Final Results for Coats Group
Guinness Peat Group PLC
28 February 2008
Guinness Peat Group plc
The following unaudited consolidated results of Coats Group Limited ("the Group") for the year ended 31
December 2007 are released by Guinness Peat Group plc ("GPG") for information only.
Richard Russell
Company Secretary
Guinness Peat Group plc
28 February 2008
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 year ended 31 December 2007
Financial summary
2007 2006
Unaudited Unaudited
US$m US$m
Revenue 1,681.2 1,615.1
Operating profit before reorganisation, impairment and 158.1 122.4
other exceptional items (see note 2)
Operating profit 118.8 79.9
Profit before taxation 95.6 57.1
Net profit attributable to equity shareholders 61.8 29.9
Net debt** 335.9 345.7
Net gearing** 63% 76%
* see note 1
** net debt and net gearing include amounts owed to GPG of $55.0 million (2006 - nil) and are
after the payment of European Commission fines cumulatively totalling $37.7 million (2006 -
$7.9 million)
• Pre-exceptional operating profit up 29%
• Industrial thread pre-exceptional operating profit up 28%, with 12% sales
growth in Asia
• Crafts pre-exceptional operating profit up 36%, with recovery in North
American crafts
• Net attributable profit more than doubled to $61.8m
Chairman's statement
Results
Coats made good progress in 2007 in terms of both profits and cash generation.
Its competitive position also continued to improve as a result of substantial
investment in the relocation and upgrading of capacity and product range
rationalisation in both the industrial and crafts businesses.
Pre-exceptional operating profit (before reorganisation, impairment and other
exceptional items) grew by 29% to $158.1 million (2006 - $122.4 million). Profit
from the industrial thread business increased by $29.0 million to $132.6 million
(+28%), driven by an improved performance in Europe and strong growth in Asia.
Crafts profit improved by $6.7 million to $25.5 million, principally as a result
of a strong recovery in North American profitability. This was partly offset by
weakness in the European crafts business, particularly handknittings, which
pushed this business into loss.
The results for crafts and industrial over the last four years provide the
context for the current year's performance.
2007 2006 2005 2004
External sales $m
Industrial thread & zips 1,087.6 1,030.1 996.2 987.7
Crafts 593.6 585.0 640.5 590.4
Total 1,681.2 1,615.1 1,636.7 1,578.1
Sales growth
Industrial thread & zips +6% +3% +1% +1%
Crafts +1% -9% +8% +13%
Total +4% -1% +4% +5%
Pre-exceptional operating profit $m
Industrial thread & zips 132.6 103.6 68.5 49.3
Crafts 25.5 18.8 58.0 41.2
Total 158.1 122.4 126.5 90.5
Pre-exceptional operating margin
Industrial thread & zips 12% 10% 7% 5%
Crafts 4% 3% 9% 7%
Total 9% 8% 8% 6%
Net earnings attributable to equity shareholders more than doubled to $61.8
million, due primarily to the improvement in pre-exceptional operating profit.
Cash flow
EBITDA (defined as pre-exceptional operating profit before depreciation and
amortisation) of $225.6 million was 22% ahead of the previous year's total of
$185.5 million. European Commission fines (see below for further details) of
$29.8 million (2006 - $7.9 million) were paid in the year, but the net operating
cash flow before reorganisation costs remained strong at $190.7 million (2006 -
$172.3 million).
Reorganisation spend was $44.6 million (2006 - $54.5 million). Spend on capital
projects at $68.8m was also lower than in the previous year (2006 - $78.3
million). Including the realisation of $25.9 million (2006 - $60.2 million)
from the sale of surplus property, reorganisation and capital spend was
comfortably covered by internally generated cash flow. Spending on the
acquisition of businesses and minority shareholdings, net of disposals, amounted
to $7.8 million (2006 - $7.5 million). Interest and tax paid at $76.2 million
was broadly in line with last year (2006 - $72.8 million).
Excluding the $55.0 million advance from GPG, the Group succeeded in generating
a $19.0 million (2006 - $25.0 million) increase in cash.
Investment, reorganisation and disposals
As noted above, the cash investment in new plant and systems amounted to $68.8
million (2006 - $78.3 million). Investment in plant and equipment largely
consisted of additional capacity to meet growth in Asia and productivity
improvements in Europe. Significant investment continues to be made in
upgrading IT systems, including the installation of SAP in all Coats units
throughout the world. Spend across the Group was 1.0 times (2006 - 1.2 times)
depreciation and amortisation.
Reorganisation spend was $44.6 million (2006 - $54.5 million). Approximately 75%
of this spend in 2007 was directed towards site closures and restructuring in
Europe. As noted at the half year, a major restructuring programme is well
underway in Europe crafts, with the objective of transforming the previous
structure of country-based organisations - each with its own product range -
into a more cost-effective pan-European business with a single, harmonised
product offer. In the process, key products are being redesigned and new supply
chains established so that the new pan-European product ranges will be more
attractive and offer better value than could have been created by individual
countries acting alone. Total numbers employed in the Group fell by 6% to
22,428 (2006 - 23,781) at the end of the year and 83% of employees are now
located in low-cost markets. Since 2003 the number of employees in high-cost
countries has fallen by more than 40%. Reorganisation cash outflows were partly
offset by proceeds from the sale of properties which had become surplus as a
result of the Group's reorganisation programme.
Spending on the acquisition of businesses and minority shareholdings in existing
subsidiaries, net of disposals, amounted to $7.8 million (2006 - $7.5 million).
This covers several relatively small transactions, including the acquisition of
Free Spirit, a North American crafts patchwork and quilting fabrics business, as
well as the acquisition of minority interests in Sri Lanka. The Free Spirit
acquisition, coupled with the subsequent launch of a wider range of patchwork
and quilting fabrics, has opened up new growth opportunities for Coats in a
popular and long-established North American crafts activity.
European Commission Investigation
In September 2007, the European Commission concluded its investigation into
European fasteners - the last part outstanding of its general investigation into
thread and haberdashery markets which began in 2001. It imposed fines against
several producers, including two fines against the Coats plc Group of €12.2
million and €110.3 million. Following legal advice, the Group has determined
not to appeal the €12.2 million fine, which was paid in December 2007.
The €110.3 million fine is in respect of the Commission's allegation of a market
sharing agreement in the European haberdashery market. Coats totally rejects
this allegation. During the investigation, Coats presented the Commission with
ample evidence which refuted this allegation and demonstrated that in any event
a fine was time-barred. Contrary to its right under the European Convention on
Human Rights, Coats was not permitted to examine the only witness who made this
allegation. Coats is vigorously contesting the Commission's decision in an
appeal which has been lodged with the Court of First Instance in Luxembourg.
Earlier in September 2007, the Court of First Instance quashed a large number of
the Commission's factual findings in respect of the €30 million needles fine,
levied against Coats in 2004, following its investigation into the European
hand-sewing needles market, for want of proof or because of clear
misinterpretation of the evidence by the Commission, and reduced the fine to €20
million. A further appeal to the European Court of Justice has now been lodged
in respect of this reduced fine.
As stated in previous reports, Coats remains of the view that any anticipated
eventual payment of the remaining fines is adequately covered by existing
provisions.
Prospects
The consistent progress achieved by the industrial business over the last four
years has fully vindicated the substantial reorganisation programme during that
period. However, given the global downturn, the purchasing power of the
consumer in Western markets is expected to be adversely affected, which will
impact apparel and footwear sales. The global industrial thread market is
therefore expected to be relatively flat in 2008. Notwithstanding this, with
major restructuring projects in Western markets largely complete, Coats will use
its more competitive cost base to maintain and in some countries grow its market
share, in particular within the Asian region.
Some improvement is expected in crafts profitability in 2008. In the Europe
market there may be some tapering off of the decline in demand seen since 2005
and a move towards a more stable environment. Benefits will begin to flow
through from the latter part of 2008 onwards from the ongoing restructuring and
product harmonisation programme, due to a lower cost base and improved supply
chains. In North America, it is anticipated that current sales levels and
profitability will be maintained.
The Group's programme of relocating and upgrading industrial thread capacity has
been successful and has made a substantial contribution to the improvement in
industrial profitability. The downturn in European crafts demand has indicated
the need for a greater pace of reorganisation in that market. In light of this,
total reorganisation costs in 2008 are expected to remain broadly in line with
2007. Reorganisation projects will continue to free up for disposal surplus
properties which, in the past, have significantly reduced the net spend.
Over the longer term, the Board remains confident that Coats' position in both
the industrial thread and crafts markets will deliver further growth
opportunities and increases in shareholder value.
Gary Weiss
Chairman
28 February 2008
Operating review
Industrial Trading Performance
INDUSTRIAL 2007 *2006 2006 Like-for-like Actual
reported like-for-like reported increase / increase /
(decrease) (decrease)
$m $m $m % %
Sales
Asia and Rest of World 511.1 467.9 457.8 +9% +12%
Europe 269.0 278.6 258.2 -3% +4%
Americas 307.5 327.4 314.1 -6% -2%
Total sales 1,087.6 1,073.9 1,030.1 +1% +6%
Pre-exceptional 132.6 108.5 103.6 +22% +28%
operating profit**
*2006 like-for-like restates 2006 figures at 2007 exchange rates
**Pre reorganisation, impairment, and other exceptional items (see note 2)
In the following comments, all comparisons with 2006 are on a like-for-like
basis
The Asian industrial business delivered another good performance. This reflects
both the continued growth in the apparel export market in this region, plus the
investment made by Coats in additional production capacity and benefits from
Coats relationships with global suppliers and brand owners. Sales and profits
are broadly based across the region.
European sales continued to be affected by customer migration from Western
Europe but this was partially offset by growth in Eastern Europe. However, there
was a major recovery in operating profit in Western Europe as a result of
reorganisation and investment in previous years.
The Americas continued to be affected by increased penetration of apparel
imports from Asia. However, there was further recovery in operating profit as a
result of earlier reorganisation and investment.
Crafts Trading Performance
2007 *2006 2006 Like-for-like Actual
reported like-for-like reported increase / increase /
(decrease) (decrease)
$m $m $m % %
Sales
Asia and Rest of World 64.8 63.8 58.9 +2% +10%
Europe 249.1 297.6 267.1 -16% -7%
Americas 279.7 272.4 259.0 +3% +8%
Total sales 593.6 633.8 585.0 -6% +1%
Pre-exceptional 25.5 21.0 18.8 +21% +36%
operating profit**
*2006 like-for-like restates 2006 figures at 2007 exchange rates and includes an
adjustment to reflect the impact of acquisitions
**Pre reorganisation, impairment, and other exceptional items (see note 2)
In the following comments, all comparisons with 2006 are on a like-for-like
basis
Crafts sales in Europe were principally affected by reduced demand for
handknittings, although all crafts categories were down in an exceptionally weak
retail environment for crafts products. With a relatively high fixed-cost base,
the reduction in sales pushed the business into loss. The major restructuring is
in its second year and will lower the cost base, improve productivity and
deliver a harmonised pan-European product offer by 2008/9.
Crafts results in the Americas benefited from a more stable handknittings market
in North America and the absence of mark-downs and other one-off charges which
affected 2006. In total, sales of handknittings were slightly down on last year
as recovery in North America was offset by decline in South America. The
acquisition of Free Spirit was successfully completed and contributed to sales
growth in patchwork and quilting fabrics.
Investment income and finance costs
Finance costs, net of investment income, were $25.4 million (2006 - $24.9
million). Net interest payable, after including $2.4 million (2006 - $2.7
million) of interest receivable shown in investment income, was up $5.0m from
$37.0 million in 2006 to $42.0 million in 2007, largely due to $2.9 million
additional amortisation of 2004 facility fee charges, given that key bank
facilities are expected to be refinanced in 2008 well before they mature in
March 2009. The net return on pension scheme assets and liabilities increased
by $7.4 million to $23.1 million.
Tax
The tax charge of $43.2 million (2006 - $26.3 million) represents a rate of 45%
(2006 - 46%) on pre-tax profit of $95.6 million (2006 - $57.1 million).
Excluding prior year charges of $1.7 million (2006 - $7.5 million credits), the
tax rate was 43% for 2007 compared to 59% in the previous year. The Group has
significant losses available to reduce future tax payments once profitability,
in particular in Europe, improves.
Profit from discontinued operations
The $14.6 million (2006 - $3.2 million) profit from discontinued operations
largely relates to the sale of UK property.
Pension and other post-employment benefits
The Group operates a defined benefit plan in the UK and there is a similar
arrangement in the USA. The UK scheme shows a recoverable surplus of $21.9
million (2006 - $22.9 million) and the USA scheme shows a recoverable surplus of
$35.0 million (2006 - $36.9 million). These surpluses are predominantly
included in non-current assets. Employer contribution holidays for these
schemes continue to be taken based on actuarial advice.
There are various pension and leaving indemnity arrangements in other countries
(primarily in Europe) where the Group operates. The vast majority of these
schemes, in line with local market practice, are not funded but are provided in
the Group accounts and are predominantly included in current and non-current
liabilities.
Balance sheet
In the year $55.0 million was received from GPG, largely offsetting the $56.7
million of bank debt repaid. Of this sum, $29.8 million was utilised in making
payments in respect of the European Commission fines. Coats expects to
refinance its main bank facilities in 2008 and the $55.0 million will be repaid
to GPG as part of this.
Net debt (including this advance) was slightly reduced to $335.9 million (2006 -
$345.7 million), notwithstanding the payment of the fines. Net gearing
(including this advance) was 63% (2006 - 76%).
Equity shareholders' funds increased from $434.5 million to $517.8 million,
reflecting the $61.8 million net attributable profit plus net gains of $21.5
million taken directly to reserves, largely in respect of exchange differences
arising on the translation of operations with functional currencies other than
the US dollar. Minority interests fell by $1.1 million to $18.4 million largely
as a result of acquisitions.
Consolidated income statement (unaudited)
2007 2006
Unaudited Unaudited
For the year ended 31 December 2007 Notes US$m US$m
Continuing operations
Revenue 1,681.2 1,615.1
Cost of sales (1,086.8) (1,084.8)
Gross profit 594.4 530.3
Distribution costs (303.7) (299.9)
Administrative expenses (179.6) (176.4)
Other operating income 7.7 25.9
Operating profit 2 118.8 79.9
Share of profits of joint ventures 2.2 2.1
Investment income 2.6 4.4
Finance costs 3 (28.0) (29.3)
Profit before taxation 95.6 57.1
Taxation 4 (43.2) (26.3)
Profit from continuing operations 52.4 30.8
Discontinued operations
Profit from discontinued operations 14.6 3.2
Profit for the year 67.0 34.0
Attributable to:
EQUITY SHAREHOLDERS OF THE COMPANY 61.8 29.9
Minority interests 5.2 4.1
67.0 34.0
Consolidated balance sheet (unaudited)
2007 2006
Unaudited Unaudited
At 31 December 2007 Notes US$m US$m
Non-current assets
Intangible assets 270.6 260.9
Property, plant and equipment 520.7 510.8
Investments in joint ventures 16.1 16.2
Available-for-sale investments 4.0 4.9
Deferred tax assets 13.9 9.5
Pension surpluses 63.7 61.3
Trade and other receivables 23.1 27.6
912.1 891.2
Current assets
Inventories 347.4 307.6
Trade and other receivables 337.1 308.5
Available-for-sale investments 0.2 0.2
Cash and cash equivalents 7 84.6 76.4
769.3 692.7
Non-current assets classified as held for sale 2.5 4.8
Total Assets 1,683.9 1,588.7
Current liabilities
Amounts owed to parent undertaking (55.0) -
Trade and other payables (373.4) (328.3)
Current income tax liabilities (11.4) (10.6)
Bank overdrafts and other borrowings (104.6) (127.9)
Provisions (162.2) (167.1)
(706.6) (633.9)
Net current assets 62.7 58.8
Non-current liabilities
Trade and other payables (20.4) (25.9)
Deferred tax liabilities (17.3) (10.7)
Borrowings (260.9) (294.2)
Retirement benefit obligations:
Funded schemes (1.8) (1.0)
Unfunded schemes (101.6) (112.4)
Provisions (39.1) (56.6)
(441.1) (500.8)
Total liabilities (1,147.7) (1,134.7)
Net assets 536.2 454.0
Equity
Share capital 4.2 4.2
Share premium account 412.1 412.1
Hedging and translation reserve 44.4 17.0
Retained profit 57.1 1.2
EQUITY SHAREHOLDERS' FUNDS 5 517.8 434.5
Minority interests 5 18.4 19.5
Total equity 5 536.2 454.0
Consolidated cash flow statement (unaudited)
2007 2006
Unaudited Unaudited
For the year ended 31 December 2007 Notes US$m US$m
Cash inflow/(outflow) from operating activities
Net cash inflow generated by operations 6 146.1 117.8
Interest paid (40.4) (37.0)
Taxation paid (35.8) (35.8)
Net cash generated from operating activities 69.9 45.0
Cash inflow/(outflow) from investing activities
Dividends received from associates and joint ventures 2.3 2.3
Acquisition of property, plant and equipment and intangible assets (68.8) (78.3)
Disposal of property, plant and equipment and intangible assets 25.9 60.2
Acquisition of financial investments - (0.9)
Disposal of financial investments 0.2 8.6
Acquisition of subsidiaries (9.8) (10.7)
Disposal of subsidiaries 2.0 3.2
Net cash absorbed in investing activities (48.2) (15.6)
Cash (outflow)/inflow from financing activities
Dividends paid to minority interests (2.7) (4.4)
Amounts received from parent undertaking 55.0 -
Decrease in debt and lease financing (56.7) (33.3)
Net cash absorbed in financing activities (4.4) (37.7)
Net increase/(decrease) in cash and cash equivalents 17.3 (8.3)
Net cash and cash equivalents at beginning of the year 50.1 57.1
Foreign exchange gains on cash and cash equivalents 0.8 1.3
Net cash and cash equivalents at end of the year 7 68.2 50.1
Reconciliation of net cash flow to movement in net debt
Net increase/(decrease) in cash and cash equivalents 17.3 (8.3)
Cash outflow from change in debt and lease financing 56.7 33.3
Change in net debt resulting from cash flows 74.0 25.0
New finance leases - (0.3)
Other (6.8) (3.9)
Foreign exchange (2.4) (3.2)
Decrease in net debt 64.8 17.6
Net debt at start of year (345.7) (363.3)
Net debt at end of year 7 (280.9) (345.7)
Consolidated statement of recognised income and expense (unaudited)
2007 2006
Unaudited Unaudited
For the year ended 31 December 2007 Notes US$m US$m
(Losses)/gains on cash flow hedges (3.7) 2.2
Exchange differences on translation of foreign operations 34.4 17.0
Actuarial losses in respect of retirement benefit schemes (4.7) (9.4)
Tax on items taken directly to equity (1.1) (0.6)
Net income recognised directly in equity 24.9 9.2
Profit for the year 67.0 34.0
Transferred to profit or loss on cash flow hedges (3.3) (2.8)
Total recognised income and expense for the year 5 88.6 40.4
Attributable to:
EQUITY SHAREHOLDERS OF THE COMPANY 83.3 36.6
Minority interests 5.3 3.8
88.6 40.4
Notes
1 Basis of preparation
Coats Group Limited is incorporated in the British Virgin Islands. It does not prepare consolidated statutory
accounts and therefore the financial information contained in this announcement does not constitute full
financial statements and has not been, and will not be, audited.
The financial information for the year ended 31 December 2007 has been prepared in accordance with the
recognition and measurement requirements of International Financial Reporting Standards ("IFRS") endorsed by the
European Union and the accounting policies adopted have been consistently applied to the financial information
presented for the year end 31 December 2006.
Coats Group Limited follows the accounting policies of its ultimate parent company, Guinness Peat Group plc.
The principal exchange rates (to the US dollar) used are as follows:
2007 2006
Average Sterling 0.50 0.54
Euro 0.73 0.79
Year end Sterling 0.50 0.51
Euro 0.68 0.76
2 Operating profit is stated after charging/(crediting):
2007 2006
Unaudited Unaudited
US$m US$m
Exceptional items:
Reorganisation costs and impairment of property, plant and equipment 40.0 51.6
Profit on the sale of property (7.1) (21.3)
Foreign exchange losses 6.4 12.2
Total 39.3 42.5
3 Finance costs
2007 2006
Unaudited Unaudited
US$m US$m
Interest on bank and other borrowings 44.4 39.7
Net return on pension scheme assets and liabilities (23.1) (15.7)
Other 6.7 5.3
Total 28.0 29.3
4 Taxation
2007 2006
Unaudited Unaudited
US$m US$m
UK taxation based on profit for the
year:
Corporation tax at 30% 7.6 23.0
Double taxation relief (7.6) (23.0)
Total UK taxation - -
Overseas taxation:
Current taxation 42.3 39.2
Deferred taxation (0.8) (5.4)
41.5 33.8
Prior year adjustments:
Current taxation - (5.9)
Deferred taxation 1.7 (1.6)
1.7 (7.5)
43.2 26.3
5 Reconciliation of equity
Equity Minority Total
shareholders' interest equity
funds
Unaudited Unaudited Unaudited
US$m US$m US$m
At 1 January 2007 434.5 19.5 454.0
Total recognised income and expense for the year 83.3 5.3 88.6
Dividends paid - (2.6) (2.6)
Other - (3.8) (3.8)
At 31 December 2007 517.8 18.4 536.2
6 Reconciliation of operating profit to net cash inflow generated by
operations
2007 2006
Unaudited Unaudited
US$m US$m
Operating profit 118.8 79.9
Depreciation 59.3 55.8
Amortisation of intangible assets (computer software) 8.2 7.3
Reorganisation costs and impairment (see note 2) 40.0 51.6
Other exceptional items (see note 2) (0.7) (9.1)
Increase in inventories (22.5) (6.1)
(Increase)/decrease in debtors (14.6) 9.8
Increase/(decrease) in creditors 40.1 (9.5)
Provision movements (46.2) (14.7)
Other non-cash movements 8.3 7.3
Net cash inflow from normal operating activities 190.7 172.3
Net cash outflow in respect of reorganisation costs and other exceptional (44.6) (54.5)
items
Net cash inflow generated by operations 146.1 117.8
7 Net debt
2007 2006
Unaudited Unaudited
US$m US$m
Cash and cash equivalents 84.6 76.4
Bank overdrafts (16.4) (26.3)
Net cash and cash equivalents 68.2 50.1
Other borrowings (349.1) (395.8)
Total net debt (280.9) (345.7)
8 Balance sheet consolidated by Guinness Peat Group plc (unaudited)
The balance sheet consolidated by Guinness Peat Group plc (GPG) as at 31 December 2007 differs from that
disclosed as follows:
Coats Coats Group Included in
Limited GPG
Group US$:GBP at GPG fair value Consolidated
Limited 0.5025 adjustments balance sheet
Unaudited Unaudited Unaudited Unaudited
US$m £m £m £m
Intangible assets 270.6 135 14 149
Other non-current assets 641.5 322 - 322
Current assets 769.3 387 - 387
Non-current assets classified as held for 2.5 1 - 1
sale
Total assets 1,683.9 845 14 859
Current liabilities (706.6) (355) - (355)
Non-current liabilities (441.1) (222) - (222)
Minority interests (18.4) (9) - (9)
Equity shareholders' funds 517.8 259 14 273
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