Annual Report 2014

STRATEGIC REPORT - PRINCIPAL RISKS AND UNCERTAINTIES

Under Irish company law (Statutory Instrument 116/2005 European Communities (International Financial Reporting Standards and Miscellaneous Amendments) Regulations 2005), the Group and the Company are required to give a description of the principal risks and uncertainties which they face.

The principal risks and uncertainties faced by the Group are set out below. The Group considers that currently the most significant risks to its results and operations over the short term are (a) strategic failures, (b) levels of competition in Great Britain and the United States and (c) failure to attract and retain high-performing employees. The forthcoming vote on Scottish independence creates a period of uncertainty.

Risks and Uncertainties

Mitigation

Risks and uncertainties relating to strategic goals

  • The Group’s reporting currency is the euro but it transacts in foreign currencies and consolidates the results of non-euro reporting foreign operations. Fluctuations in value between the euro and these currencies may affect the Group’s revenues, costs and operating profits.

The Group seeks to mitigate these risks through due diligence, careful investment and continuing monitoring and management post-acquisition.

Risks and uncertainties relating to revenue and profits

  • The GB off-trade and increasingly the GB on-trade continues to be highly competitive, driven by consumer pressure, customer buying power and the launch of heavily-invested competing products.

The Group seeks to mitigate the impact on volumes and margins through developing its multi-beverage brand portfolio and seeking cost efficiencies.

  • The US cider market has also become highly competitive.

The Group is responding through brand investment and strengthening its distributor network.

  • Consumer preference may change, new competing brands may be launched and competitors may increase their marketing or change their pricing policies.

The Group has a programme of brand investment, innovation and product diversification to maintain and enhance the relevance of its products in the market.

  • Seasonal fluctuations in demand, especially an unseasonably bad summer in Ireland or the UK, could materially affect demand for the Group’s cider products.

Geographical and brand diversification is helping to mitigate this risk.

  • Customers, particularly in the on-trade where the Group has exposure through advances to customers, may experience financial difficulties.

The Group monitors the level of its exposure carefully.

Risks and uncertainties relating to costs and production

  • Input costs may be subject to volatility and inflation and the continuity of supply of raw materials may be affected by the weather and other factors.

The Group seeks to mitigate some of these risks through long term or fixed price supply agreements. The Group does not seek to hedge its exposure to commodity prices by entering into derivative financial instruments.

  • Circumstances such as the loss of a production or storage facility or disruptions to its supply chains or critical IT systems may interrupt the supply of the Group’s products.

The Group seeks to mitigate the operational impact of such an event by the availability of multiple production facilities, fire safety standards and disaster recovery protocols, and the financial impact of such an event through business interruption and other insurances.

Financial risks and uncertainties

  • The Group’s reporting currency is the euro but it transacts in foreign currencies and consolidates the results of non-euro reporting foreign operations. Fluctuations in value between the euro and these currencies may affect the Group’s revenues, costs and operating profits.

The Group seeks to mitigate currency risks, where appropriate, through hedging and structured financial contracts to hedge a portion of its foreign currency transaction exposure. The Group seeks to partially manage foreign currency translation risk in relation to its US dollar subsidiaries through borrowings denominated in US dollar which are designated as a net investment hedge. It has not entered into structured financial contracts to hedge its translation exposure on its foreign acquisitions.

  • The solvency of the Group’s defined benefit pension schemes may be affected by a fall in the value of their investments, market and interest rate volatility and other economic and demographic factors. Each of these factors may require the Group to increase its contribution levels.

The Group seeks to mitigate this risk by continuous monitoring, taking professional advice on the optimisation of asset returns within agreed acceptable risk tolerances and implementing liability-management initiatives such as the reduction in member contractual benefits approved by the Pensions Board in February 2012.

Fiscal, regulatory and political risks and uncertainties

  • The Group may be adversely affected by changes in excise duty or taxation on cider and beer in Ireland, the UK, the US and other territories.

The Group is not able to materially mitigate this risk, which is outside its control.

  • The Group may be adversely affected by changes in government regulations affecting alcohol pricing, sponsorship or advertising, and product types.

Within the context of supporting responsible drinking initiatives, the Group supports the work of its trade associations to present the industry’s case to government.

  • In September 2014 a referendum is to be held in Scotland as to its continued membership of the UK. At the date of this report the outcome cannot be predicted. Were the vote to go in favour of independence, a further period of uncertainty would occur. Significant issues would arise including currency, tax rates, investment and membership of the EU. The economic implications for the Group cannot yet be quantified, but are likely to be mixed. A lengthy period of uncertainty would be unhelpful for forward investment.

The Group is carefully monitoring the debate on relevant issues and will formulate its strategy accordingly.

Liability-related risks and uncertainties

  • The Group’s operations are subject to extensive regulation, including stringent environmental, health and safety and food safety laws and regulations and competition law. Legislative non-compliance or adverse ethical practices could lead to prosecutions and damage to the reputation of the Group and its brands.

The Group has in place a permanent legal and compliance monitoring and training function and an extensive programme of corporate responsibility.

  • The Group is vulnerable to contamination of its products or base raw materials, whether accidental, natural or malicious. Contamination could result in a recall of the Group’s products, damage to brand image and civil or criminal liability.

The Group has established protocols and procedures for incident management and product recall and mitigates the financial impact by appropriate insurance cover.

  • Fraud, corruption and theft against the Group whether by employees, business partners or third parties are risks, particularly as the Group develops internationally.

The Group maintains appropriate internal controls and procedures to guard against economic crime and imposes appropriate monitoring and controls on subsidiary management.

Employment-related risks and uncertainties

  • The Group’s continued success is dependent on the skills and experience of its executive Directors and other high-performing personnel, including those in newly acquired businesses, and could be affected by their loss or the inability to recruit or retain them.

The Group seeks to mitigate this risk through appropriate remuneration policies and succession planning.

  • Whilst relations with employees are generally good, work stoppages or other industrial action could have a material adverse effect on the Group.

The Group seeks to ensure good employee relations through engagement and dialogue.