Coats Regulatory News (COA)

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 development

Trend 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.

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

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