to acquire Ordinary Shares in Marshalls plc at the end of a 3-year period. Awards outstanding at 31 December 2019 were over 840,096 shares (31 December 2018: 352,117). The total expenses recognised for the year arising from share-based payments were £874,000 (2018: £563,000). All-employee Sharesave (“SAYE”) scheme On 5 October 2015 options were granted over up to 1,000,000 shares to employees who had subscribed to the SAYE scheme. The option price was 291 pence, a discount of 20 per cent to the market price on the date of grant. The options were exercisable by relevant employees after a period of 3 years and accordingly reached maturity and became exercisable during 2018. A total of 692,143 Ordinary Shares were exercised, of which 77,465 were exercised in 2019 and 614,678 were exercised in 2018 of the 77,465 shares exercised in 2019, 58,724 were newly issued shares and 18,741 shares were transferred from the employee benefit trust. SAYE options that were not exercised lapsed on 1 June 2019. The total expense recognised for the year arising from share-based payments was £nil (2018: £275,000). Employee profit sharing scheme At 31 December 2019 the scheme held 42,287 (2018: 42,329) Ordinary Shares in the Company. 20 Provisions At 1 January 2018 Utilised in the year On acquisition of subsidiary undertaking At 1 January 2019 as previously reported Restatement (Note 24) At 1 January 2019 as restated Utilised in the year Additional provisions made in the period Unused amounts reversed during the period At 31 December 2019 132 Marshalls plc Annual Report and Accounts 2019 Legal and regulatory provisions £’000 8,200 (1,912) 1,000 7,288 647 7,935 (5,086) 800 (1,000) 2,649 Financial statements 20 Provisions continued Provisions were made for the estimated cost of settlement of certain legal and regulatory matters relating to the CPM business acquired on 19 October 2017, reflecting the Directors’ estimate of the likely outflow from settlement of these matters. In addition, provisions of £1,647,000 were made for the estimated cost of settlement of certain legal and regulatory matters relating to the Edenhall business acquired on 11 December 2018. The majority of these provisions are expected to be settled within the next 2 years. 21 Deferred taxation Recognised deferred taxation assets and liabilities Property, plant and equipment Intangible assets Inventories Employee benefits Equity settled share-based payments IFRS 16 transition adjustment Other items Tax assets / (liabilities) Assets 2019 £’000 – – – – 2,550 397 – 2,947 2018 £’000 – – – – 1,406 – – 1,406 Liabilities 2019 £’000 (11,321) (1,909) (337) (2,674) – – (2,066) (18,307) 2018 £’000 (10,924) (1,985) (337) (2,299) – – (2,008) (17,553) The March 2016 Budget announced that the UK corporation tax rate will reduce to 17 per cent by April 2020. The reduction in the rate to 17 per cent (effective April 2020) was substantively enacted at the balance sheet date. This will reduce the Group’s future current tax charge accordingly. The deferred taxation liability at 31 December 2019 has been calculated based on the rate at which the deferred tax is expected to unwind in the future using rates enacted at the balance sheet date. The deferred taxation liability of £2,674,000 (2018: £2,299,000) in relation to employee benefits is in respect of the net surplus for the defined benefit obligations of £15,721,000 (2018: £13,516,000) (Note 19) calculated at 17 per cent (2018: 17 per cent). Deferred tax assets on capital losses and overseas trading losses have not been recognised due to uncertainty around the future use of the losses. Movement in temporary differences Year ended 31 December 2019 Property, plant and equipment Intangible assets Inventories Employee benefits Equity settled share-based payments IFRS 16 transition adjustment Other items Year ended 31 December 2018 Property, plant and equipment Intangible assets Inventories Employee benefits Equity settled share-based payments Other items 1 January 2019 £’000 (10,924) (1,985) (337) (2,299) 1,406 – (2,008) (16,147) 1 January 2018 £’000 (10,545) (1,351) (368) (702) 2,775 (2,020) (12,211) Recognised in income £’000 Recognised in other comprehensive income £’000 Recognised in statement of changes in equity £’000 On acquisition of subsidiary undertaking £’000 (397) 76 – 109 (75) (18) – (305) – – – (484) – – (58) (542) – – – – 1,219 415 – 1,634 – – – – – – – – Recognised in income £’000 Recognised in other comprehensive income £’000 Recognised in statement of changes in equity £’000 On acquisition of subsidiary undertaking £’000 79 28 31 101 (1,198) (15) (974) – – – (1,698) – 27 (1,671) – – – – (171) – (171) (458) (662) – – – – (1,120) 31 December 2019 £’000 (11,321) (1,909) (337) (2,674) 2,550 397 (2,066) (15,360) 31 December 2018 £’000 (10,924) (1,985) (337) (2,299) 1,406 (2,008) (16,147) Deferred taxation liabilities represent sums that might become payable as tax in future years as a result of transactions that have occurred in the current year. The explanation as to why such liabilities may arise is included in the notes to the tax reconciliation (Note 6). Marshalls plc Annual Report and Accounts 2019 133 Financial statements Notes to the Consolidated Financial Statements continued 21 Deferred taxation continued Movement in temporary differences continued The deferred tax balances on short-term timing differences are expected to reverse within 1 to 3 years. Based on the current investment programme of the Group and assuming that current rates of capital allowances on fixed asset expenditure continue into the future, there is little prospect of any significant part of the deferred taxation liability of the Company becoming payable over the next 3 years. It is not realistic to make any projection after a 3-year period. The deferred tax liabilities disclosed in the year ended 31 December 2019 include the deferred tax relating to the Group’s pension scheme assets. Deferred tax assets on capital losses and overseas trading losses have not been recognised due to uncertainty around the future use of the losses. 22 Capital and reserves Called-up share capital Ordinary Shares At 1 January Issued in year At 31 December 2019 Number 2019 nominal value £’000 2018 Number 2018 nominal value £’000 199,993,433 49,998 199,378,755 58,724 15 614,678 200,052,157 50,013 199,993,433 49,845 153 49,998 On 5 October 2015 options were granted up to 1,000,000 shares to employees who had subscribed to the SAYE Scheme (Note 19). The options were exercisable by relevant employees after a period of 3 years and consequently during the year 58,724 (2018: 614,678) Ordinary Shares were issued to those employees whose options had reached maturity. Consolidation reserve On 8 July 2004 Marshalls plc was introduced as the new holding company of the Group by way of a court-approved Scheme of Arrangement under Section 425 of the Companies Act 1985. The restructuring was accounted for as a capital reorganisation and accounting principles were applied as if the Company had always been the holding company of the Group. The difference between the aggregate nominal value of the new shares issued by the Company and the called-up share capital, capital redemption reserve and share premium account of Marshalls Group plc (the previous holding company) was transferred to a consolidation reserve. Hedging reserve This represents the gains and losses arising on derivatives used for cash flow hedging, principally from the Group’s interest rate swaps, energy price contracts and forward exchange contracts. Dividends After the balance sheet date the following dividends were proposed by the Directors. The dividends have not been provided for and there were no income tax consequences. 9.65 pence final dividend (2018: 8.00 pence) per Ordinary Share 4.00 pence supplementary dividend (2018: 4.00 pence) per Ordinary Share 23 Non-controlling interests At 1 January Share of loss for the year Foreign currency transaction differences At 31 December 2019 £’000 19,142 7,934 27,076 2019 £’000 1,094 (329) (42) 723 2018 £’000 15,860 7,930 23,790 2018 £’000 1,459 (330) (35) 1,094 134 Marshalls plc Annual Report and Accounts 2019 Financial statements 24 Acquisition of subsidiary On 11 December 2018, Marshalls Mono Limited acquired 100 per cent of the issued share capital of Edenhall Holdings Limited, a concrete brick manufacturer. Edenhall Holdings Limited operates within the UK and is registered in England and Wales. Land and buildings Plant, machinery and vehicles Identifiable intangible assets Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Provisions Borrowings Finance leases Corporation tax Deferred tax Total identifiable net liabilities Goodwill Total consideration Satisfied by: Cash consideration Deferred consideration Contingent consideration Total cost of investment Monies paid into escrow Analysis of amounts paid in connection with the acquisition Total cash payments Net cash acquired Total cash outflow in connection with the acquisition 2018 Edenhall fair values acquired (as restated) £’000 3,962 8,139 3,897 2,105 5,726 33 (18,772) (1,647) (3,959) (783) (692) (1,120) (3,111) 18,190 10,759 1,900 2,420 15,079 1,000 16,079 11,759 (33) 11,726 Marshalls plc Annual Report and Accounts 2019 135 Financial statements Notes to the Consolidated Financial Statements continued 24 Acquisition of subsidiary continued Acquisition of Edenhall Holdings Limited Initial cash consideration paid to the vendors was £10,759,000 and, in addition, a further £1,000,000 was paid into an escrow account in relation to certain ongoing legal and regulatory matters identified during the course of due diligence carried out prior to concluding the acquisition. The Group has a right to be reimbursed from amounts held in escrow to the extent that any liability crystallises in respect of these ongoing legal and regulatory matters, up to the full value of the £1,000,000 held in escrow and consequently a reimbursement asset of £1,000,000 was recognised within other debtors. To the extent that any such liabilities are resolved at a lower value than the escrow balances, the excess balance remaining in escrow is payable to the vendors as additional consideration. The Group has agreed to pay the vendors deferred consideration of £1,900,000 which is payable on 11 December 2021. This is not dependent on performance. Additional consideration is also payable dependent on the achievement of performance targets in the periods post acquisition. These performance periods are up to 3 years in duration and will be settled in cash on their payment date on achieving the relevant targets. The range of the additional consideration payment is estimated to be between £nil and £2,420,000. The Group has included £2,420,000 as contingent consideration related to the additional consideration, which represents its fair value at the acquisition date and at the year end. Contingent consideration has been calculated based on the Group’s expectation of what it will pay in relation to the post-acquisition performance of the acquired entities. As part of the ongoing review of the fair value of assets and liabilities acquired, adjustments were made to certain accruals and provisions during the period, These had the effect of decreasing the fair value of the net assets acquired under the acquisition by £6,157,000, which has given rise to an increase in goodwill of a similar amount. Goodwill, land and buildings, plant and machinery, trade and other payables and provisions have been restated accordingly in respect of the reported 31 December 2018 balance sheet. Due to their contractual dates, the fair value of the receivables (shown above) is approximate to the gross contractual amounts receivable. The amount of gross contractual receivables not expected to be recovered is immaterial. The goodwill arising from the acquisition represents the opportunity to grow by utilising the capabilities and technical expertise of the acquired workforce and by developing synergistic opportunities. The goodwill arising from the acquisition is not expected to be deductible for income tax purposes. Transaction costs incurred on acquisition were £375,000 and these were fully expensed in the period to 31 December 2018 (Note 3). 25 Analysis of net debt Cash at bank and in hand Debt due within 1 year Debt due after 1 year Finance leases Lease liabilities 1 January 2019 £’000 45,709 (22,493) (59,708) (941) – (37,433) IFRS 16 on transition £’000 – – – 941 (46,520) (45,579) Cash flow £’000 7,649 10,927 – – 12,723 31,299 New leases £’000 – – – – (8,163) (8,163) Reconciliation of net cash flow to movement in net debt Net increase in cash equivalents Leases recognised on adoption of IFRS 16 Cash outflow/(inflow) from decrease/(increase) in bank borrowings Cash outflow from lease repayments Repayment of borrowings following acquisition of subsidiaries New leases entered into Effect of exchange rate fluctuations Movement in net debt in the year Net debt at 1 January Net debt at 31 December Other changes £’000 (100) (8,434) 8,434 – – (100) 2019 £’000 7,649 (45,579) 10,927 12,723 – (8,163) (100) (22,543) (37,433) (59,976) 31 December 2019 £’000 53,258 (20,000) (51,274) – (41,960) (59,976) 2018 £’000 25,779 – (34,164) 101 (4,742) – (110) (13,136) (24,297) (37,433) 136 Marshalls plc Annual Report and Accounts 2019 Financial statements 26 Changes in liabilities arising from financing activities The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s Consolidated Cash Flow Statement as cash flows from financing activities. Bank overdrafts (Note 16) Bank loans (Note 16) Finance lease liabilities (Note 16) Lease liabilities (Note 17) Total liabilities from financing activities Bank overdrafts (Note 16) Bank loans (Note 16) Finance lease liabilities (Note 16) Total liabilities from financing activities 1 January 2019 £’000 (2,673) (79,528) (941) – Financing cash flows (i) £’000 2,673 8,254 – 12,723 (83,142) 23,650 Non-cash changes Acquisition of subsidiary (Note 24) £’000 Other changes (ii) £’000 IFRS 16 Transition £’000 31 December 2019 £’000 – – – – – – – – – – 941 – (71,274) – (8,163) (46,520) (41,960) (8,163) (45,579) (113,234) Non-cash changes 1 January 2018 £’000 – (43,883) (259) (44,142) Financing cash flows (i) £’000 (1,122) (34,539) 101 (35,560) Acquisition of subsidiary (Note 24) £’000 (1,551) (911) (783) (3,245) Other changes (ii) £’000 – (195) – (195) 31 December 2018 £’000 (2,673) (79,528) (941) (83,142) (i) The cash flows from bank loans, overdrafts and other borrowings make up the net amount of proceeds from borrowings and repayments of borrowings in the Cash Flow Statement. (ii) New leases. 27 Operating leases The Group had non-cancellable total minimum lease payments to be paid in respect of operating leases on property, plant, machinery and vehicles as follows: 31 December 2018 Expiring: Within 1 year Between 1 and 5 years In more than 5 years Total £’000 6 months or less £’000 6 – 12 months £’000 1 – 2 years £’000 2 – 5 years £’000 More than 5 years £’000 1,652 31,939 32,917 66,508 1,256 5,583 891 7,730 396 5,555 897 6,848 – 9,811 1,800 11,611 – 10,990 5,400 16,390 – – 23,929 23,929 As at 31 December 2018, the total minimum lease payments under non-cancellable operating leases (above) comprised property of £34,831,000) and plant, machinery and vehicles of £31,677,000. Marshalls plc Annual Report and Accounts 2019 137 Financial statements Notes to the Consolidated Financial Statements continued 28 Contingencies Royal Bank of Scotland plc has issued, on behalf of Marshalls plc, the following irrevocable letters of credit relating to the Group’s cap on self-insurance for employer’s liability and vehicle insurance: Beneficiary M S Amlin Limited Aviva Insurance Limited M S Amlin Limited Amount Period Purpose £675,000 23 Dec 2011 to 30 Oct 2020 Employer’s liability £350,000 19 Mar 2014 to 29 Oct 2020 Vehicle insurance £750,000 30 Oct 2016 to 30 Oct 2020 Vehicle insurance 29 Related parties Identity of related parties The Group has a related party relationship with its Directors. Transactions with key management personnel Other than the Directors, there are no senior managers in the Group who are relevant for establishing that Marshalls plc has the appropriate expertise and experience for the management of its business. Directors of the Company and their immediate relatives control 0.2428 per cent (2018: 0.2202 per cent) of the voting shares of the Company. In addition to their salaries and pension allowances, the Group also provides non-cash benefits to Directors. Further details in relation to Directors are disclosed in the Remuneration Committee Report on pages 55 to 86. 30 Accounting estimates and judgements Management discussed with the Audit Committee the development, selection and disclosure of the Group’s critical accounting policies and estimates and the application of these policies and estimates. The accounting policies are set out in Note 1 on pages 104 to 114. As stated in the accounting policies, revenue is disclosed net of rebates. Whilst the Directors do not regard the determination of accruals for rebates as a key area of estimation uncertainty, the estimation of appropriate accruals for rebates requires commercial assessment. Note 12 contains details of the Group’s inventory. Whilst not considered by the Directors to be a key source of estimation uncertainty, the carrying value of the Group’s finished goods inventory has been reviewed using commercial judgement with regard to the assessment of the appropriate level of provisioning against inventory obsolescence and for net realisable value. The Directors consider the following to be the only key source of estimation uncertainty: • Note 19 contains information about the principal actuarial assumptions used in the determination of defined benefit pension obligations. These key assumptions include discount rates, the expected return on net assets, inflation rates and mortality rates and have been determined following advice received from an independent qualified actuary. Sensitivity analysis is disclosed in Note 19 on page 131. The Directors have concluded that there were no critical accounting judgements required in the preparation of the Financial Statements. 138 Marshalls plc Annual Report and Accounts 2019 Financial statements Parent Company Statement of Changes in Equity for the year ended 31 December 2019 Current year At 1 January 2019 Total comprehensive income for the year Profit for the financial year Total comprehensive income for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners Share-based payments Deferred tax on share-based payments Dividends to equity shareholders Shares issued Purchase of own shares Disposal of own shares Total contributions by and distributions to owners Total transactions with owners of the Company Share capital £’000 Share premium account £’000 Own shares £’000 Capital redemption reserve £’000 Equity reserve £’000 Retained earnings £’000 Total equity £’000 49,998 24,326 (888) 75,394 9,304 44,594 202,728 – – – – – 15 – – 15 15 – – – – – 156 – – 156 156 – – – – – 54 (1,470) 913 (503) (503) – – – – – – – – – – – – 190,796 190,796 190,796 190,796 2,013 (537) 1,011 3,024 – (537) – – – – (33,203) (33,203) – – (913) 225 (1,470) – 1,476 (33,105) (31,961) 1,476 157,691 158,835 At 31 December 2019 50,013 24,482 (1,391) 75,394 10,780 202,285 361,563 There were no items of other comprehensive income / (expense) in the year other than the profit for the financial year recorded above. Current year At 1 January 2018 Total comprehensive loss for the year Loss for the financial year Total comprehensive loss for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners Share-based payments Deferred tax on share-based payments Dividends to equity shareholders Shares issued Purchase of own shares Disposal of own shares Total contributions by and distributions to owners Total transactions with owners of the Company Share capital £’000 Share premium account £’000 Own shares £’000 Capital redemption reserve £’000 Equity reserve £’000 Retained earnings £’000 Total equity £’000 49,845 22,695 (2,359) 75,394 8,020 85,347 238,942 – – – – – 153 – – 153 153 – – – – – 1,631 – – 1,631 1,631 – – – – – – (1,210) 2,681 1,471 1,471 – – – – – – – – – – – – (7,317) (7,317) (7,317) (7,317) 1,355 (1,505) (71) – (150) (71) – – – – (29,250) (29,250) – – (2,681) 1,784 (1,210) – 1,284 (33,436) (28,897) 1,284 (40,753) (36,214) At 31 December 2018 49,998 24,326 (888) 75,394 9,304 (44,594) (202,728) There were no items of other comprehensive income / (expense) in the year other than the loss for the financial year recorded above. Marshalls plc Annual Report and Accounts 2019 139 Financial statements Company Balance Sheet at 31 December 2019 Fixed assets Investments Deferred taxation assets Current assets Debtors Current liabilities Creditors Net current assets / (liabilities) Net assets Capital and reserves Called-up share capital Share premium account Own shares Capital redemption reserve Equity reserve Profit and loss account Equity shareholders’ funds Notes 2019 £’000 2018 £’000 34 35 36 37 38 349,153 1,464 350,617 347,140 735 347,875 10,946 1,830 – 10,946 361,563 50,013 24,482 (1,391) 75,394 10,780 202,285 361,563 (146,977) (145,147) 202,728 49,998 24,326 (888) 75,394 9,304 44,594 202,728 The Company reported a profit for the financial year ended 31 December 2019 of £190,796,000 (2018: loss of £7,317,000). Approved at a Directors’ meeting on 12 March 2020. On behalf of the Board: Martyn Coffey Chief Executive Jack Clarke Finance Director The Notes on pages 141 to 146 form part of these Company Financial Statements. 140 Marshalls plc Annual Report and Accounts 2019 Financial statements Notes to the Company Financial Statements 31 Accounting policies The following paragraphs summarise the main accounting policies of the Company, which have been applied consistently in dealing with items which are considered material in relation to the Company’s Financial Statements. The Company is exempt from the requirement to give its own disclosures as the entity forms part of the Consolidated Financial Statements of Marshalls plc, which has included disclosures under IFRS 7 “Financial Instruments: Disclosures”. (a) Authorisation of Financial Statements and Statement of Compliance with FRS 101 The Parent Company Financial Statements of Marshalls plc for the year ended 31 December 2019 were authorised for issue by the Board of Directors on 12 March 2020. Marshalls plc is a public limited company that is incorporated and domiciled and has its registered office in England and Wales. The Company’s Ordinary Shares are publicly traded on the London Stock Exchange and the Company is not under the control of any single shareholder. These Financial Statements were prepared in accordance with the historical cost basis of accounting and Financial Reporting Standard 101 “Reduced Disclosure Framework” (“FRS 101”). No profit and loss account is presented by the Company as permitted by Section 408 of the Companies Act 2006. (b) Basis of preparation The Company has adopted FRS 101 from the UK Generally Accepted Accounting Practice for all periods presented. The accounting policies which follow set out those policies which apply in preparing the Financial Statements for the year ended 31 December 2019. In these Financial Statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures: • the requirements of paragraphs 45(b) and 46 – 52 of IFRS 2 “Share-based Payments”; • the requirements of IFRS 7 “Financial Instruments: Disclosures”; • the requirements of paragraphs 91 – 99 of IFRS 13 “Fair Value Measurement”; • the requirement in paragraph 38 of IAS 1 “Presentation of Financial Statements” to present comparative information in respect of paragraph 79(a)(iv) of IAS 1; • the requirements of paragraphs 10(d), 10(f), 16, 39(c), 40A, 40B, 40C, 40D, 111 and 134 – 136 of IAS 1 “Presentation of Financial Statements”; • the requirements of IAS 7 “Statement of Cash Flows”; • the requirements of paragraphs 30 and 31 of IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”; • the requirements of paragraph 17 of IAS 24 “Related Party Disclosures”; • the requirements in IAS 24 “Related Party Disclosures” to disclose related party transactions entered into between 2 or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member; and • the requirements of paragraphs 134(d) – 134(f) and 135(c) – 135(e) of IAS 36 “Impairment of Assets”. The Company also intends to take advantage of these exemptions in the Financial Statements to be issued in the following year. Objections may be served in the Company by shareholders holding in aggregate 5 per cent or more of the total allocated shares in the Company. Where required, additional disclosures are given in the Consolidated Financial Statements. (c) Investments Fixed asset investments in subsidiaries and associates are shown at cost less provision for impairment. The Directors consider annually whether a provision against the value of investments on an individual basis is required. (d) Share capital (i) Share capital Share capital is classified as equity if it is non-redeemable and any dividends are discretionary, or if it is redeemable but only at the Company’s option. Dividends on share capital classified as equity are recognised as distributions within equity. Non-equity share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders or if dividend payments are not discretionary. Dividends thereon are recognised in the profit and loss account as a financial expense. (ii) Dividends Dividends on non-equity shares are recognised as a liability and accounted for on an accruals basis. Equity dividends are recognised as a liability in the period in which they are declared (appropriately authorised and no longer at the discretion of the Company). (e) Pension schemes (i) Defined benefit scheme The Company participates in a Group-wide pension scheme providing benefits based on final pensionable pay. The defined benefit section of the Scheme was closed to future service accrual in July 2006. The assets of the Scheme are held separately from those of the Company. The defined benefit cost and contributions payable are borne by Marshalls Group Limited and, therefore, the defined benefit surplus or deficit is recorded in Marshalls Group Limited. Full details are provided in Note 19 on pages 129 to 131. (ii) Defined contribution scheme Obligations for contributions to defined contribution schemes are recognised as an expense as incurred. Marshalls plc Annual Report and Accounts 2019 141 Financial statements Notes to the Company Financial Statements continued 31 Accounting policies continued (f) Share-based payment transactions The Company enters into equity settled share-based payment transactions with its employees. In particular, annual awards are made to employees under the Company’s Management Incentive Plan (“MIP”) and the Employee Bonus Share Plan (“BSP”). These schemes allow employees to acquire shares in Marshalls plc. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. Where appropriate, the fair value of the options granted is measured using the Black-Scholes option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. Current tax relief is available as shares vest based on the value at the date of vesting. A deferred tax asset is recognised at grant date based on the number of shares expected to be issued, at the value at which they are expected to be issued, proportioned in line with the vesting period. (g) Own shares held by the Employee Benefit Trust Transactions of the Company-sponsored Employee Benefit Trust are included in the Group Financial Statements. In particular, the Trust’s purchases of shares in the Company are debited directly to equity. (h) Trade and other payables Trade and other payables are stated at nominal amount (discounted if material). (i) Income tax Income tax on the profit or loss for the year comprises current and deferred taxation. Income tax is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred taxation is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred taxation provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that are expected to apply when the temporary difference reverses, based on rates that have been enacted or substantively enacted at the balance sheet date. A deferred taxation asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred taxation assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. 32 Operating costs The audit fee for the Company was £30,000 (2018: £30,000). This is in respect of the audit of the Financial Statements. Fees paid to the Company’s auditor for services other than the statutory audit of the Company are not disclosed in the notes to the Company Financial Statements since the consolidated accounts of the Group are required to disclose non-audit fees on a consolidated basis. Details of Directors’ remuneration, share options, long-term incentive plans and Directors’ pension entitlements are disclosed on pages 55 to 86 of the Remuneration Committee Report. The average monthly number of employees of Marshalls plc (including Executive Directors) in the year ended 31 December 2019 was 188 (2018: 176). The personnel costs for the majority of these employees are borne by Marshalls Group Limited. The personnel costs charged to Marshalls plc in the year were £4,214,000 (2018: £4,093,000) in relation to 17 employees (2018: 17), including the Directors. 33 Ordinary dividends: equity shares 2018 final: paid 28 June 2019 2018 supplementary: paid 28 June 2019 2019 interim: paid 4 December 2019 2019 2018 Pence per share £’000 Pence per share 8.00 4.00 4.70 16.70 15,860 7,930 9,323 33,113 6.80 4.00 4.00 14.80 £’000 13,439 7,905 7,906 29,250 After the balance sheet date the following dividends were proposed by the Directors. The dividends have not been provided and there were no income tax consequences. 2019 final: 9.65 pence (2018: 8.00 pence) per Ordinary Share 2019 supplementary: 4.00 pence (2018: 4.00 pence) per Ordinary Share 142 Marshalls plc Annual Report and Accounts 2019 2019 £’000 19,142 7,934 27,076 2018 £’000 15,860 7,930 23,790 Financial statements 34 Investments At 1 January 2019 Additions At 31 December 2019 £’000 347,140 2,013 349,153 Investments comprise shares in the subsidiary undertaking, Marshalls Group Limited. The Directors have considered the carrying value of the Company’s investments and are satisfied that no provision is required. The increase in the year of £2,013,000 represents adjustments to the number of shares expected to vest in respect of share-based payment awards granted to employees of Marshalls Group Limited. Pursuant to Sections 409 and 410(2) of the Companies Act 2006, the subsidiary undertakings of Marshalls plc at 31 December 2019 are set out below. Subsidiaries Acraman (418) Limited Alton Glasshouses Limited Bollards Direct Limited Capability Brown Garden Centres Limited Capability Brown Landscaping Limited Classical Flagstones Limited CPM Group Limited Dalestone Concrete Products Limited Edenhall Limited Edenhall Building Products Limited Edenhall Concrete Limited Edenhall Concrete Products Limited Edenhall Holdings Limited Edenhall Technologies Limited Locharbriggs Sandstone Limited Lloyds Quarries Limited Marshalls Building Materials Limited Principal activities Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Landscape products manufacturer Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Marshalls Building Products Limited Property management Marshalls Concrete Products Limited Marshalls Directors Limited Marshalls Dormant No. 30 Limited Marshalls Dormant No. 31 Limited Marshalls EBT Limited* Marshalls Estates Limited Marshalls Group Limited* Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Intermediate holding company Marshalls Landscape Products Limited Non-trading Marshalls Landscape Products (branch) Representative office – Dubai Marshalls Landscape Products (North America) Inc. Landscape products supplier Marshalls Mono Limited Landscape products manufacturer and supplier and quarry owner supplying a wide variety of paving, street furniture and natural stone products Marshalls Natural Stone Limited Non-trading Marshalls NV Landscape products manufacturer and supplier Marshalls Profit Sharing Scheme Limited Non-trading Marshalls Properties Limited Marshalls Register Limited Marshalls Stone Products Limited Marshalls Street Furniture Limited Property management Non-trading Non-trading Non-trading Class of share % ownership Ordinary / preference Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary / preference Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary N/A Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 N/A 100 100 100 66.7 100 100 100 100 100 Marshalls plc Annual Report and Accounts 2019 143 Financial statements Notes to the Company Financial Statements continued 34 Investments continued Subsidiaries Ollerton Limited Panablok (UK) Limited Paver Systems (Carluke) Limited Paver Systems Limited Principal activities Non-trading Non-trading Non-trading Non-trading PD Edenhall Holdings Limited Intermediate holding company PD Edenhall Limited Premier Mortars Limited Quarryfill Limited Rhino Protec Limited Manufacture and sale of concrete products for the building industry Non-trading Non-trading Non-trading Robinson Associates Stone Consultants Limited Non-trading Robinsons Greenhouses Limited Rockrite Limited S Marshall & Sons Limited Scenic Blue Limited Scenic Blue Landscape Franchise Limited Scenic Blue (UK) Limited Stancliffe Stone Company Limited Stoke Hall Quarry Limited* Stone Shippers Limited Stonemarket (Concrete) Limited Stonemarket Limited The Great British Bollard Company Limited The Stancliffe Group Limited The Yorkshire Brick Co. Limited Town & Country Paving Limited Urban Engineering Limited Woodhouse Group Limited Woodhouse UK Limited Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Non-trading Xiamen Marshalls Import Export Company Limited Sourcing and distribution of natural stone products * Held by Marshalls plc. All others held by subsidiary undertakings. Class of share % ownership Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Marshalls NV is largely dependent on the continued support of Marshalls Mono Limited, which has indicated that it intends to continue providing this support for the foreseeable future. All the other companies excluding the ones below operate within the United Kingdom and are registered in England and Wales at the following address: Landscape House, Premier Way, Lowfields Business Park, Elland HX5 9HT. Marshalls NV is registered in Belgium, Xiamen Marshalls Import Export Company Limited is registered in China and Marshalls Landscape Products (North America) Inc. is registered in the USA. The Marshalls Landscape Products office in Dubai is now a branch of Marshalls Mono Limited. Paver Systems Limited, Paver Systems (Carluke) Limited and Locharbriggs Sandstone Limited are registered in Scotland. The respective registered offices are: Acraman (418) Limited, PD Edenhall Holdings Limited, PD Edenhall Limited, Edenhall Building Products Limited, Edenhall Concrete Limited, Edenhall Concrete Products Limited, Edenhall Holdings Limited and Edenhall Technologies Limited operate within the United Kingdom and are registered in England and Wales at the following address: Danygraig Road, Risca, Newport NP11 6DP. Paver Systems Limited and Paver Systems (Carluke) Limited Roadmeetings, Carluke, Lanarkshire ML8 4QG Locharbriggs Sandstone Limited Locharbriggs, Dumfries, Dumfriesshire DG1 1QS Marshalls Landscape Products (branch) LB181002W520, Jebel Ali, Dubai, United Arab Emirates Marshalls Landscape Products (North America) Inc. 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801, USA Marshalls NV Nieuwstraat 4, 2840 Rumst, Belgium Xiamen Marshalls Import Export Company Limited 12 A4, Xiangyu Building, No. 22, 4th Xiangxing Road, Xiangyu Free Trade Zone, Xiamen, China 144 Marshalls plc Annual Report and Accounts 2019 Financial statements 35 Deferred taxation Recognised deferred taxation assets and liabilities Equity settled share-based payments Movement in temporary differences Equity settled share-based payments 36 Debtors Corporation tax Amounts owed from subsidiary undertakings No debtors were due after more than 1 year. 37 Creditors Amounts owed to subsidiary undertakings Assets Liabilities 2019 £’000 1,464 1 January 2019 £’000 735 2018 £’000 735 2019 £’000 – 2018 £’000 – Recognised in income £’000 Recognised in other comprehensive income £’000 31 December 2019 £’000 192 537 1,464 2019 £’000 1,348 9,598 10,946 2019 £’000 – 2018 £’000 1,830 – 1,830 2018 £’000 146,977 38 Capital and reserves Called-up share capital As at 31 December 2019, the issued and fully paid up Ordinary Share capital was as follows: Ordinary At 1 January Issued in the period At 31 December 2019 Number 2019 nominal value £’000 2018 Number 2018 nominal value £’000 199,993,433 49,998 199,378,755 58,724 15 614,678 200,052,157 50,013 199,993,433 49,845 153 49,998 On 5 October 2015 options were granted up to 1,000,000 shares to employees who had subscribed to the SAYE Scheme (Note 19). The options were exercisable by relevant employees after a period of 3 years and during the year 58,724 (2018: 614,678) Ordinary Shares were issued to those employees whose options had reached maturity. During the year a further 18,741 shares were transferred from the employee benefit trust. Distributable reserves The Company’s distributable reserves amount to £202 million (2018: £44 million) at the end of the period. Upstream dividends of £197,145,000 were received during 2019 in order to increase the distributable reserves in Marshalls plc. Equity reserve The equity reserve represents the number of shares expected to vest in respect of share-based payment awards granted to employees of the Company. 39 Capital and leasing commitments The Company had no capital or leasing commitments at 31 December 2019 or 31 December 2018. 40 Bank facilities The Group’s banking arrangements are in respect of Marshalls plc, Marshalls Group Limited and Marshalls Mono Limited with each company being nominated borrowers. The operational banking activities of the Group are undertaken by Marshalls Group Limited and the Group’s bank debt is largely included in Marshalls Group Limited’s balance sheet. Marshalls plc Annual Report and Accounts 2019 145 Financial statements Notes to the Company Financial Statements continued 41 Contingent liabilities Royal Bank of Scotland plc has issued, on behalf of Marshalls plc, the following irrevocable letters of credit relating to the Group’s cap on self-insurance for employer’s liability and vehicle insurance: Beneficiary M S Amlin Limited Aviva Insurance Limited M S Amlin Limited Amount Period Purpose £675,000 23 Dec 2011 to 30 Oct 2020 Employer’s liability £350,000 19 Mar 2014 to 29 Oct 2020 Vehicle insurance £750,000 30 Oct 2016 to 30 Oct 2020 Vehicle insurance 42 Pension scheme The Company is the sponsoring employer of the Marshalls plc pension scheme (the “Scheme”) which is primarily a closed defined benefit scheme with a small defined contribution element (mainly AVCs). The assets of the Scheme are held in separately managed funds which are independent of the Group’s finances. Full details of the Scheme are provided in Note 19. The Company is unable to identify its share of the Scheme assets and liabilities on a consistent and reasonable basis. The latest funding valuation of the defined benefit section of the Scheme was carried out as at 5 April 2018 and was updated for the purposes of the 31 December 2019 Financial Statements by a qualified independent actuary. 43 Accounting estimates and judgements The preparation of the Financial Statements requires management to make judgements, estimates and assumptions. Although these judgements and estimates are based on management’s best knowledge, actual results ultimately may differ from these estimates. The key sources of estimation uncertainty that have a significant risk of causing material adjustments to the carrying value of assets and liabilities within the next financial year are disclosed below. There are no critical accounting judgements or key sources of estimation uncertainty. 44 Related parties Related party relationships exist with other members of the Group. All operating costs are borne by Marshalls Group Limited and are recharged to Marshalls plc in respect of specifically attributable costs. All related party transactions were made on terms equivalent to those that prevail in arm’s length transactions. 146 Marshalls plc Annual Report and Accounts 2019 Financial statements Financial History – Consolidated Group Consolidated Income Statement Revenue Net operating costs Operating profit Financial income and expenses (net) Profit before tax Income tax expense Profit for the financial year Profit for the year attributable to: Equity shareholders of the Parent Non-controlling interests EBITA1 EBITDA1 Basic earnings per share (pence) Dividends per share (pence) – IFRS Dividend cover (times) – IFRS Dividends per share (pence) – traditional Dividends per share (pence) – supplementary Dividend cover (times) – traditional Year-end share price (pence) Tax rate (%) Year ended 31 December 2015 £’000 Year ended 31 December 2016 £’000 Year ended 31 December 2017 £’000 Year ended 31 December 2018 £’000 Year ended ** 31 December 2019 £’000 386,204 (348,752) 37,452 (2,174) 35,278 (7,387) 27,891 28,149 (258) 27,891 38,774 51,828 14.32 6.25 2.3 7.00 2.00 1.6 325.0 20.9 396,922 (349,283) 47,639 (1,593) 46,046 (8,539) 37,507 37,350 157 37,507 48,648 60,794 18.95 9.65 2.0 8.70 3.00 1.6 292.5 18.5 430,194 (376,755) 53,439 (1,388) 52,051 (9,925) 42,126 42,503 (377) 42,126 54,581 67,895 21.52 12.20 1.8 10.20 4.00 1.5 454.9 19.1 490,988 (426,154) 64,834 (1,899) 62,935 (11,307) 51,628 51,958 (330) 51,628 66,593 80,792 26.29 14.80 1.8 12.00 4.00 1.6 464.8 18.0 541,832 (468,151) 73,681 (3,828) 69,853 (11,942) 57,911 58,240 (329) 57,911 76,104 103,875 29.36 16.70 1.8 14.35 4.00 1.6 860.0 17.1 1 EBITA is defined as earnings before interest, tax and amortisation of intangibles. EBITDA is defined as earnings before interest, tax and amortisation of intangibles and depreciation. Consolidated Balance Sheet Non-current assets Current assets Total assets Current liabilities Non-current liabilities Net assets Net borrowings Gearing ratio 2015 £’000 2016 £’000 2017 * £’000 2018 * £’000 2019 ** £’000 192,815 137,017 329,832 (87,071) (50,043) 192,718 (11,462) 6.0% 193,393 139,685 333,078 (87,068) (28,889) 217,121 5,413 (2.5%) 248,055 166,372 414,427 (109,507) (67,293) 237,627 (24,297) 10.2% 302,785 210,776 513,561 (141,190) (105,656) 266,715 (37,433) 14.0% 350,035 212,534 562,569 (162,349) (104,454) 295,766 (59,976) 20.3% * The comparatives have been restated as a result of a reassessment of the fair value of assets and liabilities acquired (Note 24). ** The Group applied IFRS 16 “Leases” with effect from 1 January 2019 and consequently the information disclosed above for the year ended 31 December 2019 includes the impact of adoption. Marshalls plc Annual Report and Accounts 2019 147 Financial statements Shareholder Information Shareholder analysis at 31 December 2019 Size of shareholding 1 to 500 501 to 1,000 1,001 to 2,500 2,501 to 5,000 5,001 to 10,000 10,001 to 25,000 25,001 to 100,000 100,001 to 250,000 250,001 to 500,000 500,001 and above Number of shareholders 1,835 498 592 356 224 161 147 66 40 84 % 45.84 12.44 14.79 8.89 5.60 4.02 3.67 1.65 1.00 2.10 Number of Ordinary Shares 263,306 375,742 1,002,305 1,272,192 1,587,208 2,600,836 7,617,219 10,444,113 14,411,662 160,477,574 4,003 100.00 200,052,157 % 0.13 0.19 0.50 0.64 0.79 1.30 3.81 5.22 7.20 80.22 100.00 Financial calendar Preliminary announcement of results for the year ended 31 December 2019 Announced 12 March 2020 Final dividend for the year ended 31 December 2019 Payable 30 June 2020 Half yearly results for the year ending 31 December 2020 Announcement 13 August 2020 Half yearly dividend for the year ending 31 December 2020 Payable 2 December 2020 Results for the year ending 31 December 2020 Announcement Early March 2021 Advisers Stockbrokers Numis Securities Limited Peel Hunt Auditor Deloitte LLP Legal advisers Herbert Smith Freehills LLP Pinsent Masons LLP Financial adviser N M Rothschild & Sons Limited Bankers HSBC Bank plc Lloyds Bank plc Royal Bank of Scotland plc Registrars Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Shareholders’ enquiries should be addressed to the Registrars at the above address (tel: 0870 707 1134) Registered office Landscape House Premier Way Lowfields Business Park, Elland Halifax HX5 9HT West Yorkshire Telephone: 01422 312000 Website: www.marshalls.co.uk Registered in England and Wales: No. 5100353 148 Marshalls plc Annual Report and Accounts 2019 Financial statements The Group’s commitment to environmental issues is reflected in this Annual Report which has been printed on Galerie Satin which is a mixed source FSC® certified and ECF (Elemental Chlorine Free) material. This is a certified CarbonNeutral® publication. Printed in the UK by Park Communications, using their environmental printing technology; vegetable inks were used throughout. Both the manufacturing mill and the printer are registered to the Environmental Management System ISO14001 and are Forest Stewardship Council® (FSC) chain-of-custody certified. Marshalls plc, Landscape House, Premier Way, Lowfields Business Park, Elland HX5 9HT