Coats Group Final Results
Guinness Peat Group PLC
26 February 2007
Guinness Peat Group plc
The following unaudited consolidated results of Coats Group Limited ("the Group") for the year ended 31 December
2006 are released by Guinness Peat Group plc ("GPG") for information only.
Richard Russell
Company Secretary
Guinness Peat Group plc
27 February 2007
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 2006
Financial summary
2005
2006 Unaudited
Unaudited Restated*
*
US$m US$m
Revenue 1,615.1 1,636.7
Operating profit before reorganisation, impairment and other exceptional 122.4 126.5
items
(see note 2)
Operating profit 79.9 99.8
Profit before taxation 57.1 84.2 **
Net profit attributable to equity shareholders 29.9 58.3 **
Net debt 345.7 363.3
Net gearing 76% 86%
• Improved performance from Industrial Thread offset by lower Crafts sales
• Asia like for like sales growth of 12%
• Restructuring of Industrial Thread near completion
* See note 1
** Restated, see note 1
CHAIRMAN'S STATEMENT
Results
Coats overall performance in 2006 was similar to 2005, however at divisional
level a major improvement in industrial thread was offset by weakness in the US
handknittings market.
Pre-exceptional operating profit (before reorganisation, impairment and other
exceptional items) was $122.4 million compared to $126.5 million in 2005. This
reflects a 2% improvement in second half profits compared to previous year after
an 8% decline in the first half. Lower sales of fancy yarn in North America
continued to be a major factor affecting crafts profitability but in the second
half this was exacerbated by generally weak demand for crafts in Europe. In
contrast, industrial sales and profit margins continued the improvement seen in
the first half.
In addition to the impact of lower sales, crafts profits were impacted by
inventory write-downs and other one-off charges. The year-on-year decline was
magnified by the build up of North American retailers' handknittings stocks
which had benefited 2005 but which was reversed in 2006. On a more positive
note, the industrial business - which makes up 64% of Coats' sales and where the
majority of recent investment and reorganisation has been directed - made
substantial progress as a result of productivity gains in Western markets and
sales growth in Asia.
The individual results for crafts and industrial over the last three years
provide an additional perspective on the current year's performance:
2006 2005 2004
External sales $m
Crafts 585.0 640.5 590.4
Industrial thread & zips 1030.1 996.2 987.7
Total 1,615.1 1,636.7 1,578.1
Like-for-like sales growth
Crafts -12% +3% +8%
Industrial thread & zips +2% -1% -
Total -3% +1% +3%
Pre-exceptional operating profit $m
Crafts 18.8 58.0 41.2
Industrial thread & zips 103.6 68.5 49.3
Total 122.4 126.5 90.5
Pre-exceptional operating margin
Crafts 3% 9% 7%
Industrial thread & zips 10% 7% 5%
Total 8% 8% 6%
Net earnings attributable to equity shareholders fell by $28.4 million to $29.9
million due to a $42.5 million negative swing on foreign exchange gains /
losses, which was only partially offset by lower reorganisation costs ($51.6
million compared to $62.4 million) and higher profits on property disposals
($21.3 million compared to $17.2 million).
EBITDA (defined as pre-exceptional operating profit before depreciation and
amortisation) of $185.5 million was 2% ahead of the previous year's total of
$182.5 million. Net operating cash flow before reorganisation costs remained
strong at $172.3 million compared to $231.2 million in 2005, which included an
exceptional reduction in net working capital of $55.4 million. Although the
year-end working capital position was slightly above the previous year,
underlying management of working capital continued to improve with the average
working capital / sales ratio falling to 22% from 24% in 2005.
Spending on reorganisation and capital projects remained high at $132.8 million
(2005 - $135.6 million), but including the realisation of $60.2 million from the
sale of surplus property (2005 - $56.6 million) this was comfortably covered by
internally generated cash flow. Net debt fell by $17.6 million to $345.7
million.
Investment, reorganisation and disposals
Investment in new plant and systems amounted to $78.3 million (2005 - $81.3
million). The bulk of investment was directed towards upgrading existing
operations with the balance consisting of additional capacity to meet growth in
Asia. Total spending in Asia accounted for approximately half of the total.
In cash terms, reorganisation spend of $54.5 million was level with 2005 but
this partly reflected the cash outflows on projects for which provisions were
already established and the P&L charge of $51.6 million was significantly lower
than the previous year's total of $62.4 million. Approximately 70% of the charge
in 2006 was directed towards site closures and overhead reduction in Europe.
Total numbers employed in the Group fell by 4% to 23,781 at the end of the year
and over 80% of employees are now located in low cost markets. As in previous
years, reorganisation cash outflows were covered by proceeds from the sale of
properties, which in most cases had become surplus as a result of the Group's
reorganisation program.
Spending on acquisition of businesses and minority shareholdings in existing
subsidiaries, net of disposals, amounted to $7.5 million (2005 - net inflow of
$5.4 million). The net total covers several relatively small transactions, the
most significant of which was the acquisition of HP, a crafts wholesaler in
Denmark with annual sales of approximately $12 million. Once fully integrated,
HP will complement last year's acquisition of Almedahls and strengthen Coats'
position as the leading crafts business in Scandanavia.
Prospects
The consistent progress achieved by the industrial business over the last three
years is encouraging and further improvement is planned - both from cost
reductions in Western markets as the benefits from recent investment and
reorganisation are fully delivered, and also from sales growth in Asia. Global
demand - which is mainly dependent on consumer purchases of clothing and
footwear - is expected to remain reasonably firm but certain regions, notably
Europe and South America, will continue to be impacted by growth in imports from
Asia. Trading conditions in all regions remain highly competitive.
The outlook for handknittings - which accounts for just under 40% of Coats
crafts sales of $585.0 million - is mixed. Although underlying consumer demand
for classic and basic yarns remained relatively stable during 2006, the decline
in fancy yarns impacted retailer confidence in the whole handknittings category
and there has to be some uncertainty over the level of 2007 sales. In any event
there should be some recovery in profitability due to the reduction of
mark-downs and other one-off charges which affected 2006.
In other crafts categories, demand has also been weaker but opportunities to
take full advantage of Coats' overall market leadership position are being
pursued. New ranges of consumer sewings, crochet and embroidery are being
developed which will form the basis of a harmonised global offer in contrast to
the largely country-specific ranges which currently make up the majority of
sales. Not only should this result in more efficient supply chains, but the more
focused offer will enable greater levels of marketing support to be concentrated
on growing market share. However, the benefits of these projects are unlikely to
come through until 2008/9.
The Group's program of relocating and upgrading industrial thread capacity has
been successful and has made a substantial contribution to the improvement in
industrial profitability. Given the nature of the industry, it is likely that
there will continue to be an ongoing need to close or downsize plants in certain
countries while expanding in others but reorganisation costs in 2007 and beyond
are expected to be lower than the average of the last three years. Going
forward, a greater proportion of reorganisation projects will be related to
reduction of selling and administration overheads as well as reorganisation
within the crafts business. At the same time, after the catch-up investment of
the last three years, it is anticipated that net capital expenditure will tend
to move closer towards the level of depreciation.
There have been no significant developments in the European Commission
investigation since the half year. During 2007, the outcome of the Commission's
investigation into European fasteners - the last outstanding part of the general
investigation into thread and haberdashery markets which began in 2001 - should
be announced. In addition, the Court of First Instance is expected to rule on
Coats' appeal against the fine levied in 2004 in respect of needles. As stated
in previous reports, it is believed that any anticipated eventual payment of
fines is adequately covered by existing provisions.
Overall, the Board remains confident of the potential for improvement in Coats
results as the heavy restructuring program of the last three years continues to
deliver benefits. The industrial business should continue to gain from its
strong position in the high growth markets of Asia. In addition, its
profitability in Europe and North America will be less constrained by excess
capacity and uneconomic units although competitive pressures remain high,
particularly in zips. The crafts business should be able to improve
profitability in the medium term, although the extent of recovery in the short
term will depend on the level of handknittings demand as well as the speed at
which the new ranges in other crafts categories can be rolled out.
Finally, in terms of net earnings, the reduced level of reorganisation cost
should begin to allow the improvements in operating profit achieved over the
last three years to flow through to the bottom line.
Gary Weiss
Chairman
27 February 2007
OPERATING REVIEW
Sales by region
2005 Exchange Acquisitions / 2005 2006 Like-for-like
retranslation * disposals like-for-like reported increase/
$m $m $m $m $m (decrease) %
External sales
Asia and Rest of world 463.9 (3.4) 460.5 516.7 +12%
Europe 545.4 8.4 11.5 565.3 525.3 -7%
North America 431.3 1.5 432.8 363.5 -16%
South America 196.1 15.1 211.2 209.6 -1%
Total 1,636.7 21.6 11.5 1,669.8 1,615.1 -3%
*Impact of restating 2005 figures at 2006 exchange rates.
Asia and Rest of world
Sales +12%
Coats' operations in Asia are mainly focused on industrial thread with sales and
profits growing strongly throughout the region, reflecting the benefit of
relationships with global retailers and brand owners as well as the continued
growth in apparel exports. In addition to the impact from higher sales volumes,
margins benefited from the ramping up of production at the new plants in China.
Europe
Sales -7%
Sales of industrial thread and zips in total continued to suffer from net
customer migration, although there were individual growth markets within Eastern
Europe. Fashion trends also had a negative impact on zip sales compared to the
previous year. Industrial sales in total fell by 8% on a like-for-like basis,
but despite this the business moved into profit as a result of reorganisation
benefits although margins remained well below Group targets.
Crafts sales, which make up approximately half of the total sales in the region,
fell by 6% once the benefit from exchange rates and acquisitions is excluded.
Handknitting sales weakened in the second half after a relatively good first
half, while other categories were weaker throughout the year. Along with the
reduction in sales, transitional costs due to the move to a new supply chain had
a significant impact on operating profit which for the region as a whole offset
the gains made by the industrial business.
North America
Sales -16%
Industrial sales fell by 3%, reflecting a relatively strong performance in a
region which is still experiencing net customer migration. More importantly,
after several years of losses the business moved into profit as benefits from
earlier reorganisation and investment finally came through. However margins
remained well below Group targets.
Crafts sales, as in Europe, account for approximately half of the regional total
but handknittings have a greater weight in the product mix. Mainly as a result
of the weakness in the fancy yarns segment, full year North American crafts
sales fell by 26%. Although second half crafts sales were not as weak as the
first half (which fell by 35%), inventory write-downs and other one-off charges
led to a substantial reduction in regional profits.
South America
Sales -1%
Industrial sales continued to be under pressure from the strengthening of local
currencies against the US dollar and consequent increase in import penetration.
However margins were protected by improvements in productivity.
The crafts business in South America represents approximately 40% of total sales
in the region. In contrast to Europe and North America, crafts sales and profits
for the full year increased slightly but demand trends in the second half were
noticeably weaker than in the first half.
Overall, regional profit was slightly up on essentially flat sales.
Investment income, finance costs
Finance costs, net of investment income, were $24.9 million compared to $17.2
million in the previous year, which included foreign exchange gains of $11.8
million. The Group's borrowings are now largely denominated in US dollars, with
remaining local currency debt in general covered by assets in the same currency.
Net interest payable, after including $2.7 million of interest receivable shown
in investment income, was $37.0 million, in line with the previous year, whilst
the credit from the net return on pension scheme assets and liabilities
increased by $7.4 million to $15.7 million.
Tax
The tax charge of $26.3 million (2005 - $39.5 million) represents a rate of 46%
(2005 - 47%) on pre-tax profit of $57.1 million (2005 - $84.2 million). The
current year's charge benefited from a $7.5 million credit on prior year
adjustments whereas the charge in 2005 included an additional charge of $14.8
million. Excluding those adjustments, the tax rate was 59% for 2006 compared to
29% in the previous year. The exceptionally high rate in 2006 was mainly due to
an increase in non-deductible exceptional costs.
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 $22.9
million (2005 - $27.2 million) and the USA scheme shows a recoverable surplus of
$36.9 million (2005 - $28.9 million). The UK and USA surpluses are included in
non-current assets. During the year the UK scheme's triennial valuation was
completed and as a consequence an employer contribution holiday continues to be
taken.
There are various pension and leaving indemnity arrangements (primarily in
Europe) where the Group operates. The vast majority of these schemes, in line
with local market practice, are not "funded" but are fully provided in the Group
accounts and are predominantly included in current and non-current liabilities.
Balance sheet
Equity shareholders' funds increased from $397.9 million to $434.5 million,
reflecting the $29.9 million net attributable profit plus net gains of $6.7
million taken directly to reserves. Minority interests fell by $7.2 million to
$19.5 million largely as a result of acquisition. In conjunction with the
reduction in net debt from $363.3 million to $345.7 million, net gearing was
reduced from 86% to 76%.
Consolidated income statement (unaudited)
2006 2005
Unaudited Unaudited
Restated*
For the year ended 31 December 2006 Notes US$m US$m
Continuing operations
Revenue 1,615.1 1,636.7
Cost of sales (1,084.8) (1,084.0)
Gross profit 530.3 552.7
Distribution costs (299.9) (306.2)
Administrative expenses (176.4) (165.6)
Other operating income 25.9 18.9
Operating profit 2 79.9 99.8
Share of profits of joint ventures 2.1 1.6
Investment income 4.4 7.0
Finance costs 3 (29.3) (24.2) *
Profit before taxation 57.1 84.2
Taxation 4 (26.3) (39.5)
Profit from continuing operations 30.8 44.7
Discontinued operations
Profit from discontinued operations 3.2 15.0
Profit for the 34.0 59.7
year
Attributable to:
EQUITY SHAREHOLDERS OF THE COMPANY 29.9 58.3
Minority interests 4.1 1.4
34.0 59.7
* Finance costs have been restated following an amendment to IAS 21 (see note 1).
Consolidated balance sheet (unaudited)
2006 2005
Unaudited Unaudited
Restated*
At 31 December 2006 Notes US$m US$m
Non-current assets
Intangible assets 260.9 257.5
Property, plant and equipment 510.8 482.5
Investments in joint ventures 16.2 16.4
Available-for-sale investments 4.9 3.5
Deferred tax assets 9.5 4.6
Pension surpluses 61.3 57.5
Trade and other receivables 27.6 23.4
891.2 845.4
Current assets
Inventories 307.6 286.9
Trade and other receivables 308.5 302.7
Available-for-sale investments 0.2 8.8
Cash and cash equivalents 7 76.4 77.8
692.7 676.2
Non-current assets classified as held for sale 4.8 30.2
Total assets 1,588.7 1,551.8
Current liabilities
Trade and other payables (328.3) (313.5)
Current income tax liabilities (10.6) (4.5)
Bank overdrafts and other borrowings (127.9) (122.0)
Provisions (167.1) (150.0)
(633.9) (590.0)
Net current assets 58.8 86.2
Non-current liabilities
Trade and other payables (25.9) (28.0)
Deferred tax liabilities (10.7) (12.1)
Borrowings (294.2) (319.1)
Retirement benefit obligations:
Funded schemes (1.0) (2.1)
Unfunded schemes (112.4) (113.3)
Provisions (56.6) (62.6)
(500.8) (537.2)
Total liabilities (1,134.7) (1,127.2)
Net assets 454.0 424.6
Equity
Share capital 4.2 4.2
Share premium account 412.1 412.1
Hedging and translation reserve 17.0 0.7 *
Retained profit/(loss) 1.2 (19.1) *
EQUITY SHAREHOLDERS' FUNDS 5 434.5 397.9
Minority interests 5 19.5 26.7
Total equity 5 454.0 424.6
* Reserves have been restated following an amendment to IAS 21 (see note 1).
Consolidated cash flow statement (unaudited)
2006 2005
Unaudited Unaudited
For the year ended 31 December 2006 Notes US$m US$m
Cash inflow/(outflow) from operating activities
Net cash inflow generated by operations 6 117.8 176.9
Interest paid (37.0) (36.4)
Taxation paid (35.8) (39.8)
Net cash generated from operating activities 45.0 100.7
Cash inflow/(outflow) from investing activities
Dividends received from associates and joint ventures 2.3 2.8
Acquisition of property, plant and equipment and intangible assets (78.3) (81.3)
Disposal of property, plant and equipment and intangible assets 60.2 56.6
Acquisition of financial investments (0.9) (9.3)
Disposal of financial investments 8.6 2.4
Acquisition of subsidiaries (10.7) (7.6)
Disposal of subsidiaries 3.2 13.0
Net cash absorbed in investing activities (15.6) (23.4)
Cash outflow from financing activities
Dividends paid to minority interests (4.4) (7.1)
Decrease in debt and lease financing (33.3) (119.5)
Net cash absorbed in financing activities (37.7) (126.6)
Net decrease in cash and cash equivalents (8.3) (49.3)
Net cash and cash equivalents at beginning of the year 57.1 113.5
Foreign exchange gains/(losses) on cash and cash equivalents 1.3 (7.1)
Net cash and cash equivalents at end of the year 7 50.1 57.1
Reconciliation of net cash flow to movement in net debt
Net decrease in cash and cash equivalents (8.3) (49.3)
Cash outflow from change in debt and lease financing 33.3 119.5
Change in net debt resulting from cash flows 25.0 70.2
New finance leases (0.3) (3.6)
Transfer of preference shares from equity under IAS 32 - (28.0)
Other (3.9) (3.9)
Foreign exchange (3.2) 5.8
Decrease in net debt 17.6 40.5
Net debt at start of year (363.3) (403.8)
Net debt at end of year 7 (345.7) (363.3)
Consolidated statement of recognised income and expense (unaudited)
2006 2005
Unaudited Unaudited
Restated*
For the year ended 31 December 2006 Notes US$m US$m
Gain on cash flow hedges 2.2 4.6
Exchange differences on translation of foreign operations 17.0 (12.6) *
Actuarial (losses)/gains in respect of retirement benefit schemes (9.4) 47.4
Tax on items taken directly to equity (0.6) 0.3
Net income recognised directly in equity 9.2 39.7 *
Profit for the year 34.0 59.7 *
Transferred to profit or loss on cash flow hedges (2.8) 0.8
Other transfers - (2.1)
Total recognised income and expense for the year 5 40.4 98.1
Attributable to:
EQUITY SHAREHOLDERS OF THE COMPANY 36.6 96.7
Minority interests 3.8 1.4
40.4 98.1
* see note 1 for details of the restatement.
Notes
1 Basis of preparation
Coats Group Limited is incorporated in the British Virgin Islands. It does not prepare consolidated statutory
accounts and therefore the financial information contained in this announcement does not constitute full
financial statements and has not been, and will not be, audited.
The financial information for the year ended 31 December 2006 has been prepared in accordance with the
recognition and measurement requirements of International Financial Reporting Standards ("IFRS") endorsed by
the European Union, and the accounting policies adopted have been consistently applied to the restated
financial information presented for the year ended 31 December 2005.
The accounting policies adopted have been applied consistently to the restated financial information presented
for the year ended 31 December 2005.
Subsequent to the publication of the results for the year ended 31 December 2005, an amendment to IAS 21 on The
Effects of Changes in Foreign Exchange Rates has been endorsed by the European Union, whereby currency
translation gains and losses arising on inter-company loans that are not in the functional currency of either
party can now be dealt with through reserves rather than in the income statement.
The impact of this accounting policy change is as follows:
2005
Unaudited
US$m
Finance costs as previously reported (30.1)
IAS 21 adjustment for 2005 5.9
Finance costs as restated (24.2)
Hedging and translation reserve as previously reported 5.0
IAS 21 adjustment as at 31 December 2004 1.6
IAS 21 adjustment for 2005 (5.9)
Hedging and translation reserve as restated 0.7
Retained loss as previously reported (23.4)
IAS 21 adjustment as at 31 December 2004 (1.6)
IAS 21 adjustment for 2005 5.9
Retained loss as restated (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:
2006 2005
Average Sterling 0.54 0.55
Euro 0.79 0.81
Year end Sterling 0.51 0.58
Euro 0.76 0.85
2 Operating profit is stated after charging/(crediting):
2006 2005
Unaudited Unaudited
US$m US$m
Exceptional items:
Reorganisation costs and impairment of property, plant and 51.6 62.4
equipment
Profit on the sale of property (21.3) (17.2)
Foreign exchange losses/(gains) 12.2 (18.5)
Total 42.5 26.7
3 Finance costs
2006 2005
Unaudited Unaudited
US$m US$m
Interest on bank and other borrowings 39.7 41.3
Foreign exchange gains - (11.8)
Net return on pension scheme assets and liabilities (15.7) (8.3)
Other 5.3 3.0
Total 29.3 24.2
4 Taxation
2006 2005
Unaudited Unaudited
US$m US$m
UK taxation based on profit for the year:
Corporation tax at 30% 23.0 30.3
Double taxation relief (23.0) (30.3)
Total UK taxation - -
Overseas taxation:
Current taxation 39.2 32.6
Deferred taxation (5.4) (7.9)
33.8 24.7
Prior year adjustments:
Current taxation (5.9) 11.6
Deferred taxation (1.6) 3.2
(7.5) 14.8
26.3 39.5
5 Reconciliation of equity
Equity Minority Total equity
shareholders' interests
funds
Unaudited Unaudited Unaudited
US$m US$m US$m
At 1 January 2006 397.9 26.7 424.6
Total recognised income and expense for the period 36.6 3.8 40.4
Dividends paid - (4.4) (4.4)
Other - (6.6) (6.6)
At 31 December 2006 434.5 19.5 454.0
6 Reconciliation of operating profit to net cash inflow generated by
operations
2006 2005
Unaudited Unaudited
US$m US$m
Operating profit 79.9 99.8
Depreciation 55.8 50.4
Amortisation of intangible assets (computer 7.3 5.6
software)
Reorganisation costs (see note 2) 51.6 62.4
Other exceptional items (see note 2) (9.1) (35.7)
(Increase)/decrease in inventories (6.1) 3.9
Decrease in debtors 9.8 34.2
(Decrease)/increase in creditors (9.5) 17.3
Provision movements (14.7) (11.7)
Other non-cash movements 7.3 5.0
Net cash inflow from normal operating activities 172.3 231.2
Net cash outflow in respect of reorganisation costs and other exceptional (54.5) (54.3)
items
Net cash inflow generated by operations 117.8 176.9
7 Net debt
2006 2005
Unaudited Unaudited
US$m US$m
Cash and cash equivalents 76.4 77.8
Bank overdrafts (26.3) (20.7)
Net cash and cash equivalents 50.1 57.1
Other borrowings (395.8) (420.4)
Total net debt (345.7) (363.3)
8 Balance sheet consolidated by Guinness Peat Group plc (unaudited)
The balance sheet consolidated by Guinness Peat Group plc ("GPG") as at 31 December 2006 differs from
that disclosed as follows:
Coats Group Included in
Limited
Coats Group US$:GBP at GPG fair value GPG's
consolidated
Limited 0.5102 adjustments balance sheet
Unaudited Unaudited Unaudited Unaudited
US$m £m £m £m
Intangible assets 260.9 133 14 147
Other non-current assets 630.3 322 - 322
Current assets 692.7 353 - 353
Non-current assets classified as held 4.8 2 - 2
for sale
Total assets 1,588.7 810 14 824
Current liabilities (633.9) (323) - (323)
Non-current liabilities (500.8) (256) - (256)
Minority interests (19.5) (10) - (10)
Equity shareholders' funds 434.5 221 14 235
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