Annual Financial Report 2018
COATS GROUP PLC
Annual Financial Report 2018
Coats Group plc ('Coats' or the 'Company') has today submitted to the Financial Conduct Authority's national storage mechanism its Annual Financial Report for the year ended 31 December 2018 ('Annual Report 2018'), as required by UK Listing Rule 9.6.1.
The Annual Report 2018 is available from the Company's website, www.coats.com/ara2018, and will also be available for viewing at the Financial Conduct Authority's national storage mechanism at www.morningstar.co.uk/uk/NSM.
This announcement also contains as appendices additional information for the purposes of compliance with the UK Disclosure Rules and Transparency Rules, including principal risk factors, a responsibility statement and details of related party transactions. This information is extracted, in full unedited text, from the Annual Report 2018. The Preliminary Announcement released on 1 March 2019 contained a condensed set of financial statements together with extracts of the Company's management report, and is also available to view on the Company's website www.coats.com/investors. These announcements should be read in conjunction with and are not a substitute for reading the full Annual Report 2018.
Stuart Morgan
Company Secretary
8 March 2019
Enquiry Details:
Rob Mann
Coats Group plc
020 8210 5175
About Coats Group plc
Coats is the world's leading industrial thread company. At home in some 50 countries, Coats has a workforce of 18,000 people across six continents. Revenues in 2018 were US$1.4bn. Coats' pioneering history and innovative culture ensure the company continues leading the way around the world. It provides complementary and value added products, services and software solutions to the apparel and footwear industries. It applies innovative techniques to develop high technology Performance Materials threads, yarns and fabrics in areas such as automotive composites, fibre optics and Oil and Gas. Headquartered in the UK, Coats is a FTSE 250 company and is a constituent of the FTSE4Good Index Series. To find out more about Coats visit www.coats.com.
Appendix
Principal risk
A description of the principal risks the company faces is extracted from pages 25 to 27 of the Annual Report 2018.
Throughout the year, the Board has kept each of the principal risks under review with support from the Group Risk Management Committee. The Board also undertook a comprehensive assessment of the principal risks facing the Group, along with the current levels of risk tolerance for each of those risks. Due to the ever-changing global risk environment, the following risks have been updated since 2017:
· NEW 'Risk of supplier non-performance and/or unavailability and/or price increases of raw materials' has been moved up from a Key Risk to the category of Principal Risk in light of various market developments leading to limited availability of a number of key raw materials and a restricted number of suppliers for certain such raw materials.
· DEMOTED 'Risk of failure to identify, understand and respond to customer and end user expectations' has been moved down and off the list of Principal Risks and is now categorised as a Key Risk due to the ongoing focus, monitoring and actions taken by the management team throughout the course of 2018.
· DEMOTED IN PART 'Risk of legacy environmental matters': with the exception of the Lower Passaic River matter. This has also been moved down to become a Key Risk in light of the ongoing focus, monitoring and mitigating actions taken by the management team.
· FROM STABLE TO INCREASING: 'Economic Risk' is increasing in light of the ongoing political uncertainty in various parts of the world and the uncertainty that this brings in particular in relation to free trade conventions.
· FROM INCREASING TO STABLE: 'Connecting for Growth programme': the execution risk in relation to this programme is now stabilised as a result of the progress in the structural, operational and financial deliverables during 2018 - the focus is now very largely on fully embedding the programme in 2019.
· FROM INCREASING TO STABLE: 'Cyber Risk': the trend for this risk has now stabilised as a result on the ongoing focus, monitoring and actions, including various technology enhancements as well as a range of policies, standards and training programmes, implemented by the management team throughout the course of 2018.
· FROM STABLE TO DECREASING: 'Pension scheme deficit funding risk': has gone from stable to decreasing because of the agreement of a single funding valuation setting our UK pension deficit contributions, for the next three years, at an affordable level.
Our principal risks, along with a summary of the measures we have put in place to manage and mitigate them, are set out below.
As stated above, the Board will continue to keep these principal risks, as well as the appropriateness of this list and the ever evolving broader risk environment, under ongoing review.
|
Principal risk |
Risk nature / potential impact |
Action / mitigation |
|
1. STRATEGIC |
|
|
|
Connecting for Growth programme Trend on year: Stable ~ (2017: New risk) |
Execution of global transformation programme - in particular implementation of digital offering and global functional model. |
The Group is continuing to make changes to its operating model in order to increase productivity, promote efficiency in its supply chain and thereby enhance speed of delivery to customers and to optimise its use of digital platforms to improve customer experience. Leadership of the programme is provided by a Group Executive Team member, Ronan Cox, supported by a team of project managers. The programme is monitored regularly, including through the use of key performance and risk indicators, and regular pulse surveys are carried out to ensure the programme continues to drive colleague engagement in terms of the change process. Financial savings are checked monthly by the finance function. Regular reviews are held at executive management and Board level to ensure the programme continues its very positive progress in delivering on its change management programme and in fully embedding the relevant processes and behaviours to become part of business as usual in 2019.Leadership of the programme is provided by a Chief Transformation Officer supported by a team of project managers. The programme is monitored regularly, including through the use of key performance and risk indicators and regular pulse surveys are carried out to ensure the programme continues to drive colleague engagement in terms of the change process. Financial savings are audited monthly by the finance function. Regular reviews are held at executive management and Board level to ensure the programme continues its very positive progress in delivering on its change management programme and in fully embedding the relevant processes and behaviours to become part of business as usual in 2019. |
Appropriate talent and capability developmentTrend on year: Stable ~ (2017: Stable ~) |
Risk of failure to develop and retain talent and capability, given business changes and growth in new areas. |
The Board and senior management remain very focused on talent and capability development, as well as retention and succession planning. 2018 capability development actions included training new cohorts on a range of management and senior leader development programmes such as Transcend, Business Partnering and Sales Accelerator training. 2018 also saw Board approval of an updated People Strategy to support the changing roles and capabilities required by the business over the next three years. In 2019, we will offer specific training in order to develop our senior business leaders for future Group Executive Team opportunities. |
|
2 EXTERNAL |
|
|
|
Economic risk Trend on year: Increasing ( 2017: Stable ~) |
Economic risk arising from political and demand uncertainty - including risk to free trade conventions. |
The economic outlook for many of the markets in which Coats operates remains highly uncertain. Geopolitical events in recent years and, in particular, the risks to free trade, including in light of ongoing US/China trade discussions, and the potential consequences for economic growth, add to this uncertainty. However, the breadth of our portfolio and our geographic reach help to mitigate our exposure to any particular localised risk and enable us to meet demand if brands/customers were to transition to other countries. As a gobal industrial manufacturing company with no UK manufacturing facilities and minimal direct sales in the UK, Coats is of the view that there would be limited direct adverse impacts on the Group from Brexit. Both the UK and the EU, however, are significant markets for both Apparel and Footwear and Performance Materials. Therefore any impact on sales and future growth expectations for these markets could have an indirect consequence for our business. We also maintain an appropriate dialogue with our key customers and suppliers regarding their own risk management and mitigation plans including in relation to Brexit. Whilst there continue to be a number of uncertainties in connection with the future of the UK and its relationship with the EU, there have been indirect factors which continue to have an impact on our results, primarily the effect of lower discount rates on the accounting valuation of pension liabilities and the depreciation of sterling on our UK costs. Many years of exposure to emerging markets have given us experience of operating and developing our business successfully during periods of economic and political volatility. We continually monitor and analyse economic and demand indicators to ensure that our supply chain remains flexible and our product portfolio remains relevant. This analysis provides a key input to our product development, business planning and pricing strategies. The Group's international footprint and comprehensive portfolio also provide a mitigating balance in our exposure to both EU and non-EU markets. |
|
Cyber risk Trend on year: Stable ~ (2017: Increasing ) |
Risk of cyber incidents leading to corruption of applications, critical IT infrastructure, compromised networks, operational technology and/or loss of data. |
Throughout the year we implemented a range of policies, standards and training programmes that focused on IT security and the need to prevent loss of data. We deployed a new vulnerability management solution to enhance the ability to detect common vulnerabilities. This enables us to detect issues before they are able to harm our environment. In 2018, we also delivered a programme of online training to the Group. Technology enhancements were also put in place, including further firewall blocking of non-approved applications, the expanded deployment of multi-factor authentication, deployment of an email encryption solution for all high-risk users and centralisation of data into Microsoft Azure which both protects the data and creates enhanced tracking capabilities. We also deployed a data loss prevention solution to allow us to detect and/or block sensitive data transfers when data is sent to a non-Coats location. Plans for 2019 include adding a managed security operations centre which will bring the monitoring of our network from a security perspective up to 24x7x365. We also plan to add enhanced technology such as intrusion detection, data and asset labelling, asset tracking, improving our identity and access management, and mobile device management to better control our phones and tablets. |
|
Environmental non-performance risk Trend on year: Stable ~ (2017: Stable ~) |
Environmental non-performance risk given changing standards and increased scrutiny resulting in disruption of existing business, fines and/or reputational damage |
Our environmental policy applies across the Group. The Coats Global Environmental Policy was updated during 2018 with a greater focus on Leadership and Commitment. A communications campaign took place to assist in communicating the policy and its meaning to teams across the Group. We also implemented a global digital platform for environmental incident reporting. This further reduces our environmental risk by leveraging risk-assessed improvement actions to prevent re-occurrence of environmental incidents. Compliance with all applicable environmental legal requirements is a minimum standard for the Group and is monitored very closely at both a local and Group level. In 2018, a pilot for an advanced environmental legal register with enhanced evaluation of legal compliance took place in China and discussions regarding a broader roll-out are ongoing. The Board have sanctioned the implementation of a harmonised global system for management of energy and environment aligned to ISO 50001 and ISO 14001 respectively, as part of the wider materiality strategy. During 2018, the Group eliminated the persistent organic pollutant, polychlorinated biphenyl, from the high voltage electrical infrastructure. |
|
3. OPERATIONAL |
|
|
|
Risk of supplier non-performance and/or unavailability and/or price increases of raw materials Trend on year: Increasing ( 2017: Key risk) |
Risk of local and broader economic and regulatory market developments leading to limited availability of key raw materials and/or restricted number of suppliers for such materials. |
The Group conducts scenario analysis on each of our key raw materials to assess what counter measures can be put in place if certain events were to occur. Regular assessment of financial performance of key suppliers and evaluation of suppliers' own risk management plans is undertaken and our dependency on key suppliers and raw materials is reviewed frequently. Our supplier portfolio is also kept balanced with a view to further minimising risk. There is ongoing development of a pipeline for alternative suppliers and product substitution. In order to remain alert to market developments, procurement teams maintain access to good market intelligence on key raw materials and feedstocks. In addition to this we continue to work with third party experts on market developments and market insights. |
|
Products and services liability risk Trend on year: Stable ~ (2017: Stable ~) |
Products and services liability risk arising in particular from Performance Materials and software services. |
Our products and services are tested and measured against stringent quality standards. As a result of our ongoing strengthening of controls in the Performance Materials area with enhanced batch by batch testing of safety critical products, pass rates are at an all-time high. In 2018, we drove digital automation with direct Internet of Things (IoT) linkage implemented between testing equipment and the SAP quality module in order to minimise the risk of human error. We worked towards fail-safe restrictive programming to prevent the risk of the sale of unapproved products to safety-critical customer sectors and we introduced additional key risk indicators to track monthly and quarterly progress. Due to these actions, there have been a reduction in the rate of customer quality complaints and zero major non-conformances reported in key automotive management systems audited during 2018. There were also zero incidences of contamination reported in feminine hygiene during 2018. In 2019, Coats will be deploying a failsafe digital solution to eliminate product mislabelling and will continue to extend the deployment of IoT connectivity beyond existing safety critical testing, using IoT data to continue to increase the internal safety critical pass rates. Coats' global insurance programme includes product liability cover. |
|
Bribery and anti-competitive behaviour risk Trend on year: Stable ~ (2017: Stable ~) |
Risk of breach of anti-corruption law or competition law resulting in a material fine and/or reputational damage. |
The Group continues to maintain clear and well publicised policies and processes, spanning bribery and anti-competitive behaviour along with a number of other ethics issues, including in relation to partners, contractors and suppliers which are reinforced through a comprehensive Supplier Code (covering initial due diligence processes, on-boarding, training, ongoing compliance and auditing). These policies are reviewed annually. There is extensive online and face-to-face training and regular communications through a range of channels including through our global ethical champions network. A sub-committee of the Group Risk Management Committee comprising key business and functional leaders meets quarterly to consider a range of ethics risks (including key risk indicators for those risks), legislative and regulatory developments and mitigation plans. The Group actively maintains a whistle blower system, enabling employees and others who are aware of, or suspect unethical behaviour to report it confidentially. Awareness of the system, together with the risk and the policies, has been increased through an ongoing Ethical Culture Campaign which operates at a Group and local level. See page 22 for more details. |
|
4. LEGACY RISKS: |
|
|
|
Pension scheme deficit funding risk Trend on year: Decreasing ¯ (2017: Stable ~) |
Risk of potential volatility in UK pension gross liabilities and total assets leading to increased annual cost of repair plan to fund deficit (which could impact one or more of free cash flow and dividend payment). |
The funded UK pension scheme is overseen by its Trustee Board, which is required to have the appropriate knowledge and understanding in this area. Independent professional trustee Directors are appointed to the Trustee Board to provide additional expertise. In particular, professional investment advice is taken as necessary; and assets diversified by class and geography and currency exposures hedged where appropriate. Interest rate and inflation exposures are hedged at appropriate levels (currently >80% of interest rate and inflation linked liabilities are hedged). Consolidation of the three UK defined benefit pensions schemes into one single scheme has simplified our governance requirements; and the agreement of a single funding valuation has set our UK pension deficit contributions for the next three years at an affordable level. The Group and the Trustee Board routinely review de-risking of the scheme through liability management and investment strategies. See note 10 on page 112 for more details. |
|
Lower Passaic River Legacy environmental matter risk Trend on year: Stable ~ (2017: Stable ~) |
Detail of the Lower Passaic River legacy environmental matter can be found in note 28 on page 134. |
The Board continues to monitor developments very closely and oversee the strategy in relation to the Lower Passaic River proceedings. More details can be found in note 28 on page 134. |
Responsibility statement
The following responsibility statement is repeated here solely for the purpose of complying with Disclosure and Transparency Rule 6.3.5. This statement relates to and is extracted from page 76 of the Annual Report 2018. Responsibility is for the full Annual Report 2018 and not the extracted information presented in this announcement or the Preliminary Announcement released on 1 March 2019.
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
• the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that it faces; and
• the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
This responsibility statement was approved by the Board of Directors.
Related party transactions
A description of the related party transactions of the Company is extracted from page 140 of the Annual Report 2018.
Remuneration of key management personnel
The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 - Related Party Disclosures. Further information regarding the remuneration of individual directors is provided on pages 55 to 67 in the audited part of the Directors' remuneration report.
|
Year ended 31 December
|
2018 US$m
|
2017 US$m
|
|
Short-term employee benefits |
3.8 |
3.6 |
|
Share based payments |
1.1 |
0.9 |
|
|
4.9 |
4.5 |
Trading transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures are disclosed below.
During the year, Group companies entered into the following transactions with related parties who are not members of the Group:
|
|
Sale of goods |
Purchase of goods |
||
|
|
2018 US$m
|
2017 US$m |
2018 US$m |
2017 US$m |
|
Joint ventures |
3.7 |
2.9 |
50.9 |
52.7 |
-ENDS-
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