AGM Chairman's Presentation
GUINNESS PEAT GROUP PLC
("GPG" or the "Company")
Announcement
Annual General Meeting: Chairman's Presentation
GPG announces that at its Annual General Meeting ("AGM") to be held in Auckland, New Zealand on 23 May 2013 at 9.30 a.m., the Chairman will make the following presentation, the text of which is set out below.
In addition a video presentation on the Coats business will be made by Paul Forman, CEO of Coats. A copy of that presentation is available on the GPG website.
Fellow shareholders, before proceeding to the formal business of the Meeting, I will say a few words about the Company. I will show a video presentation made by Paul Forman, Chief Executive of Coats, which will further update shareholders on the Coats business after my address and before the formal business.
In updating this Annual General Meeting on GPG I would like to concentrate on five areas:
1. A reminder of what we said we would do and what we have achieved in sell down
2. A summary of where Coats has been and what has been done since 2011
3. Cost reduction and progress made
4. Pensions, including the review by the UK Pensions Regulator
5. New Chair and Board makeup going forward
1. Sell Down
a) Introduction
On 11 February 2011, a newly constituted GPG Board announced a strategy to realise value for GPG shareholders. The main constituent parts of that strategy were outlined as follows:
· GPG to undertake an orderly value realisation of GPG's investment portfolio over time
· As part of the orderly value realisation, GPG's investment portfolio may be reduced to the point where an investment in GPG becomes an investment in Coats
· Cash proceeds from the orderly realisation of investments to be used to pursue capital management initiatives
A general timeframe of up to 3 years to complete the above strategy was referenced at the time.
Two and a quarter years on from that statement, substantial progress has been made in terms of executing this strategy.
b) Investment Portfolio Realisation Strategy
Turning firstly to the GPG investment portfolio value realisation strategy.
At December 2010, shortly before the announcement of the revised Group strategy to realise value, GPG had an investment portfolio with a market value of approximately £677 million, consisting of some 55 investments in listed and unlisted businesses in jurisdictions including Australia, New Zealand and the United Kingdom.
It was never intended to embark on a fire sale of the investment portfolio, so considerable time was invested at the commencement of the wind-down programme to formulate strategic exit paths and, where possible, do so in cooperation with GPG's underlying investee companies.
Most of GPG's investment portfolio - in value terms - consisted of significant shareholdings in illiquid companies. Volatile and generally poor equity market conditions over the realisation period presented additional challenges.
Overall, the value realisation programme has progressed well and met the expectations of the GPG Board. Save for one material remaining listed investment, the entire investment portfolio has now been realised for cash.
In the 2013 year to date, sales of the Group's investments in AVJennings, Capral, CIC, PrimeAg Australia, Tandou and Tourism Property Investment Group, the bulk of the Group's investment in Ridley Corp. and a surplus property associated with a former subsidiary, Gosford Quarry Holdings, have been completed. Furthermore, the Group received on 12 April 2013 NZ$40.1 million from Tower as part of that company's own return of capital to shareholders.
In total, realised and expected investment portfolio sale and cash distribution proceeds for the 2013 calendar year to date are £164 million.
Added to realisations achieved in the previous financial years, realised and expected cash proceeds from the investment portfolio realisation programme since 1 January 2011 are £622 million.
The remaining GPG investment portfolio - which has a current market value of approximately £70 million - is principally comprised of the Group's 33.6% shareholding in Tower Limited.
In relation to Tower, it is noteworthy that significant progress has also been made in terms of maximising shareholder value with respect to that specific investment. Following the sale of its Health business in 2012, Tower also announced on 2 April 2013 and 10 May 2013 respectively the sales of its Investment business for NZ$79 million and most of its Life Insurance business for NZ$189 million. Tower has confirmed that its half year results presentation on 28 May 2013 will include details of how it intends to apply the proceeds of these transactions, including the amount of capital to be returned to shareholders. We continue to work closely with the Tower board to secure an outcome which is in the best interests of all Tower shareholders, with whom we have a completely aligned interest.
c) Cash and Capital Management
As a consequence of the investment portfolio realisation programme, GPG has been able to complete a capital management programme that comprised an initial capital return of £80 million, an ordinary dividend of £12 million and a subsequent on-market buy-back of £70 million.
As at the current date, GPG still maintains a very substantial cash holding - in the order of £325 million excluding the anticipated dividend and share sale proceeds relating to CIC of £37 million. This balance is being managed through the Group's London office under guidance from the Board. Steps are being taken to ensure the Group avoids jurisdictional as well as counter-party concentration risk. As reported in the recent Interim Management Statement the Board has also chosen to diversify its currency risk by holding a portion of the Group's cash in USD.
I will discuss later the constraints which pension issues have placed on further capital management activity at present.
2. Now moving on to Coats
· As many of you are aware, Coats is the world's leading industrial thread and consumer textile crafts business.
· It was established in Scotland in the 1750s and became the UK's first truly international company.
· It now spans almost every country in the world, and has more than 20,000 people working across six continents - there is even a Coats Land in Antarctica.
· To give you a feel for the global scale of Coats' activities:
o 1 in 5 garments around the world is held together using Coats' thread
o 75 million car airbags are made using Coats' thread every year
o Coats produces enough yarn to knit 65 million scarves a year
o In 3½ hours Coats makes enough thread to go to the moon and back
o Coats is the second largest and fastest growing global zip manufacturer
o 1 million teabags using Coats' thread are brewed every 10 minutes
· You will shortly hear and see more about Coats' business and strategy for growth from Coats' chief executive Paul Forman via a film - he apologises that he couldn't be here today in person.
· But I want to highlight some key aspects of Coats' business and performance.
· Coats delivered a solid performance in difficult market conditions in 2012, and this year has seen a good first quarter.
· The current management team, led by Paul, has been working hard to ensure Coats is well positioned to build on its strong business fundamentals in order to maximise shareholder and investor return.
· The business has a clear strategy for building on its sound foundations, which it has developed since 2011 and which you will hear in more detail shortly, but in brief:
o Coats has a very strong base as a global leader in its markets with a robust business model - it is three times larger than its nearest competitor, and in 2012 generated revenues of US$1.7 billion
o It has a clear growth strategy based around three clearly articulated and internally well understood goals to be: the leading global player in textile crafts; the leading global player in speciality threads and yarns; and the leading value added partner to the global apparel and footwear industries.
o The business has a soundly invested asset base of factories, warehouses and distribution centres across the world - its global footprint is unrivalled by its competitors
o It is a business that is both cash generative and has the potential for margin growth
o Coats is fortunate to have an experienced and focused management team that has been working, particularly over the last two years, to ready the business for the change in structure, with strategic support from GPG's management team.
· A bit more detail - Coats operates on a truly global basis - it has a presence in all major markets. It has its own strong brands - Sylko thread; Milward needles and haberdashery; Rowan, Red Heart and Paton's yarns may be familiar to you.
· The business also has close and long standing relationships with the world's leading footwear and apparel brands - like adidas, Timberland, Marks and Spencer, Abercrombie & Fitch, Columbia and Lee jeans to name a few - and with leading retailers such as Walmart in the US, and Marks and Spencer and Karstadt in Europe. These relationships are deeply embedded over many years and very hard for competitors to replicate, which gives further strength to Coats' business model.
· Coats is focussed on profitable and cash generative growth, and continues developing business opportunities by:
o providing complementary and value added products and services to the apparel and footwear industries to increase efficiency and help manufacturers streamline their operations;
o extending the crafts offer into new markets and online - the growth in digital sales following investment in digital platforms and marketing has been remarkable. Red Heart yarn (a US brand that we have recently launched into Western Europe) website traffic has grown from under 600 thousand visitors in 2010 to nearly 14 million in 2012, while online sales grew from US$562,000 to US$1.8 million. And it has continued this trajectory;
o Coats also has a very focused global R&D team which is busy applying innovative techniques to develop products in new areas such as tracer threads to aid in brand protection, aramids and fibre optics;
o in addition to a focus on sales growth, there have been a number of cost management initiatives implemented across the business through the deployment of tools such as the Six Sigma process for continuous improvement, and the recent and successful restructuring of the cost base for the Crafts business across Europe.
· I won't spoil Paul's forthcoming update by saying more at this point, but of course will be happy to take questions at the end.
It is important to add that getting Coats to this point has not been a quick or easy process. Since GPG acquired full ownership of the business substantial capital investment has been made in Coats. More recently Paul, his team and independent Coats directors have, under the strategic supervision of GPG as Coats' sole shareholder, made major changes to the way in which Coats operates, and it is today a much more efficient business in every sense than it was in 2011.
Coats has in place a business plan which is based on both top line growth and on-going improvement in operating costs and cash generation. This plan is designed to deliver the profitability necessary to support Coats as an independent entity going forward. While there has been no finality reached on the capital structure of Coats, the intention of the Board is to distribute cash to GPG shareholders rather than to retain cash to unnecessarily support the Coats balance sheet. A strong cash outcome during the current year will assist this considerably.
3. Now moving on to Cost reduction
Another area which has been a focus both for the Board and for shareholders has been the overhead costs associated with the wind down of GPG. GPG's major cost has been and continues to be its staff. At the time of re-setting the Group strategy the Board concluded that to maximise shareholder value it was critical to secure the continuing involvement of key personnel, particularly those responsible for the asset realisation programme. A large part of the reported costs arising since then has related to the necessary incentive plans for retained staff and redundancies of departing staff. The current Board has had to take these steps within the context of the contracts and employment arrangements put in place by the preceding Board.
GPG had developed a very complex structure in many respects, had what could at best be described as idiosyncratic governance, and the task of unravelling this has been costly.
When in early 2011 the process commenced, GPG had a headcount of 30, which comprised 2 executive directors, 6 investment professionals, 11 employees dealing with finance, company secretarial and administration tasks and 11 support staff. By the middle of 2011 the executive director roles had been eliminated and by December 2012 the permanent workforce had been reduced to 15. We are planning further significant changes between now and the year end. However, one impact of the review being performed by the Pensions Regulator is that certain corporate functions at the GPG level will be retained beyond our intended timescale in order to manage both that process and GPG's capital management initiatives.
GPG currently operates from offices in London, Sydney and Perth. The London office has been partly sub-let to a third party tenant since June 2012, the Perth satellite office will close by half year and we are actively marketing the offices in Sydney.
The other major area of variable cost is advisors' fees. The complex nature of the current situation means that specialist advice is necessary and brings with it a cost. However, I can assure shareholders that use of advisors is closely monitored by the Board.
Steps are continuously being taken to simplify the Group and the way we work. The near completion of the asset realisation programme will help and will enable further progress to be made in reducing costs.
We are also moving to reduce the costs of governance of the Board of GPG, which I will discuss shortly.
4. Now moving on to Pensions
· The GPG Group has three UK pension schemes, the Coats Pension Plan, the Brunel Holdings Pension Scheme and the Staveley Industries Retirement Benefits Scheme.
· As we announced on 10 April 2013, GPG received correspondence from the UK Pensions Regulator ("TPR") in relation to the Coats and Brunel schemes. TPR is undertaking a review into whether financial support should be provided to those schemes under the provisions of the UK Pensions Act 2004. It is reasonable to expect TPR will extend this investigation to Staveley as well. GPG will of course be fully cooperating with TPR in all aspects of the investigation.
· As you would expect, the Board is fully engaged in this process and has established a sub-committee to focus, with the Executive management, on reaching a satisfactory outcome. We have also started engaging with TPR, establishing contact and having an introductory meeting. These exchanges have been constructive and we have dates agreed for further dialogue in the coming months.
· The review is in its early stages and centres on whether there are grounds for TPR to compel GPG to provide financial support to the Schemes. To do this, TPR has to demonstrate that the participating employers are "insufficiently resourced" and that it is reasonable to exercise its moral hazard powers.
· I don't want to get into the technical aspects of the calculations or indeed how reasonableness is defined for financial support at this time. I have however asked the Executive team to arrange a conference call for investors and analysts to cover any such matters. We will look to arrange this for late June.
· If however, TPR concludes it does have grounds, it could issue a Financial Support Direction ("FSD") and require GPG to make an offer of support to the relevant scheme. If TPR considers the offer is not sufficient, it has statutory powers to set the level of support required. We believe that at this stage TPR is focused on investigating whether there are grounds for imposing FSDs. TPR did also indicate at the recent introductory meeting that it might broaden its investigation to consider Contribution Notices ("CNs"). TPR may impose a CN on GPG or persons or other entities connected or associated with the Scheme's sponsoring employers if TPR considers the person has been party to an act or deliberate omission in the past (subject to certain time limits) that has caused, in broad terms, material detriment to that scheme.
· The key issues at play here are therefore: do we have an exposure to the Schemes and if so how much; what is the process and how long could it take to reach a conclusion; and what are the implications for GPG and future cash returns. Taking each in turn:
· Is there an exposure?
o Firstly I want to make it clear, it has always been intended that the obligations to the Schemes are met. The only question comes as to whether GPG itself has the obligation or whether it is owed by companies further down the structure.
o To date, the Board's advice has been that it would not be reasonable for TPR to require GPG to support the Coats scheme or the Staveley and Brunel schemes over and above the £124 million already expected to be retained by the Group for the Staveley and Brunel schemes.
o As is normal in the face of such an investigation, the Board has initiated an independent review of the advice it has received to date and has asked Herbert Smith Freehills ("HSF") and KPMG to lead this. The Board has also asked HSF and KPMG to work alongside our existing advisers to provide legal and financial advice during the investigation process. It is expected that their review will be complete by end of June/beginning of July.
· If so how much?
o I cannot give any specific guidance on quantum until the independent review has been completed. I can however set some boundaries;
o the best outcome would be that no further support over and above the £124 million is required;
o although we await the outcome of the independent review, we are currently advised that the worst outcome were there to be FSDs (as opposed to CNs) imposed the exposure for relevant entities could be substantial, but is unable to be quantified at this time. Our advice continues to be robust, and so we believe that the likelihood of this outcome for FSDs and CNs is remote but I cannot deny that it is possible. The independent review now being conducted will help further assess any exposure and GPG's response.
· What is the process and how long could it take?
o The formal process involves initially TPR investigating whether there is a case to impose a FSD. If it believes there is a case, there will be an opportunity for the company to make its submissions. TPR will then decide whether to direct that financial support be put in place. The company has the right to require an independent Tribunal to review this decision. The Tribunal can require TPR to change its decision.
o Despite TPR having these powers since 2005, they have rarely been used and as such there is little precedent available. However these investigations do not move quickly and to follow the process outlined above could take many months if not years.
o There is however the opportunity to reach an agreed settlement at any stage and indeed most cases are concluded in this way.
o The Board is considering all options at this point and will be making a decision as to how to proceed after completing the independent review referred to earlier.
· Implications for GPG and capital returns:-
o As you are aware, we have made good progress in realising value from our investment portfolio. On completion of this process, we expect to have around £390 million of cash available.
o We have already outlined the need to retain £124 million for the two GPG Schemes and announced on 25 October 2012 that the transition plan to New Coats will include a thorough review of the appropriate capital structure for New Coats as a standalone listed company.
o It has always been our intention that as much of the remaining cash as possible is returned to our shareholders.
o However, as indicated in our announcement on 10 April 2013, capital management initiatives have been suspended following TPR correspondence. Until we are clearer on TPR's position and pending the outcome of the independent review, this is the right approach.
· We recognise that this process has introduced an unwelcome level of uncertainty into the transition and capital return process. You can be assured, however, the Board is very focused on the matter and we are committed to ensuring shareholders are fully updated as to the process and its implications.
5. Turning now to the new Chair and Board makeup going forward
For such time as the GPG Board continues to need to undertake matters such as managing the pension investigations and seeking resolution with TPR, determining the capital structure of New Coats and remaining cash distributions, it is expected that a separate GPG Board will remain in place but its workload, which is likely to be reduced, will be scoped and recosted to reduce costs. During this period it is intended that the Coats Board will appoint a new Chairman and re-constitute its Board to reflect the needs of the business. We have progressed appointment of a new Chairman to the point that we have a group of very strong candidates with whom we are having discussions.
Once the above actions are completed, GPG's remaining investments are sold and capital management procedures concluded, it remains the Board's expectation that there will be no need for separate GPG and Coats Boards.
Conclusion
This has been a complex process and we have met our original goals in terms of the matters which are under our direct control.
We are aware of some confusion about the nature of an investment in GPG as matters now stand.
The value of a share in GPG should be considered as follows:
- the share which a holding represents of the cash held in GPG at the present time less any requirements on that cash for the on-going operation of GPG, less any contribution which may be required to support any of the pension schemes, less any support which may be required for the Coats balance sheet;
- the value which is generated from the final realisation of our equity in Tower; and
- the on-going value of Coats which remains in the ownership of GPG shareholders so long as their shares are retained.
To be clear, while one aspect of our work to get full value recognition for Coats involves promotion of the business in the London market and others, it is the intention that the listing will be maintained in New Zealand and in Australia so long as substantial portions of the equity are held here.
I thought it would also be appropriate to indicate at this time, that the 2014 AGM is likely to be held in London.
Thank you for your understanding and support for the Company.
That concludes my opening comments. I would now like to show the video presentation made by Paul Forman, Chief Executive of Coats.
Chris Healy
Company Secretary
Guinness Peat Group plc
Tel: +44 20 7484 3370
23 May 2013
Enquiry details are:
New Zealand and Australian media: Geoff Senescall on: +64 9 309 5659
UK media: Kevin Smith on: +44 20 7282 1054
This information is provided by RNS
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