Coats Regulatory News (COA)

NEW

'Connecting for Growth programme' - Added given the launch of the global strategic change programme and in particular the implementation of the Group's digital offering and global functional model.

NEW

'Changing customer and end user expectations' - Added given the importance of continuing to identify, understand and respond to these expectations.

¯

'Failure of critical infrastructure' - Moved down and off the list of principal risks in light of the robust controls and effective mitigating actions demonstrated by the management team during 2017 including in response to the tornado which impacted the Albany Crafts distribution centre.

Amended

'Data controls and security' - Management of sensitive corporate and personal data and compliance with the General Data Protection Regulations has been moved down and off the list of principal risks in light of the robust controls and mitigating actions demonstrated by the management team during 2017. IT security risks remain on the list of principal risks within 'Cyber Risk'.

1. STRATEGIC:

Connectingfor Growth programme

Trend on year:NEW

Execution of global strategicchange programme - in particular implementation of digital offering and global functional model.

The Group is pursuing changes in its operating model to increase productivity, promote efficiency in its supply chain and therefore 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 Chief Transformation Officer, supported by a team of project managers, and regular reviews, including through the use of key performance and risk indicators, are held at executive management and Board level.

Customerand end user expectations

Trend on year:NEW

Risk of failure to identify, understand and respond to changing customer and end-user expectations (e.g. spending patterns and impact of online channel switch).

Our sales teams have over 1,000 interactions a day with brands, retailers and manufacturers and this informs our understanding of different markets. During the year we created a new customer insights role and extended the use of our Customer Relationship Management systems to gain more customer insights. We also strengthened our commercial team to better service key and emerging markets. In order to ensure a firm understanding of emerging trends and technologies, we undertake regular competitor and media analysis, desktop research and attend external and industry-led events.

Appropriate capability development

Trend on year:No move ~

Risk of failure to attract 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.

2017 capability development actions included new cohorts on a range of management and senior leader development programmes and individual assessments and coaching for selected senior managers. 2017 also saw Board approval of a new People Strategy to support the changing roles and capabilities required by the business in the next three years.

2. EXTERNAL:

Cyber risk

Trend on year: Upwards -

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 leakage of data. These were driven by the global Technology function and led by the Cyber and Information Security Director.

In 2018 we are building on this approach by delivering a programme of automated training to targeted groups and the Group as a whole to reinforce the training on an ongoing basis. Technology enhancements are also being put in place, including further firewall blocking of non-approved applications, the expanded deploymentof multi-factor authentication, deployment of an email encryption solution, and centralisation of data into Azure which both protects the data and creates enhanced tracking capabilities.

Economic risk

Trend on year:No move ~

Economic risk arising from political and demand uncertainty - including risk to free trade conventions.

As a global 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 on our business.

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.

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 provide an increasing balance in our exposure to both EU and non-EU markets.

Environmentalnon-performance risk

Trend on year:No move ~

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. Compliance with all environmental legal requirements is a minimum standard for the Group, and is monitored very closely at both a local and Group level.

A Group-wide environmental management system (EMS)aligned to ISO 14001 will commence in 2018, which will further enhance our systematic management of these requirements and standards.

3. OPERATIONAL:

Products and services liabilityrisk

Trend on year:No move ~

Products and services liability risk arising in particular from Performance Materials and software services.

Products and services are tested and measured against stringent quality standards. Controls in the Performance Materials area specifically have been strengthened with enhanced batch by batch testing of safety critical products. Coats' global insurance programme includes productliability cover.

Actions and programmes developed during the year included: digital automation with direct Internet of Things linkage implemented between testing equipment and the SAP quality module in order to minimise the risk of human error; fail-safe restrictive programming to prevent the risk of sale of unapproved products to safety-critical customer sectors; introduction of new key risk indicators to track monthly and quarterly progress; and a zero defect communication programme to factory operators and associates working in safety critical areas.

Bribery andanti-competitive behaviour risk

Trend on year:No move ~

Risk of breach of anti-corruption law or competition law resulting in a materialfine 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, 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. See page 52 for more details.

4. Legacy risks

Pension scheme deficit fundingrisk

Trend on year:No move ~

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 pension schemes are overseen by their Trustees, who are required to have the appropriate knowledge and understanding in this area. Where appropriate, independent professional trusteesare appointed to the schemes 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.

Funding agreements are reviewed and agreed triennially.

The Group and the schemes' trustees routinely review de-risking of the schemes through liability management and investment strategies. See note 9 on page 104 for more details.

Legacy environmentalrisks

Trend on year:No move ~

Under the laws of certain countries,Coats' subsidiaries could potentiallybe deemed responsible for investigating and/or remediating conditions alleged to be associated in whole or in part with former operations.

The Board continues to monitor the strategy and developments in relation to the Lower Passaic River proceedings, more detail of which can be found in note 28 on page 127.

Beyond that the Group continues to refine its policies and procedures for managing and mitigating potential legacy risks associated with former operations.

Year ended 31 December

2017

US$m

2016

US$m

Short-term employee benefits

3.6

5.1

Share based payments

0.9

1.3

4.5

6.4

Sale of goods

Purchase of goods

2017

US$m

2016

US$m

2017

US$m

2016

US$m

Joint ventures

2.9

2.8

52.7

46.2