Annual Financial Report

RNS Number : 3945D

Guinness Peat Group PLC

27 March 2014

 



GUINNESS PEAT GROUP PLC

("GPG" or the "Company")

Dissemination Announcement

ANNUAL REPORT 2013

The Annual Report of the Company for the year ended 31 December 2013 ("the 2013 Annual Report") is being placed on the Company's website at www.gpgplc.com and will shortly be posted to shareholders.  A copy of the 2013 Annual Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

The Group's Preliminary Announcement of Results for the year ended 31 December 2013 (the "Preliminary Announcement") was released to the market on 25 February 2014 (as supplemented by an announcement on 10 March 2014) and may also be viewed on the Company's website at www.gpgplc.com.  The Preliminary Announcement contained a condensed set of financial statements for the Group together with extracts of its management report. That information, together with the information contained below, constitutes the material required to be published by the Company pursuant to UK Disclosure and Transparency Rule 6.3.5, which is required to be communicated by the Company in unedited full text through the Regulatory Information Service.

MANAGEMENT REPORT

A description of the principal risks that the Group faces is extracted from pages 9 to 10 and pages 29, 30 and 31 of the 2013 Annual Report:

Principal Risks It is the responsibility of the Board and its various committees to identify and understand the key risks faced by the business and ensure mitigating action is taken to control them. In the case of GPG those risks are:
Risk	Nature of Risk	Action/Mitigation
Investment portfolio realisation programme	The risk of being perceived a forced seller of investments had the potential to impact materially upon the quantum of proceeds achieved by the investment team.	The Board addressed this risk by publicly stating the assets would only be sold when acceptable offers were available and indicating that shareholder value maximisation was a key focus. This process is now complete.
Employee defined benefit obligations - accounting impact and regular funding	The Group has a number of employee defined benefit arrangements in place, the most significant being: > three UK pension schemes:    Coats, Brunel and Staveley; and > the Coats North America plan. The UK schemes can impact the Group on various levels. Given their size, and particularly that of the Coats Pension Plan, these schemes can have a material impact on the Group's reported results. Under IAS19 (revised) the Consolidated Income Statement includes an administrative charge and a finance cost relating to these schemes and variations in these charges can give rise to fluctuations in reported earnings. In addition, changes in the IAS19 accounting surpluses and deficits in the schemes impact the level of shareholders' funds. When funding deficits arise this can have a cash flow impact. The net accounting and funding positions of these arrangements are particularly sensitive to real interest rates and the investment performance of any segregated assets.	Managing the funding position of the three UK pension schemes is the primary responsibility of their respective Trustees. The strategy followed by each Trustee targets the long term funding position of its scheme. Each has used corporate bonds to fund short term liabilities. Equities and other return-seeking assets are held for the longer term. These provide a natural hedge respectively for short term obligations and medium and long term inflation risk. Coats has in place a short term inflation hedging programme. In addition, the trustees have implemented formal de-risking strategies with thresholds for switching return-seeking assets into bonds. As reported on page 5, the 2012 funding valuation for the Coats UK Pension Plan was completed during the year and resulted in the scheme deficit increasing from £101 million to £215 million. As of November 2013 a new recovery plan commenced for that scheme and the rate of contributions increased from that date from £7 million per annum to £14 million per annum. In addition, as part of agreeing the deficit of £215 million and a 14 year recovery plan, Coats plc agreed to provide the scheme with a Parent Company Guarantee. The Brunel scheme is in the process of completing its 2013 triennial valuation. There was no deficit in 2010 and, hence, there is currently no recovery plan. However, the Board expects a recovery plan to result from the current exercise. The Staveley scheme last had a triennial valuation as at 5 April 2011. The 2011 valuation resulted in a one-off payment of £5 million being made to the scheme in July 2012 and for an eight-year recovery plan at an annualised rate of £1.3 million. The trustee has called for the next funding valuation three months early, with an effective date of 31 December 2013. The valuation processes for both the Brunel and Staveley schemes are being progressed but understandably are being impacted by tPR's investigations process. The Coats North America plan has a funding surplus and the investment strategy followed includes a matching asset pool which should substantially reduce the risk of a funding shortfall arising in the future.
Employee defined benefit obligations - regulatory investigation	As previously reported and described further in the Chairman's Statement on pages 2 to 6 , tPR has commenced investigations into the Group's three UK defined benefit pension schemes and has to date issued Warning Notices on two (Brunel and Staveley).	The Board has always taken legal and actuarial advice in its dealings with these schemes and continues to do so. The Group has a pro-active approach to addressing the risk to shareholder value represented by these schemes and tPR's investigation. The Board is exploring all options with the aim of resolving tPR's investigations as efficiently as possible without unduly compromising shareholders' interests.
Treasury concentration risk	The realisation of the Group's investment portfolio combined with the deferment in returning capital to shareholders while there is uncertainty surrounding tPR's investigation has resulted in a significant proportion of shareholder value being represented by cash.	The Board is cognisant of the potential for this to give rise to concentration risk. The Board is provided on a weekly basis with a report of cash balances by bank, jurisdiction and currency. In addition it regularly reviews these risks at Board meetings to ensure appropriate mitigating action is being taken.
Foreign currency exposure	The Group's principal assets are now its cash holdings and its investment in Coats. The Coats business' activities are primarily denominated in USD, although it has major asset bases in other currencies, including the Indian Rupee and the Brazilian Real. Coats takes action to protect its anticipated transactional currency exposure but does not hedge its assets and liabilities and neither does GPG. GPG holds its cash primarily in GBP, NZD and USD. The GBP balance is held to cover known liabilities whereas the NZD and USD represent the currently surplus funds. Given the investigation being carried out by tPR, the Board faces the potential of some as yet unquantified obligations to provide further financial support to the Group's UK pension schemes. The size and nature of these obligations will only be known once the process with the respective scheme trustees and tPR has been completed. If all rights of appeal are pursued, this process would be unlikely to complete before the end of 2015. This in turn means the Board is currently not able to determine with certainty the quantum of future returns to shareholders.	The Board regularly reviews its currency exposures and has taken steps to ensure transparent reporting to shareholders of the positions held.
Human Resources	Shareholder value is heavily dependent on key individuals both within the Parent Group and Coats.	The Board has recognised the risk to delivery of the strategic aim from key staff leaving during the process. It regularly reviews the appropriateness of its incentive and reward arrangements and has established retention and/or incentive plans to address this risk.
Coats	Given the simplification of GPG's business model, Coats now represents the major portion of the Group's business risk.	Coats faces a wide range of commercial and operational risks and, as noted above, the management of this business is delegated by the GPG Board to the Coats board. Coats manages these risks through various structures, but most particularly through its own Risk Management Committee and Internal Audit Function. The Coats Head of Internal Audit attends meetings of and reports to the GPG Audit, Finance and Risk Committee. The key risk areas identified and managed through this process are described in more detail on pages 28 to 30.

In the case of the key risks faced by the Coats business these are:

Risk		Nature of Risk	Action/Mitigation
Strategy and strategic planning risks
Delivery of Group Strategy		Coats does not deliver on growth projects financially due to lack of resource, poor project management, lack of skills or lack of acceptance in the market. Coats does not deliver the skills and/or culture to achieve the broader growth agenda to facilitate financial goals with a consequence that profitability goals are not achieved or the market multiple is materially below target.	Each project is managed by a dedicated team and sponsored by a member of either the Coats Management Board or Industrial or Crafts Leadership Teams. They are controlled by a Steering Committee and monitored financially. A decision gate process is in place to ensure that projects meet strict commercial criteria. The Coats board receives regular reports on project progress and sets targets for successful commercialisation measured in terms of profitable sales.
Recruiting, maintaining and motivating high-quality staff		Coats does not identify and retain key staff or does not improve skills and knowledge resulting in an inability to execute its growth strategy.	Coats has a Group HR Director and a network of HR professionals including a Head of Reward and a Head of Learning & Development. It has HR policies and processes to manage the risks relating to its employees. These policies cover areas including reward and recognition, health and safety, talent management, skills assessment and development, performance management, succession planning and employee consultation. A group wide employee satisfaction survey for all employees is conducted annually. Strategies are developed and implemented to address concerns raised in the survey. Coats conducts an annual survey of pay and benefits to ensure that its overall terms and conditions of employment remain competitive.
Operational risks
Pension Risks		Fluctuations in interest rates, investment values and returns, inflation and/or member longevity in Coats defined benefit pension arrangements result in funding burdens on the Group in the future.	Coats' pension position and strategy is regularly reviewed by the Coats board. Coats' funded pension schemes are overseen by the Trustees of the funds; as appropriate the company is represented amongst them. The Trustees take professional actuarial and investment advice as necessary. They have the required skills as a result of experience and training, and where appropriate Coats appoints independent professional trustees to its schemes. As appropriate, Coats actively seeks to de-risk its schemes to reduce the impact of fluctuations.
Treasury Risks		Coats is exposed to uncertainties in financial markets and the banking sector including foreign exchange, interest rate, credit and liquidity risks as well as the risk of bank failure.	Coats has policies covering all aspects of its Treasury operations that provide strict controls on managing risks and the selection of banks. In response to the Euro crisis Coats performed additional risk analysis and established a contingency plan to cover the risk of losses.
		Coats is unable to present itself as an attractive candidate for financing.	Compliance with the terms of Coats' senior bank facility agreements is actively monitored. There is regular contact with core relationship banks and alternative sources of finance have been identified.
IT Risks		Unauthorised access to Coats IT systems and data stores results in the theft of data or the disruption of business processes.	Standard firewall capability is overseen by an external vendor. There are periodic penetration tests resulting in intrusion reports that are acted upon. Coats' networks are actively monitored and multiple layers of user password protection are used at the device level and application level. Communications with portable devices are encrypted. Coats has a programme to ensure that all internal users have the appropriate access rights and permissions for their roles.
		Coats' IT network and systems performance is inadequate for critical transactions and processes.	Coats has established IT systems in place and Group and Divisional IT teams to manage the IT risks.
Supplier Dependency Risks		One or more of Coats' major external suppliers is unable or unwilling to supply goods causing major disruption to the Coats supply chain that cannot be replaced in the short-term, with the consequence of lost contribution and long-term impact on customer relations.	Coats has a procurement function that is responsible for monitoring and managing relationships with suppliers. This involves monitoring and reviewing external supply chains, multiple sourcing of materials and strategic inventories. The head of this function is a member of the Coats Management Board. Regular meetings are held with key suppliers. These meetings include detailed discussions of market conditions and supply expectations. Coats also spreads its risk by dealing with more than one supplier on each key material and by continually identifying new sources of supply. Coats' global insurance programme includes supplier dependency cover.
Internal Supply Chain Risks		Disproportionate reliance on critical internal supply chain nodes or combination of nodes has a significant impact on Coats' profitability in the event of disruption to any of them.	Coats has a manufacturing and supply chain function that is responsible for monitoring and managing these single point exposures. This involves monitoring and reviewing internal supply chains, fire protection systems and creating and testing disaster recovery plans. The head of this function is a member of the Coats Management Board. Property risk surveys are conducted on a rolling basis of all Coats critical supply chain nodes. The implementation of the risk reduction recommendations is actively monitored and where necessary capital expenditure is prioritised. Coats' global insurance programme includes property destruction and business interruption cover.
Customer Dependency Risks		Key crafts customers reduce the shelf space for a group of products which Coats supplies or engages in price negotiation materially reducing the contribution earned by the business.	Coats has a commercial capability that is responsible for monitoring and managing relationships with key crafts customers. Strong commercial relationships are maintained with senior level management at the customers that includes direct access to final decision makers. Coats works to ensure a high degree of customer collaboration, communication and management attention to POS data and weekly replenishment levels. Coats ensures that it provides a high level of service / stock availability for all customer orders. There has been significant investment in pattern/design support, product promotions and consumer advertising to ensure high consumer in-store footfall and sales growth together with marketing effort aimed at demonstrating craft consumer demographics, in-store buying behaviour and positive correlation to store sales in other categories.
Environmental Risks	Non-compliance with Coats' environmental control procedures or local requirements (if these are stricter) leads to a serious pollution event having an adverse impact on Coats' operations and resulting in regulatory action being taken. This results in litigation, resultant damages and damage to reputation.		The Group Management Board defines objectives and targets to achieve the highest practicable standards of environmental performance for the Group. All Environmental issues are reported up to the GPG Audit, Finance and Risk Committee and the Coats Group Management Board through a semi-annual Risk Questionnaire completed by all operating units. All sites must comply with their local legal requirements for effluent quality and volume and must hold the relevant permit to discharge. Coats has 'Global Water Effluent Limits', which is a set of 15 parameters with the strictest limits of any local authority according to three downstream categories. Coats' global insurance programme includes cover for 3rd Party property damage and injury or illness resulting from pollution of air, water or soil caused by a sudden or unforeseen incident.
	Coats is held responsible and accountable for clean-up/remediation costs of legacy environmental issues originating before it acquired those sites or after their disposal/closure.		Every step is taken to ensure that sites that are closed and/or sold are cleaned up at that juncture.
Labour Relations Risks	Poor labour relations in Coats' critical manufacturing sites results in disruption to business.		A group wide employee satisfaction survey for all employees is conducted annually. Strategies are developed and implemented to address concerns raised in the survey. In the event of disruption Coats has the ability to move production to other sites if necessary.
Health and Safety (H&S) Risks	Non-compliance with Coats H&S procedures or local requirements (if these are stricter) leads to the injury or death of individuals. As well as being a failure of its duty of care to its employees and contractors, this has an adverse impact on Coats' operations and results in regulatory action being taken. This results in litigation, resultant damages and damage to reputation.		Coats' H&S Policy forms the basis of the Coats Group's H&S management systems and processes. The H&S Policy requires high standards of H&S management at all sites which are implemented through performance monitoring, risk assessment and the management and mitigation of identified risks to help provide continuous improvement in H&S performance. H&S performance is reported to the Coats board by the Coats CEO whenever it meets. The governance structure for H&S places responsibility for H&S performance on the most senior manager of each Coats business unit. Every unit is required to report its H&S KPI's to the Group Risk Manager who reports them direct to the board. The senior managers of the business units are supported by the site managers and senior HR officers who are accountable for ensuring that all activities under their control are carried out in accordance with the Coats H&S Policy and management systems. Each site has an H&S Manager who as a minimum must be trained and qualified according to the requirement of local legislation. All employees are responsible for ensuring that all incidents and near misses both on site and on the way to or from work are reported to the H&S Manager.
Non-compliance with laws and regulation	Non-compliance with any applicable laws/regulations (including those relating to bribery and corruption, human rights and competition/anti-trust) by Coats or one of its major trading partners results in civil or criminal liabilities, individual or corporate fines and reputational damage. It could also result in Coats being excluded from government related contracts.		Coats is committed to the highest standards of corporate and individual behaviour. This commitment is set out in the Ethics Policy and the Code of Business Conduct. Online compliance training in anti-bribery and corruption, competition/anti-trust and ethics is repeated periodically for all senior employees as well as those in high risk positions. Further information is available on pages 22. Coats has a whistleblower system, which enables employees who are aware of, or suspect, misconduct, illegal activities, fraud, abuse of assets or violations of any group policy, to report these confidentially.

Related Party Transactions

A description of the related party transactions of the Company is extracted from page 52 of the 2013 Annual Report:

Remuneration of Key Management Personnel

The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 - Related Party Disclosures. Further information regarding the remuneration of individual directors is provided on page 47 in the audited part of the Directors' Remuneration report.

Year ended 31 December	2013 £m	2012 £m
Short-term employee benefits	1	1

Trading transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures are disclosed below.

During the year, Group companies entered into the following transactions with related parties who are not members of the Group:

		Sales of goods	Purchases of goods		Other income
	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m
Joint ventures	4	5	28	24	3	8

Transactions with joint ventures are conducted on an arm's length basis.

Amounts owing by/(to) joint ventures at the year end are disclosed in notes 19, 22 and 33.

RESPONSIBILITY STATEMENT

The following responsibility statement is repeated here solely for the purpose of complying with Disclosure and Transparency Rule 6.3.5.  This statement relates to and is extracted from page 52 of the 2013 Annual Report.  Responsibility is for the full 2013 Annual Report and Accounts not the extracted information presented in this announcement and the Preliminary Announcement of Results.

We confirm that to the best of our knowledge:

1.       the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

2.       the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

The Directors' Responsibilities Statement was approved by order of the Board.

Chris Healy

Company Secretary

Guinness Peat Group plc

Tel: [phone]

27 March 2014

Enquiry details are:

New Zealand and Australian media:          Geoff Senescall on:            [phone]

UK media:                                                  Kevin Smith on:                  [phone]

 

END

 

 

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