Coats Regulatory News (COA)

Enquiry details

Investors

Chris Dyett

Coats Group plc

+44 (0)79 7497 4690

Media

Richard Mountain / Nick Hasell

FTI Consulting

+44 (0)20 3727 1374

1.

Talent and capability risk has been amended to refer more explicitly to diversity, equity and inclusion given the importance of this area.

2.

Risk of increasing customer expectations has been amended to be more explicit in relation to product sustainability, given the importance of this area.

3.

Economic and geopolitical risk has been amended to call out even more explicitly macroeconomic and global political uncertainty risk.

4.

M&A programme ambition risk has been amended to make more explicit reference to the integration of the two recent acquisitions.

From increasing to stable

The risk trend for talent and capability risk has decreased from increasing to stable, due to the risk not being higher than 12 months ago and the various internal actions undertaken in 2022 as part of the Strategic Projects.

From increasing to stable

The risk trend for climate change has decreased from increasing to stable, due to the risk not being higher than 12 months ago and in light of the robust process and activities being pursued under the regular oversight of the GET and the Board.

From increasing to stable

The risk trend for risk of supplier non- performance and/or unavailability and/ or price increases of raw materials, labour and freight has decreased from increasing to stable, due to the risk not being higher than 12 months ago and anticipated supply chain trends which are already starting to materialise.

Principal risk

Risk trend

Action / mitigation

1. Strategic

M&A programme ambition risk in light of Group's increasing ambition in scale of its acquisition programme and its ability to source, satisfactorily acquire and integrate suitable targets, including two footwear acquisitions completed in H2 2022

Stable

Originating and executing M&A opportunities is a key focus for the Group. A key component of our strategy is value creation and very carefully considered and disciplined use of capital to fund inorganic opportunities to build scale and acquire new capabilities, technology and talent. The Board has approved a set of criteria to source and evaluate acquisition opportunities, aligned to Group divisional strategy. These criteria include both financial parameters, such as revenue growth and EBITDA margins, and non-financial parameters, such as innovation and sustainability credentials. All M&A projects are overseen and closely monitored by the Board and by senior executive management.

Clear M&A processes have been developed and include identification and evaluation of opportunities, specified roles and responsibilities for all aspects of M&A projects, along with focused project management resources during both execution and integration phases.

Specific M&A risks and mitigations include the risk of failing to achieve required financial returns by either overpaying for a target or under-delivering on the business case. This risk is managed by deep sector knowledge brought by executive management, an experienced M&A team which leverages specialist external advice on valuations, and focused diligence to satisfy the Board that the commercial fundamentals are robust.

The risk of failing to fully integrate the target company into the Group is managed by a dedicated integration management office (IMO), involved from the diligence phase onwards and leveraging internal and external diligence resources, to facilitate successful integration of the target company. A key focus of the IMO is enabling delivery of the business case, whilst managing people and culture change to ensure sustained success.

The risk of failing to capture synergies is managed by ensuring that synergy cases are robust and achievable and are reviewed by internal and external experts. The IMO plays a key role in ensuring the integration allows for effective synergy delivery in line with the business case. In addition to a well-resourced acquisitions team, we leverage wider internal resources and external advisers in specialist areas such as valuation, financing, due diligence and integration. Post-completion/integration reviews are also conducted to ensure that learnings are identified and built into subsequent projects as part of a continuous improvement process. Significant work has been completed in 2022 and, having acquired two strategic businesses (Texon and Rhenoflex), our primary focus remains the successful integration of these acquisitions into Coats, whilst continuing to build a robust pipeline of opportunities for future acquisitions.

Risk of ever-increasing customer product and sustainability expectations and Group's continuing ability to meet and exceed those expectations as part of its strategic growth and sustainability ambitions

Stable

For customers across all industries, 2022 was an unprecedented year of market volatility, uncertainty, and complexity. Expectations of speed to market, productivity, innovation, quality, reliability, and sustainability developed and changed rapidly through the year.

Coats continued to leverage its market leadership, customer relationships and global footprint to meet and exceed those expectations.

We continue to leverage our well-established lines of communication with customers to gain deep and valuable insights, and to anticipate trends that have the potential to change our industry in the long term. We utilise various methods to engage with manufacturers, brands and OEMs as well as customer and industry stakeholders, influencers and decision-makers, including surveys, calls and workshops. Considering and responding to the outcomes of these daily interactions result in our delivery of superior customer value. In 2022 we have met customers' innovation and sustainability needs by launching 17 new products across Apparel, Footwear, and Performance Materials divisions, as well as continuing our focus on recycled solutions. Our acquisitions of Texon and Rhenoflex provided the opportunity for us to offer enhanced and synergistic solutions, including new levels of innovation and sustainability. For example, Texon's Proweave allows us to enhance our partnerships with brand customers. The demand for increased personalisation and customisation continues and is a focus in our innovation.

The addition of Rhenoflex's Rhenoprint 2.0 technology to our portfolio enhances our offer to customers in this area, including reducing waste and increasing productivity. Coats Digital's FastReactPlan was selected by a large Chinese apparel manufacturer to transform its production processes, enabling them to respond with agility to complex order requests and improve on-time deliveries. In Personal Protection, increased worker protection remains a key theme with more industry regulation and the need for comfort with multi-hazard protection. Our customers and their customers continue to demand increased performance from the materials they use, and our new personal protection yarn ranges address these customer needs.

Our new sustainability targets for the period 2023-2026 include energy, materials, water, waste and people goals, in line with customer expectations. Our Sustainability team continue to collaborate and engage with customers across the globe to deepen their understanding of demand trends and successfully meet and exceed expectations as evidenced by the significant increase in sustainable product sales and the development of new products to progress the industry circularity agenda. Sales of EcoVerde continued to grow during the year and we supported a major European retailer in the launch of a new sportswear brand by supplying high quality recycled threads.

We were able to flex our broad geographic manufacturing footprint to allow us to meet customer requirements for speed of production and delivery in the event of local disruption, a key differentiator of the business. During the year we utilised our total Asian manufacturing footprint to maximise service across markets in China that were experiencing ongoing impacts from Covid-19 to meet increased demand during the peak season. We also expanded our manufacturing capacity of a specialised thread product for a world-leading retailer to allow them to fast-track productions of a new innerwear range.

Risk of failure to attract, retain and develop diverse and inclusive set of talent and capability given business changes, growth in new areas and labour availability challenges.

Stable

As a result of significant macroeconomic volatility, 2022 has seen critical labour shortages and specific skill gaps in some labour markets where Coats operates - particularly the US, India and China - which have become increasingly competitive. To ensure that Coats retains, attracts and develops the right talent with the right skill sets, the Board's and senior management team's close focus on engaging and developing talent continued

in 2022.

Following our successful switch to 100% online learning in 2020, we delivered more than 95,000 hours of training to our employees in 2022 through a variety of training platforms. We added new elements to our suite of learning programmes including Manager Excellence, which focuses on critical manager skills through short, relevant sessions of an hour every month for 12 months.

In order to further engage our employees we launched a Global Recognition Program called 'Applause' with 8 programs to recognise employees at all levels of the organisation both globally and locally. Recognising that a sense of belonging contributes to a great place to work, we launched our 'Coats for All' initiative, bringing all our diversity initiatives across the world under one umbrella and brand. The gender diversity initiative under the name of 'Coats for Her', with five programs to develop and nurture our female talent, further engaged our colleagues. A Global Job Vacancy Bulletin ensured transparency of vacancies to allow development of talent and capability. Whilst ensuring engagement and career development of Coats employees, we actively monitored the Coats markets to ensure payment of living wage for all our employees to receive a wage that is sufficient to afford a decent standard of living in their country or location. We also closely monitored the inflation situation and made interventions where required.

As part of our employee listening strategy, which provides an integrated approach to understanding the overall employee experience, we continued surveys during 2022 as well as considering the insights from the Designated Non-Executive for Workforce Engagement. Through our Future of Work survey we listened to what our employees want from a workplace post-pandemic. As a result of the outcomes, we implemented flexible work policies to continue engaging our employees. A Future of Work leadership guide provided our managers with tips and tricks on how to engage employees in this new hybrid world of work. Through the Great Place to Work survey we heard the voice of over 14,000 of our employees and were proud that 86% of our employees worked in a certified 'Great Place To Work'. The Great Place To Work Trust Index score increased from 79% to 85%, showing the increased engagement of the workforce. The survey also allowed us to understand how we can further improve the work environment for our employees. Whilst we continued to deliver key employee health and wellbeing programs at a local level across Coats, we will be focusing on a global wellbeing program called "Fit for Work, Fit for Life" addressing all four health zones: mental, physical, emotional and social to further retain our employees.

2. External

Economic and geopolitical risk arising from significant macroeconomic and demand uncertainty - across both key Asian and developed markets - including risk to free trade conventions - as well as global inflationary pressures and ongoing geopolitical developments

Increasing

2022 was a year of significant macroeconomic uncertainty with continued higher than normal inflation evident across all areas of the business. We have taken swift actions to counter the continued high inflation through early and decisive strategic pricing actions and a combination of activities (including the execution of the Strategic Projects, acquisitions and divestments that supplemented self-help initiatives including productivity improvement and cost control measures). We have also focused on volume and share gain in addition to taking strategic pricing actions where appropriate. Supply chain disruptions have been managed through leveraging our global footprint, long term relationships with global suppliers and adjusting our inventory holding as needed (see further actions referred to in Supply risk on page 47).

The Group continued to conduct appropriate financial forecasting and modelling to track liquidity and assess foreign exchange exposure. We utilised our prior experiences of managing in a downturn, including creating appropriate contingency plans for a number of scenarios across our geographies. The ongoing impacts from the Covid-19 pandemic that continue to manifest and impact both the supply chain and labour, particularly in China, are monitored with the previous learnings being utilised.

We monitor geopolitical risks and take action where appropriate. The Russian invasion of Ukraine resulted in swift decision making by the Board and GET to ensure our people were safe and that our operations were closed where necessary. The wider implications of the war, including on oil/energy price and supply availability are considered and managed via our Supply chain relationships and our global operational footprint.

Overall, our strategic focus has been on innovation, sustainability and automation to manage the Group through a volatile, uncertain, complex and ambiguous environment and achieve our strategic goals in 2022.

Cyber risk

Risk of cyber incidents leading to corruption of applications, critical IT infrastructure, compromised networks, operational technology and/or loss of data.

Stable

2022 was a year of transition with changes in our internal talent adding to our in-house capabilities and the consolidation of certain systems to allow us to introduce more protective systems. We changed to a new provider for phishing simulations and user awareness and training materials. These improved training materials and better insights of user habits from phishing tests enable us to target users' specific education needs and in turn give Coats greater protection from online threats.

Our Managed Detection and Response (MDR) service was replaced with a more robust device protection system and service, which includes a tier-1 Security Operations Centre (SOC) and network discovery capability. Outbound internet traffic filtering through the 2021 SASE solution enables us to monitor traffic from our devices to identify and block malicious activity. We proactively strengthened and matured existing controls, including bringing support for some systems in-house rather than by third parties. This enables our team to provide a better level of support with greater agility.

For our key systems we make daily backups to an alternative cloud provider to ensure we do not have a single point of failure, and for these key systems we utilise the layers of protection provided by Microsoft. For 2023 we have key strategic projects planned including firewall enhancement across all global locations and secure reconfiguration of our networks to reduce risk and mitigate potential attack.

As Coats continues to grow as a digital organisation, and supporting our strategy to Accelerate and Transform, there will be huge benefits to be gained along with significant digital security and strategy risks. Moving forward we will focus on continuing to ensure the right level of governance, cyber personnel, technology, processes and training across our business to minimise these risks, working on a principle of security by design at all times.

Climate change risk arising from either (i) the impact of failing to sufficiently address the need to decarbonise the Company's operations and reduce emissions, leading principally to commercial and reputational risks and the financial risk of emissions taxes or other legislative changes, or (ii) the physical impact of climate change on the Company's operations and business model, and that of its customers in the textile supply chain.

Stable

The GET, through the Group Sustainability function, is responsible for overseeing the reporting of environmental data by the business, and driving the sustainability strategy and climate change risk management processes. The Board and Sustainability Committee provide strategic oversight and monitor the execution of the Company's sustainability strategy and initiatives. The ARC reviews the processes for the reporting of environmental data externally. We manage a detailed register of climate related risks and opportunities which are assessed based on their level of materiality and impact over short, medium and long term time horizons and for those of greatest impact we define and implement mitigating actions.

Through 2022 we have further progressed work on climate change risk analysis, including a review of our core scenario database which remains unchanged, and building on our review of physical risks with detailed bottom up analysis for those sites identified at highest risk of coastal or riverine flooding. As a result of this further analysis, we have determined that the physical flooding risks are marginally lower than our previous assessment and more granular details are included in our Taskforce on Climate-related Financial Disclosures (TCFD) report. As a major identified risk we have also reviewed and updated our model for future carbon taxes.

As during 2021, risk and opportunity analysis, quantification and mitigation has been carried out using the TCFD Recommendations as detailed in "Recommendations of the Task Force on Climate-related Financial Disclosures", 2017, with use of additional guidance from "Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures", 2021.

Work progress was reported to the GET on a quarterly basis and went to the ARC for review in both February and December 2022. A copy of our 2022 TCFD disclosures, which set out the implications of climate risk over the short, medium and long term, can be found in the TCFD Report. As a result of this, our current most significant transitional risk remains linked to the potential introduction of carbon emission taxes and this is detailed in our TCFD disclosures.

Following the submission and approval of our near term (2030) Science Based Targets (SBTs) for emissions reduction under the 1.5°C pathway in February 2022, we have now submitted our long term Science Based Targets for Net Zero emissions by 2050 and await their approval. Delivery of the SBT carbon emission reductions will clearly have a very significant mitigating effect on any carbon tax regimes that may potentially be introduced. Progress has been made in transitioning to renewable supplies through 2022, however country level energy market regulation could present a risk of fully achieving the planned rate of progress in the coming few years. Priority focus will be given to our units with highest energy consumption, with Renewable Energy Certificates purchased to compensate in areas where full transition is not possible. You can read more about our new sustainability targets in the sustainability report.

During the due diligence processes for the Texon and Rhenoflex acquisitions, initial assessments of the impact of their operations on our climate commitments were undertaken. In both of the key aspects relating to climate commitments we found that they were on a similar trajectory to Coats (though not committed to SBTs) and had made good progress to date on material transition and emissions reduction. During 2023 they will be fully incorporated into our SBTs by re-baselining back to 2019.

Risk of supplier non- performance, unavailability and/or price increases of raw materials, labour and freight and/or logistical challenges causing major disruption to Coats' supply chain.

Stable

The Group continues to conduct regular scenario analysis and continuity planning in relation to each of our key raw materials and dyes, as well as labour and freight, to assess what counter measures can be put in place if certain events were to occur.

During 2022, there was a continued impact of the Covid-19 virus on global supply chains particularly in China, limiting availability of certain feedstocks and raw materials. This, coupled with the volatile global economic environment, has resulted in demand fluctuations and the withdrawal from the market of some suppliers. There was also higher than normal inflation across raw materials, freight, labour and energy. To mitigate these, we continue to assess our global stocking policy for strategic raw materials, enter into discussions with key suppliers ahead of any anticipated shortages to secure the required volumes and destocking where downturns are expected. We also have expanded our supplier base where necessary. We monitored regulatory developments and utilised our global footprint to respond to changing sourcing requirements. Robust assessments of financial performance of key suppliers and evaluation of suppliers' own risk management plans are undertaken, and our dependency on key suppliers and raw materials was reviewed frequently. From August 2022 onwards, supply concerns on most raw materials were viewed to have eased.

We continue to work closely with our key suppliers to ensure our requirements are met and rely on systems and tools, such as the supplier portal, to manage costs. Coats' scale and global footprint offers security to both brands and contractors.

Environmental non-performance risk given changing standards, increasing scrutiny, customer and investor demands and expectations and scale of Group's own self-imposed standards and ambitions, creating commercial, financial and reputational risks as well as opportunities.

Stable

During 2022 we retained very tight focus on risk mitigation areas that align to our 2022 sustainability targets. This meant that we made continued progress on reducing energy intensity through our energy monitoring system pilot, and accelerated our transition to renewable electricity and performed strongly in relation to Zero Discharge of Hazardous Chemicals (ZDHC) standards.

Progress on waste prevention and reduction was accelerated in 2022 with many circularity initiatives introduced, particularly in paper, cardboard and plastic packaging.

Environmental targets continue to be core to our sustainability strategy and we have now developed 2026 targets which will ensure that this remains central to the business.

Our 2026 targets include further reduction in energy intensity, with significant focus on our energy transition, effluent standards, increased water recycling and zero waste to landfill. Further details on our sustainability strategy can be found in our annual Sustainability Report which is published at the same time as this Annual Report (www.coats.com/sustainability).

We continue to track and implement new and updated Environment, Health & Safety (EHS) legislative requirements using a subscription based environmental system, thereby enhancing our performance in relation to EHS legal requirements. We also utilise a permit management system for management of all environmental permits and licences held in each country we operate in.

Our environmental incident management system ensures that we have a consistent and transparent way of managing any environmental incidents that occur, and we implement corrective and preventative actions to prevent reoccurrence through a risk-based approach. Online analytical monitoring equipment provides real-time data for our effluent treatment plants that discharge direct to natural waterways, to ensure we meet local permit conditions and ZDHC limits.

Following our acquisitions of Texon and Rhenoflex in 2022, we have commenced the program of aligning those business units to the Coats environmental policies and procedures, and use of common systems. During the due diligence their environmental performance was assessed as fully as possible, and no concerning issues were identified.

Our global Business Continuity Plan includes environmental emergency preparedness and response plans, and we track environmental risks through an environmental aspects and impacts management system. Our environmental management plans are run through a series of workstreams to ensure key stakeholders have an input into their delivery through a define, measure, analyse, improve and control (DMAIC) process.

3. Operational

Health and safety - risk of (i) safety incident(s) leading to injury or fatality involving our employees or other interested parties such as contractors, visitors, onsite suppliers etc along with potential resulting prosecution, financial costs, business disruption and/or reputational damage; and/ or (ii) physical and mental health issues, including as a result of the pandemic, impacting wellbeing, engagement, productivity and talent retention.

Stable

The Board continues to receive and discuss with management - as a priority at each Board meeting - detailed reviews of health and safety (H&S) performance and monitoring of progress against established annual H&S targets and objectives. Senior management and employees throughout the Group likewise remain closely focused on creating an injury-free work environment through the identification and remediation of hazards and training and behavioural change programmes.

Covid-19 has continued to be an area of focus in 2022, but at a much lower level than in the two previous years. Our units performed commendably in maintaining appropriate levels of workplace controls and were able to protect employees from workplace infection and maintain operations. With the significant increase in Covid-19 cases in China towards the end of 2022 as societal controls were lifted, we immediately re-introduced tighter workplace controls to protect employees.

We continued pursuing our Journey to Zero safety strategy that was launched in 2019. We maintain a consistent focus on proactive and preventive actions as well as leading indicators, as well as full investigation of any incident or near miss. We maintained broadly the same level of employee training hours as in 2021 (30 hours vs 29 in 2021).

All of our proactive, preventive actions translated into the following results for 2022:

- 11% reduction in work-related recordable injury rate (0.40 vs 0.45 in 2021)

- 27% reduction in lost time case rate (0.24 vs 0.34 in 2021)

- 36% reduction in days lost per lost time injury (13 vs 21 in 2021)

- 24% reduction in first aid case rate (2.27 vs 2.97 in 2021)

At the end of 2022, to align our H&S management structure to the new business structure, and recognising the significant progress made in the last few years, we embedded much of the global team more directly into the business Divisions where they will be better able to work closely with units to maintain the improvement momentum.

Our slimmer global team will work with divisional and geographic H&S leaders on global development and delivery of global strategies. During 2023 we will continue our Journey to Zero strategy and will be revising and updating our safety management system. We will also be ensuring that our new acquisitions made in 2022 are aligned with our H&S policies and procedures. We have also detected a marginal increase in commuting- related incidents in 2022 that we believe is related to a post-Covid-19 behavioural shift of employees from public to private transport and we will be enhancing still further our focus on developing awareness and mitigation of commuting risks amongst our employees.

Bribery and anti- competitive behaviour - risk of breach of anti- corruption law or competition law, resulting in material fine and/or reputational damage.

Stable

The Group continues to maintain clear and well-publicised policies and processes, including on anti-bribery and corruption and anti-competitive behaviour, which sit alongside and interact with policies and procedures covering a number of other ethics issues, such as the Code of Business Conduct, Gifts and Entertainment Policy, Ethics Code and Supplier Code. These various policies and procedures apply not only to Coats but also to Coats' relations with partners, contractors and suppliers. These policies are reviewed and updated annually, with the most recent review being completed in December 2022. The policies are reinforced through contractual terms and through a comprehensive Supplier Code. The Supplier Code and onboarding process contains initial due diligence processes (through an automated vendor data management system), onboarding, training, ongoing compliance monitoring and auditing.

The GET, comprising key business and functional leaders, regularly considers a range of ethics risks (including closely monitoring key risk indicators for those risks), legislative and regulatory developments, any issues or trends identified from the Group's internal audit function and mitigation plans. GIA conducts a dedicated risk questionnaire which covers anti-bribery and corruption and anti-competitive practices. The risks and mitigation plans are also considered at division level during regular local risk management meetings.

Coats implements an extensive annual and new-joiner training regime for its staff, with enhanced training for managers and customer-facing and procurement staff. Specific training regimes were also implemented for the staff who joined Coats as part of the Rhenoflex and Texon acquisitions. This training regime includes compulsory annual training in a range of areas, including anti-bribery and corruption and anti-competitive behaviour. Refreshed online ethics training, alongside the ongoing self-certification testing regime, was released in 2022. Coats also maintains an extensive database of relevant training materials and guidance on its web portal and carries out face-to-face training and regular communications through a range of channels, including through leveraging the support of its global ethical culture champions network. The Group actively maintains a whistleblower system through a dedicated "Speak Up" inbox and 24/7 whistleblower hotline which is maintained by an external provider. The whistleblowing system enables employees and others who are aware of, or suspect, unethical behaviour to report it confidentially. Awareness of the system, together with the risks and the policies, is publicised through an ongoing Ethical Culture Campaign which operates at a Group and local level. An independent review of the Group's whistleblowing policy and associated processes is currently being conducted to ensure these continue to align appropriately with best corporate governance practice.

4. Legacy risks

Lower Passaic River legacy

environmental matter

Detail of the Lower Passaic River legacy environmental matter can be found in note 28 on page 151.

Stable

The Board continues to monitor developments very closely and oversees the strategy in relation to the Lower Passaic River proceedings.

·

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 they face; 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 position, performance, business model and strategy.

Year ended 31 December

2022

US$m

2021

US$m

Short-term employee benefits

10.3

10.4

Share based payments

2.1

1.6

12.4

12.0

Sale of goods

Purchase of goods

2022

US$m

2021

US$m

2022

US$m

2021

US$m

Joint ventures

1.4

2.7

63.2

61.1