Annual Financial Report

RNS Number : 9730G

Coats Group PLC

07 March 2018

 

COATS GROUP PLC

Annual Financial Report 2017

Coats Group plc ('Coats' or the 'Company') has today submitted to the Financial Conduct Authority's national storage mechanism its Annual Financial Report for the year ended 31 December 2017 ('Annual Report 2017'), as required by UK Listing Rule 9.6.1.

The Annual Report 2017 is available from the Company's website, www.coats.com/ara2017, and will also be available for viewing at the Financial Conduct Authority's national storage mechanism at www.morningstar.co.uk/uk/NSM.

This announcement also contains as appendices additional information for the purposes of compliance with the UK Disclosure Rules and Transparency Rules, including principal risk factors, a responsibility statement and details of related party transactions.  This information is extracted, in full unedited text, from the Annual Report 2017.  The Preliminary Announcement released on 27 February 2018 contained a condensed set of financial statements together with extracts of the Company's management report, and is also available to view on the Company's website www.coats.com/investors. These announcements should be read in conjunction with and are not a substitute for reading the full Annual Report 2017.

Stuart Morgan

Company Secretary

7 March 2018

Enquiry Details

Rob Mann

Coats Group plc

020 8210 5175

Appendix

Principal Risks overview

A description of the principal risks the company faces is extracted from pages 23 to 25 of the Annual Report 2017.

During the year the Board, supported by the Group Risk Management Committee, undertook a robust assessment of the principal risks facing the Group along with the current levels of risk tolerance for each of those risks.

As a result of this process, the Directors created a refreshed Group Risk Register. This included introducing a new risk category - 'External risk', arising from the macroeconomic climate, political events, regulatory issues and competitive pressures - and revising the contents of the Group Risk Register itself:

NEW	'Connecting for Growth programme' - Added given the launch of the global strategic change programme and in particular the implementation of the Group's digital offering and global functional model.
NEW	'Changing customer and end user expectations' - Added given the importance of continuing to identify, understand and respond to these expectations.
¯	'Failure of critical infrastructure' - Moved down and off the list of principal risks in light of the robust controls and effective mitigating actions demonstrated by the management team during 2017 including in response to the tornado which impacted the Albany Crafts distribution centre.
Amended	'Data controls and security' - Management of sensitive corporate and personal data and compliance with the General Data Protection Regulations has been moved down and off the list of principal risks in light of the robust controls and mitigating actions demonstrated by the management team during 2017. IT security risks remain on the list of principal risks within 'Cyber Risk'.

Currently the Board has identified ten principal risks, which fall into one of the following four categories:

·   Strategic: Risks that could adversely impact the Group's ability to achieve its defined strategic objectives.

·   External: Risks arising from the macroeconomic climate, political events, regulatory issues and competitive pressures.

·   Operational: Risks inherent in our ongoing commercial operations and geographic footprint, which if not effectively managed, would be liable to cause significant commercial disruption.

·   Legacy: Risks relating to the Group's past operations and activities, including through historical mergers and acquisitions, which could create material financial exposure for the Group in its present form.

These principal risks, along with a summary of the measures in place to manage and mitigate them, are set out in the table below.

As stated above, the Board will continue to keep these principal risks, as well as the appropriateness of this list and the ever evolving broader risk environment, under ongoing review.

Principal risk	Risk nature/potential impact	Action / mitigation
1. STRATEGIC:
Connecting for Growth programme Trend on year: NEW	Execution of global strategic change programme - in particular implementation of digital offering and global functional model.	The Group is pursuing changes in its operating model to increase productivity, promote efficiency in its supply chain and therefore speed of delivery to customers and to optimise its use of digital platforms to improve customer experience. Leadership of the programme is provided by a Chief Transformation Officer, supported by a team of project managers, and regular reviews, including through the use of key performance and risk indicators, are held at executive management and Board level.
Customer and end user expectations Trend on year: NEW	Risk of failure to identify, understand and respond to changing customer and end-user expectations (e.g. spending patterns and impact of online channel switch).	Our sales teams have over 1,000 interactions a day with brands, retailers and manufacturers and this informs our understanding of different markets. During the year we created a new customer insights role and extended the use of our Customer Relationship Management systems to gain more customer insights. We also strengthened our commercial team to better service key and emerging markets. In order to ensure a firm understanding of emerging trends and technologies, we undertake regular competitor and media analysis, desktop research and attend external and industry-led events.
Appropriate capability development Trend on year: No move ~	Risk of failure to attract and retain talent and capability given business changes and growth in new areas.	The Board and senior management remain very focused on talent and capability development, as well as retention and succession planning. 2017 capability development actions included new cohorts on a range of management and senior leader development programmes and individual assessments and coaching for selected senior managers. 2017 also saw Board approval of a new People Strategy to support the changing roles and capabilities required by the business in the next three years.
2. EXTERNAL:
Cyber risk Trend on year: Upwards -	Risk of cyber incidents leading to corruption of applications, critical IT infrastructure, compromised networks, operational technology and/or loss of data.	Throughout the year we implemented a range of policies, standards and training programmes that focused on IT security and the need to prevent leakage of data. These were driven by the global Technology function and led by the Cyber and Information Security Director. In 2018 we are building on this approach by delivering a programme of automated training to targeted groups and the Group as a whole to reinforce the training on an ongoing basis. Technology enhancements are also being put in place, including further firewall blocking of non-approved applications, the expanded deployment of multi-factor authentication, deployment of an email encryption solution, and centralisation of data into Azure which both protects the data and creates enhanced tracking capabilities.
Economic risk Trend on year: No move ~	Economic risk arising from political and demand uncertainty - including risk to free trade conventions.	As a global industrial manufacturing company with no UK manufacturing facilities and minimal direct sales in the UK, Coats is of the view that there would be limited direct adverse impacts on the Group from Brexit. Both the UK and the EU, however, are significant markets for both Apparel and Footwear and Performance Materials. Therefore any impact on sales and future growth expectations for these markets could have an indirect consequence on our business. Whilst there continue to be a number of uncertainties in connection with the future of the UK and its relationship with the EU, there have been indirect factors which continue to have an impact on our results, primarily the effect of lower discount rates on the accounting valuation of pension liabilities and the depreciation of sterling on our UK costs. We continually monitor and analyse economic and demand indicators to ensure that our supply chain remains flexible and our product portfolio remains relevant. This analysis provides a key input to our product development, business planning and pricing strategies. The Group's international footprint and comprehensive portfolio provide an increasing balance in our exposure to both EU and non-EU markets.
Environmental non-performance risk Trend on year: No move ~	Environmental non-performance risk given changing standards and increased scrutiny resulting in disruption of existing business, fines and/or reputational damage.	Our environmental policy applies across the Group. Compliance with all environmental legal requirements is a minimum standard for the Group, and is monitored very closely at both a local and Group level. A Group-wide environmental management system (EMS) aligned to ISO 14001 will commence in 2018, which will further enhance our systematic management of these requirements and standards.
3. OPERATIONAL:
Products and services liability risk Trend on year: No move ~	Products and services liability risk arising in particular from Performance Materials and software services.	Products and services are tested and measured against stringent quality standards. Controls in the Performance Materials area specifically have been strengthened with enhanced batch by batch testing of safety critical products. Coats' global insurance programme includes product liability cover. Actions and programmes developed during the year included: digital automation with direct Internet of Things linkage implemented between testing equipment and the SAP quality module in order to minimise the risk of human error; fail-safe restrictive programming to prevent the risk of sale of unapproved products to safety-critical customer sectors; introduction of new key risk indicators to track monthly and quarterly progress; and a zero defect communication programme to factory operators and associates working in safety critical areas.
Bribery and anti-competitive behaviour risk Trend on year: No move ~	Risk of breach of anti-corruption law or competition law resulting in a material fine and/or reputational damage	The Group continues to maintain clear and well publicised policies and processes, spanning bribery and anti-competitive behaviour along with a number of other ethics issues, including in relation to partners, contractors and suppliers which are reinforced through a comprehensive Supplier Code (covering initial due diligence processes, on-boarding, ongoing compliance and auditing). These policies are reviewed annually. There is extensive online and face-to-face training and regular communications through a range of channels including through our global ethical champions network. A sub-committee of the Group Risk Management Committee comprising key business and functional leaders meets quarterly to consider a range of ethics risks (including key risk indicators for those risks), legislative and regulatory developments and mitigation plans. The Group actively maintains a whistle blower system, enabling employees and others who are aware of or suspect unethical behaviour to report it confidentially. See page 52 for more details.
4. Legacy risks
Pension scheme deficit funding risk Trend on year: No move ~	Risk of potential volatility in UK pension gross liabilities and total assets leading to increased annual cost of repair plan to fund deficit (which could impact one or more of free cash flow and dividend payment).	The funded pension schemes are overseen by their Trustees, who are required to have the appropriate knowledge and understanding in this area. Where appropriate, independent professional trustees are appointed to the schemes to provide additional expertise. In particular, professional investment advice is taken as necessary; and assets diversified by class and geography and currency exposures hedged where appropriate. Interest rate and inflation exposures are hedged at appropriate levels. Funding agreements are reviewed and agreed triennially. The Group and the schemes' trustees routinely review de-risking of the schemes through liability management and investment strategies. See note 9 on page 104 for more details.
Legacy environmental risks Trend on year: No move ~	Under the laws of certain countries, Coats' subsidiaries could potentially be deemed responsible for investigating and/or remediating conditions alleged to be associated in whole or in part with former operations.	The Board continues to monitor the strategy and developments in relation to the Lower Passaic River proceedings, more detail of which can be found in note 28 on page 127. Beyond that the Group continues to refine its policies and procedures for managing and mitigating potential legacy risks associated with former operations.

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 76 of the Annual Report 2017. Responsibility is for the full Annual Report 2017 and not the extracted information presented in this announcement or the Preliminary Announcement released on 27 February 2018.

We confirm that to the best of our knowledge:

·      the financial statements, prepared in accordance with the relevant financial reporting framework, 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;

·      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 it faces; and

·      the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

This responsibility statement was approved by the Board of Directors.

Related party transactions

A description of the related party transactions of the Company is extracted from page 131 of the Annual Report 2017.

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 pages 55 to 67 in the audited part of the Directors' remuneration report.

Year ended 31 December	2017 US$m	2016 US$m
Short-term employee benefits	3.6	5.1
Share based payments	0.9	1.3
	4.5	6.4

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:

	Sale of goods		Purchase of goods
	2017 US$m	2016 US$m	2017 US$m	2016 US$m
Joint ventures	2.9	2.8	52.7	46.2

About Coats Group plc

Coats is the world's leading industrial thread manufacturer and a major player in the Americas textile crafts market. At home in some 50 countries, Coats employs 19,000 people across six continents. Revenues in 2017 were US$1.5bn. Coats' pioneering history and innovative culture ensure the company continues leading the way around the world, providing complementary and value added products and services to the apparel and footwear industries; applying innovative techniques to develop high technology Performance Materials threads and yarns in areas such as automotive composites and fibre optics; and extending the crafts offer into new markets and online. Headquartered in the UK, Coats is a FTSE 250 listed company on the London Stock Exchange. To find out more about Coats visit www.coats.com.

 

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