Coats Group Limited
Guinness Peat Group PLC
30 August 2006
Guinness Peat Group plc
The following unaudited consolidated results of Coats Group Limited ("the
Group") for the six months ended 30 June 2006 are released by Guinness Peat
Group plc ("GPG") for information only.
Richard Russell
Company Secretary
Guinness Peat Group plc
30 August 2006
Contacts:
Blake Nixon (UK) 00 44 20 7484 3370
Gary Weiss (Australia) 00 61 2 8298 4305
Tony Gibbs (New Zealand) 00 64 9 379 8888
Coats Group Limited: unaudited results* for the six months ended 30 June 2006
Financial summary
Like-for-like**
2006 2005 2005
Half year Half year Half year
Unaudited Unaudited Unaudited
US$m US$m US$m
Revenue 806.7 ** 836.9 830.4
Operating profit before reorganisation, 61.0 ** 68.1 66.5
impairment and other exceptional items (see note
2)
Operating profit 47.3 ** 56.3 54.2
Net profit attributable to equity shareholders 23.1 *** 36.8
Net debt 406.2 483.9
*See note 1
**Excluding the impact of exchange translation and the acquisition and disposal
of businesses (see Operating Review)
***Restated, see note 1
• Improved performance from industrial thread offset by lower crafts sales
• Asia like-for-like sales growth of 17%
• Crafts handknittings sales affected by US retailer de-stocking
• Debt reduced by $78 million compared to previous half year
CHAIRMAN'S STATEMENT
Results
In H1 2006, Coats Group Limited continued to make underlying progress despite
more difficult trading conditions.
Pre-exceptional operating profit (before reorganisation, impairment and other
exceptional items) decreased by 10% on a like-for-like basis to $61.0 million.
The decrease was almost entirely due to lower crafts handknitting sales in North
America, which more than offset a significant improvement in the profitability
of industrial thread due to cost savings in North America and strong growth in
Asia. During the first half, on a like-for-like basis, Group worldwide sales of
industrial thread grew by 3% whilst sales of crafts products fell by 14%.
Further details are included in the Operating Review.
Net exceptional charges of $13.7 million (see note 2) were slightly above the
prior half year total of $12.3 million. However the net increase of $1.4 million
masks a $4.7 million reduction in reorganisation costs and a $19.5 million
profit from the sale of surplus properties, the benefit of which was wiped out
by an adverse swing of $25.6 million in exchange movements.
Interest costs were in line with the previous half year but total net finance
costs increased by $6.4 million mainly due to the absence of the exchange gain
which benefited the 2005 comparative. Net earnings attributable to equity
shareholders of $23.1 million (2005 - $36.8 million) were also affected by a
relatively high tax charge, due to unrelieved losses in certain territories.
Net cash inflow from operations before reorganisation costs and exceptional
items was $4.7 million (2005 - $16.5 million), reflecting the seasonal increase
in working capital in the six months to 30 June. However compared to June 2005,
the ratio of average working capital / sales reduced by two percentage points to
23.5% and net debt at $406.2 million was $77.7 million lower.
Investment, reorganisation & disposals
Investment in new plant and systems amounted to $32.8 million (2005 - $38.5
million). The bulk of investment was directed towards upgrading existing
operations with the balance consisting of additional capacity to meet growth in
Asia.
Reorganisation costs of $23.3 million (2005 - $28.0 million) were charged during
the period. Most of the projects involve site closures and overhead reduction in
Europe. In cash terms these were more than offset by exceptionally high
disposals of surplus property totalling $46.2 million (2005 - $16.6 million).
Prospects
The improvement in industrial profitability during the first half was
encouraging and demonstrates that investment in new plant and reorganisation is
beginning to pay off. Although the market for industrial thread remains
extremely competitive, global demand is reasonably stable and second half
results should continue to benefit from recent spending on new plant and
reorganisation.
The fall in US handknittings sales during the first half was disappointing but
not unexpected given the high stocks held by major crafts retailers at the end
of last year as mentioned in the 2005 report. For the second half, the main
uncertainty is whether underlying consumer demand for handknittings will be
sustained at the relatively high levels experienced over the last few years.
However, given the Group's broad portfolio of other crafts products and with a
reduced impact from retailer de-stocking in the second half, it is expected that
crafts sales and profits in the second half will show some recovery.
The main objectives for full year 2006 continue to be debt reduction and
execution of the reorganisation projects necessary to reduce the Group's cost
base. Despite difficult market conditions, the Group expects to make progress at
the operating level on a like-for-like basis in the second half. The Board
remains confident that the Group will continue to make further progress.
Gary Weiss
Chairman
30 August 2006
OPERATING REVIEW
Trading performance by region*
2005 Exchange Acquisitions/ 2005 2006 Like-for-like
$m retranslation** disposals like-for-like reported increase/(decrease)
$m $m $m $m %
External sales
Asia 221.8 (2.7) 219.1 257.3 17%
UK & Europe 284.9 (10.7) 8.0 282.2 263.0 (7)%
N America 228.2 0.9 229.1 179.3 (22)%
S America 95.5 11.0 106.5 107.1 1%
Total 830.4 (1.5) 8.0 836.9 806.7 (4)%
Pre-exceptional
operating profit***
Asia 31.3 (0.5) 30.8 40.0 30%
UK & Europe 7.1 0.5 7.6 6.4 (16)%
N America 16.1 0.2 16.3 2.0 (88)%
S America 12.0 1.4 13.4 12.6 (6)%
Total 66.5 1.1 0.5 68.1 61.0 (10)%
*All figures prepared in accordance with IFRS as explained in note 1
**Impact of restating 2005 figures at 2006 exchange rates
***Pre reorganisation, impairment and other exceptional items (see note 2)
In the following comments on regional performance, all comparisons with 2005 are
based on the table above.
Asia
Sales +17%; OP +30%
All Asian markets delivered strong performances, led by China and India. Demand
for industrial thread in the region was strong, assisted by further migration of
garment production from other areas previously considered low cost such as
Eastern Europe and Central America. Sales benefited from the Group's
relationships with global retailers and brand owners as well as the new capacity
installed in 2005. In addition to the impact of higher sales volumes, the growth
in profit also reflects the resolution of the start-up issues which affected the
new China plants and depressed margins in H1 2005.
UK & Europe
Sales -7%; OP -16%
Although handknitting sales continued to grow in Europe, on a like-for-like
basis (after adjusting for Almedahls, acquired in April 2005) crafts sales
overall were down 3% on previous year as a result of weak demand for other
traditional crafts products. Sales of industrial products fell by 9%, with zips
particularly weak as a result of current fashion trends in addition to customer
migration which also affected demand for apparel thread.
In contrast to last year's improved performance, in H1 2006 the impact of lower
sales offset the savings generated by ongoing reorganisation. Efforts continue
to execute successfully the major remaining projects required to reduce the cost
base and improve margins.
North America
Sales -22%; OP -88%
Crafts sales fell by 35%, almost entirely due to handknittings where sales were
affected by retailer de-stocking. The sharp drop in handknittings volume was
largely responsible for the reduction in profits from the region. The comparison
with H1 2005 is exacerbated by the exceptionally strong sales of handknittings
in that period which led to retailers' over-stocked position at the end of the
year. Whilst there was a decline in underlying consumer demand for fancy yarns
in the North American 2005/6 season, sales of classic yarns were more stable.
However, given the seasonality of this business the overall market trend will
remain uncertain until later in the year.
Sales of industrial thread decreased by 8%, with demand affected by net
migration of apparel production from Mexico and Central America to Asia.
Notwithstanding the difficult sales climate, benefits from previous investments
in plant and reorganisation resulted in improved industrial margins, albeit
still below Group targets.
South America
Sales +1%; OP -6%
US dollar values of sales and profits in South America benefited from
revaluation of local currencies but the resulting reduction in competitiveness
depressed demand for industrial thread and zips and put pressure on margins. As
in 2005, this was largely offset by growth in crafts sales, driven by
handknittings.
Consolidated income statement (unaudited)
2006 2005 2005
Half year Half year Full year
Unaudited Unaudited Unaudited
Restated* Restated*
For the six months ended 30 June 2006 Notes US$m US$m US$m
Continuing operations
Revenue 806.7 830.4 1,636.7
Cost of sales (535.2) (534.1) (1,084.0)
Gross profit 271.5 296.3 552.7
Distribution costs (152.3) (152.6) (306.2)
Administrative expenses (92.2) (90.5) (165.6)
Other operating income 20.3 1.0 18.9
Operating profit 2 47.3 54.2 99.8
Share of profits of joint ventures 1.2 0.9 1.6
Investment income 3.2 2.0 7.0
Finance costs 3 (15.0) (8.6) * (24.2) *
Profit before taxation 36.7 48.5 84.2
Taxation 4 (15.5) (9.1) (39.5)
Profit from continuing operations 21.2 39.4 44.7
Discontinued operations
Profit/(loss) from discontinued operations 3.5 (0.6) 15.0
Profit for the period 24.7 38.8 59.7
Attributable to:
EQUITY SHAREHOLDERS OF THE COMPANY 23.1 36.8 58.3
Minority interests 1.6 2.0 1.4
24.7 38.8 59.7
* Finance costs have been restated from the $12.1 million disclosed in the interim accounts for the six months ended
30 June 2005 and from the $30.1 million disclosed in accounts for the year ended 31 December 2005 following an
amendment to IAS 21 (see note 1).
Consolidated balance sheet (unaudited)
2006 2005 2005
30 June 30 June 31 December
Unaudited Unaudited Unaudited
Restated* Restated*
At 30 June 2006 Notes US$m US$m US$m
Non-current assets
Intangible assets 257.6 253.0 257.5
Property, plant and equipment 479.9 458.6 482.5
Investments in joint ventures 16.6 17.6 16.4
Available-for-sale investments 4.2 10.0 3.5
Deferred tax assets 6.9 12.0 4.6
Pension surpluses 64.9 28.5 57.5
Trade and other receivables 24.9 20.0 23.4
855.0 799.7 845.4
Current assets
Inventories 317.2 331.1 286.9
Trade and other receivables 342.1 354.7 302.7
Available-for-sale investments 5.9 - 8.8
Cash and cash equivalents 7 41.1 72.7 77.8
706.3 758.5 676.2
Non-current assets classified as held for sale 10.4 64.7 30.2
Total assets 1,571.7 1,622.9 1,551.8
Current liabilities
Trade and other creditors (284.3) (275.2) (313.5)
Current income tax liabilities (7.8) (35.8) (4.5)
Bank overdrafts and other borrowings (105.7) (94.8) (122.0)
Provisions (159.3) (172.7) (150.0)
(557.1) (578.5) (590.0)
Net current assets 149.2 180.0 86.2
Non-current liabilities
Trade and other creditors (29.0) (10.2) (28.0)
Deferred tax liabilities (12.0) (16.0) (12.1)
Borrowings (341.6) (461.8) (319.1)
Retirement benefit obligations:
Funded schemes (2.2) (22.1) * (2.1)
Unfunded schemes (120.5) (99.7) (113.3)
Provisions (56.4) (41.4) (62.6)
(561.7) (651.2) (537.2)
Liabilities directly associated with non-current
assets classified as held for sale - (22.1) -
Total liabilities (1,118.8) (1,251.8) (1,127.2)
Net assets 452.9 371.1 424.6
Equity
Share capital 4.2 4.2 4.2
Share premium account 412.1 412.1 412.1
Revaluation reserve - 1.2 -
Hedging and translation reserves 8.9 11.4 * 0.7 *
Retained profit/(loss) 4.4 (88.7) * (19.1) *
EQUITY SHAREHOLDERS' FUNDS 5 429.6 340.2 397.9
Minority interests 5 23.3 30.9 26.7
Total equity 5 452.9 371.1 424.6
* Retirement benefit obligations for funded schemes as at 30 June 2005 have been restated from the $65.0 million
disclosed in the interim accounts for the six months ended 30 June 2005 and reserves have been restated following an
amendment to IAS 21 (see note 1).
Consolidated cash flow statement (unaudited)
2006 2005 2005
Half year Half year Full year
Unaudited Unaudited Unaudited
For the six months ended 30 June 2006 Notes US$m US$m US$m
Cash (outflow)/inflow from operating activities
Net cash (outflow)/inflow generated by operations 6 (23.9) (5.8) 176.9
Interest paid (17.4) (19.0) (36.4)
Taxation paid (14.8) (18.8) (39.8)
Net cash (absorbed)/generated from operating activities (56.1) (43.6) 100.7
Cash inflow/(outflow) from investing activities
Dividends received from associates and joint ventures 1.0 0.9 2.8
Acquisition of property, plant and equipment and intangible assets (32.8) (38.5) (81.3)
Disposal of property, plant and equipment and intangible assets 46.2 16.6 56.6
Acquisition of financial investments (3.0) (5.1) (9.3)
Disposal of financial investments 4.8 - 2.4
Acquisition and disposal of businesses 2.0 12.4 5.4
Net cash generated/(absorbed) in investing activities 18.2 (13.7) (23.4)
Cash inflow/(outflow) from financing activities
Dividends paid to minority interests (1.1) (2.3) (7.1)
Increase/(decrease) in debt and lease financing 2.4 (7.7) (119.5)
Net cash generated/(absorbed) in financing activities 1.3 (10.0) (126.6)
Net decrease in cash and cash equivalents (36.6) (67.3) (49.3)
Net cash and cash equivalents at beginning of the period 57.1 113.5 113.5
Foreign exchange gains/(losses) on cash and cash equivalents 0.1 (6.6) (7.1)
Net cash and cash equivalents at end of the period 7 20.6 39.6 57.1
Reconciliation of net cash flow to movement in net debt
Net decrease in cash and cash equivalents (36.6) (67.3) (49.3)
Cash (outflow)/inflow from change in debt and lease financing (2.4) 7.7 119.5
Change in net debt resulting from cash flows (39.0) (59.6) 70.2
New finance leases - - (3.6)
Transfer of preference shares from equity under IAS 32 - (28.0) (28.0)
Other (2.0) 1.0 (3.9)
Foreign exchange (1.9) 6.5 5.8
(Increase)/decrease in net debt (42.9) (80.1) 40.5
Net debt at start of period (363.3) (403.8) (403.8)
Net debt at end of period 7 (406.2) (483.9) (363.3)
Consolidated statement of recognised income and expense (unaudited)
2006 2005 2005
Half year Half year Full year
Unaudited Unaudited Unaudited
Restated* Restated*
For the six months ended 30 Notes US$m US$m US$m
June 2006
Gain on revaluation of - 1.2 -
available-for-sale investments
Gain on cash flow hedges 5.5 0.4 4.6
Exchange differences on 3.8 0.1 * (12.6) *
translation of foreign
operations
Actuarial gains in respect of - - 47.4
retirement benefit schemes
Tax on items taken directly to - - 0.3
equity
Net income recognised directly 9.3 1.7 39.7
in equity
Profit for the period 24.7 38.8 * 59.7 *
Transferred to profit or loss (1.3) 0.5 0.8
on cash flow hedges
Other transfers 0.5 - (2.1)
Total recognised income and 5 33.2 41.0 98.1
expense for the period
Attributable to:
EQUITY SHAREHOLDERS OF THE 31.7 39.0 96.7
COMPANY
Minority interests 1.5 2.0 1.4
33.2 41.0 98.1
* See note 1 for details of the restatement.
Notes
1 Basis of preparation
Coats Group Limited is incorporated in the British Virgin Islands. It does not prepare consolidated statutory
accounts and therefore the financial information contained in this announcement does not constitute full
financial statements and has not been, and will not be, audited.
The financial information for the six months ended 30 June 2006 has been prepared in accordance with the
recognition and measurement requirements of International Financial Reporting Standards (IFRS) endorsed by the
European Union, and the accounting policies adopted have been consistently applied to the restated financial
information presented for the six months ended 30 June 2005 and the full year ended December 2005.
Subsequent to the publication of the half year results for the six months ended 30 June 2005, management
reviewed the Group's IFRS accounting policies in the light of emerging best practice. It is considered that
best practice under IAS 19 on Employee Benefits is for administration costs to be deducted annually from the
expected and actual return on pension plan assets, rather than for provision to be made for the present value of
these costs expected over the life of the plan.
Subsequent to the publication of the results for the full year ended 31 December 2005, an amendment to IAS 21 on
The Effects of Changes in Foreign Exchange Rates has been endorsed by the European Union, whereby currency
translation gains and losses arising on inter-company loans that are not in the functional currency of either
party can now be dealt with through reserves rather than in the income statement.
The impact of these accounting policy changes is as
follows:
2005 2005
Half year Full year
Unaudited Unaudited
US$m US$m
Hedging and translation reserves as previously 16.5 5.0
reported
IAS 19 adjustment (3.2) -
IAS 21 adjustment as at 31 December 2004 1.6 1.6
IAS 21 adjustment for 2005 (3.5) (5.9)
Hedging and translation reserves as restated 11.4 0.7
Retained loss as previously reported (136.7) (23.4)
IAS 19 adjustment 46.1 -
IAS 21 adjustment as at 31 December 2004 (1.6) (1.6)
IAS 21 adjustment for 2005 3.5 5.9
Retained loss as restated (88.7) (19.1)
Coats Group Limited follows the accounting policies of its ultimate parent company, Guinness Peat Group plc.
The principal exchange rates (to the US dollar) used are as
follows:
June June December
2006 2005 2005
Average Sterling 0.56 0.53 0.55
Euro 0.81 0.78 0.81
Period end Sterling 0.54 0.56 0.58
Euro 0.78 0.83 0.85
2 Operating profit is stated after charging/
(crediting):
2006 2005 2005
Half year Half year Full year
Unaudited Unaudited Unaudited
US$m US$m US$m
Exceptional items:
Reorganisation costs and impairment of property, 23.3 28.0 62.4
plant and equipment
Profit on the sale of property (19.5) - (17.2)
Foreign exchange losses/(gains) 9.9 (15.7) (18.5)
Total 13.7 12.3 26.7
3 Finance costs
2006 2005 2005
Half year Half year Full year
Unaudited Unaudited Unaudited
US$m US$m US$m
Interest on bank and other borrowings 19.9 21.1 41.3
Foreign exchange gains - (10.3) (11.8)
Net return on pension scheme assets and liabilities (7.2) (2.8) (8.3)
Other 2.3 0.6 3.0
Total 15.0 8.6 24.2
4 Taxation
The taxation charges for the six months ended 30 June 2006 and 30 June 2005 are based on the estimated effective
tax rate for the full year, including the effect of prior period tax adjustments. The foreign exchange losses
recognised in operating profit and finance costs for the six months ended 30 June 2006 of $9.9 million (2005 -
$26.0 million gains) are non-taxable. Excluding these items, a taxation charge of $15.5 million (2005 - $9.1
million) arises on adjusted profits of $46.6 million (2005 - $22.5 million).
5 Reconciliation of closing equity
Equity Minority Total equity
shareholders' interests
funds
Unaudited Unaudited Unaudited
US$m US$m US$m
At 1 January 2006 397.9 26.7 424.6
Total recognised income and expense for the period 31.7 1.5 33.2
Dividends paid - (1.1) (1.1)
Other - (3.8) (3.8)
At 30 June 2006 429.6 23.3 452.9
6 Reconciliation of operating profit to net cash (outflow)/inflow generated by
operations
2006 2005 2005
Half year Half year Full year
Unaudited Unaudited Unaudited
US$m US$m US$m
Operating profit 47.3 54.2 99.8
Depreciation 28.2 23.4 50.4
Amortisation of intangible assets (computer 3.5 4.5 5.6
software)
Reorganisation costs (see note 2) 23.3 28.0 62.4
Other exceptional items (see note 2) (9.6) (15.7) (35.7)
(Increase)/decrease in inventories (23.0) (33.2) 3.9
(Increase)/decrease in debtors (35.6) (18.5) 34.2
(Decrease)/increase in creditors (23.6) (18.8) 17.3
Provision movements (6.0) (6.9) (11.7)
Other non-cash movements 0.2 (0.5) 5.0
Net cash inflow from normal operating activities 4.7 16.5 231.2
Net cash outflow in respect of reorganisation costs (28.6) (22.3) (54.3)
and other exceptional items
Net cash (outflow)/ inflow generated by operations (23.9) (5.8) 176.9
7 Net debt
2006 2005 2005
Half year Half year Full year
Unaudited Unaudited Unaudited
US$m US$m US$m
Cash and cash equivalents 41.1 72.7 77.8
Bank overdrafts (20.5) (33.1) (20.7)
Net cash and cash equivalents 20.6 39.6 57.1
Other borrowings (426.8) (523.5) (420.4)
Total (406.2) (483.9) (363.3)
8 Balance sheet consolidated by Guinness Peat Group plc
(unaudited)
The balance sheet consolidated by Guinness Peat Group plc (GPG) as at 30 June 2006 differs from that disclosed
as follows:
Coats Group Coats Group GPG fair value Included in
Limited Limited adjustments GPG's
consolidated
balance sheet
US$:GBP at
0.5405
Unaudited Unaudited Unaudited Unaudited
US$m £m £m £m
Intangible assets 257.6 139 14 153
Other non-current assets 597.4 323 323
Current assets 706.3 382 382
Non-current assets classified as held for sale 10.4 6 6
Total assets 1,571.7 850 14 864
Current liabilities (557.1) (301) (301)
Non-current liabilities (561.7) (304) (304)
Minority interests (23.3) (13) (13)
Equity shareholders' funds 429.6 232 14 246
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