Coats Group Plc Regulatory News (COA)

GUINNESS PEAT GROUP plc

("GPG" or "the Company")

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2012

CHAIRMAN'S STATEMENT

The Company is in an unusual transitional process and this report reflects that with some unavoidable complexity. In this statement I endeavour to set out the main items which shareholders should consider. The aim is to give shareholders the necessary level of information to judge appropriately the value of their ownership of the Coats business and the value which will be returned to them from assets which have been or will be realised.

The 2012 financial year saw the advancement of the strategy to realise value for shareholders through the orderly realisation of the Group's investment portfolio and the progression of initiatives to transform GPG into the Coats business as a stand-alone, listed entity. As has been reported at various points throughout the year, good progress has been made on asset realisations with the result that GPG's balance sheet has been greatly simplified and cash reserves expanded. The Company's composition of net assets is now comprised of its 100% investment in Coats, cash resources, the GPG pension schemes and a remaining pool of 5 material investment portfolio assets. Further detail on each of these balance sheet categories is provided below.

Divestments from the investment portfolio between 1 January and 31 December 2012 have generated cash proceeds of £314 million with a further £37 million between the year end and 22 February 2013 (a combined total of NZ$689 million). Sales during 2012 included: ClearView Wealth; Green's General Foods; and Gosford Quarry Holdings, together with the completion of the disposal of Turners & Growers. Since the year end, the Group has successfully disposed of Capral and AVJennings. Total net proceeds since 1 January 2011 are £495 million (NZ$971 million) as at 22 February 2013; further details are provided in the Appendix to this Statement. GPG's Parent Group unaudited cash balance as at 22 February 2013 stands at approximately £275 million (NZ$540 million), having increased from £243 million (NZ$477 million) at year end.

The Board continues to review how best to use these cash proceeds to pursue capital management initiatives. Following the £80 million (NZ$157 million) return of capital and £12 million (NZ$24 million) net cash dividend paid in 2011, a £10 million (NZ$20 million) on-market buyback programme was announced on 3 September 2012 and this was extended on 25 October 2012 with a revised upper limit of £70 million (NZ$137 million). As at 22 February 2013, the Company has bought back £34 million (NZ$67 million) of shares and currently intends to continue with this initiative. In particular, as a result of the Company coming out of its close period by publication of this preliminary statement of results, the buyback programme will recommence in Australia. As the asset realisation process progresses, further surplus cash will be returned to shareholders utilising appropriate mechanisms, including making efforts to facilitate exits for those small shareholders who are seeking an efficient route to realisation of their investment. The quantum and timing of future cash distributions will be determined taking into account, in particular, the Group's obligation to support the GPG pension schemes and the appropriate capital structure to be established for Coats. Further capital management initiatives will be outlined to shareholders at or prior to the forthcoming Annual General Meeting of shareholders.

It is the Board's intention that GPG will be re-launched as Coats as the various arrangements for the disposal of assets, return of value to shareholders and establishment of Coats as an independent business are completed. The current target for completion of this transition is the second half of 2013, however both external and internal events may impact on this. The GPG Annual Report, which will be published towards the end of the first quarter of 2013, will reflect progress on this transition.

The transition plan includes the following key initiatives:

·; Reconstitution of the Board to ensure it has the requisite skills to develop Coats as a stand-alone, listed entity for the long term;

·; A continued focus on enhancing the business performance and strategic positioning of Coats;

·; Finalisation of support for the UK pension schemes;

·; Determination of the optimal capital structure necessary to provide the stand-alone Coats entity with the resources and mix of debt and equity required for it to achieve its strategic objectives and optimise its capital markets positioning; and

·; Evaluation and implementation of the most efficient method to return the maximum amount of excess cash to GPG shareholders, taking into consideration all of the above factors.

Reported (Consolidated) Financial Results

Shareholders' funds decreased by £168 million (NZ$330 million) to £434 million (NZ$852 million) at 31 December 2012. As a consequence, the net asset backing per share decreased during the year from 37.1p (NZ$0.74) to 27.7p (NZ$0.54).

Consolidated Income Statement:

The presentation of GPG's income statement has significantly changed in 2012. While GPG remains principally an investment group and the activity of the Board and senior officers is that of managing the public company activity, supervising its investment in Coats and maximising value for shareholders through the asset realisation programme and liability management exercise, the reclassification of all remaining non-Coats fixed asset investments as held-for-sale supports the presentation of the gains and losses on investment sales and other investment activity as discontinued. GPG's net loss attributable to members in the year was £3 million (NZ$6 million) compared to a profit of £1 million (NZ$2 million) in 2011.

The key elements of GPG's result for the year are presented in a non-statutory format below:

 Simplified Balance Sheet:

GPG's financial position on a non-statutory basis is shown in the 31 December 2012 Simplified Balance Sheet below:

Overview of GPG's Key Net Asset Value Components

Cash at bank

Parent Group cash at bank on 31 December 2012 was £243 million (NZ$477 million) (2011: Parent Group net debt £14 million (NZ$27 million)). Disposals of investments during 2012 saw net cash generated from investment activity and realisations totalling £314 million (NZ$616 million). Between 1 January 2013 and 22 February 2013 a further £37 million (NZ$73 million) has been realised, including full realisation of investments in Capral and AVJennings. GPG's (unaudited) cash balance as at 22 February 2013 stands at approximately £275 million (NZ$540 million).

As at 22 February 2013, the total net proceeds including dividend and other cash distributions generated since 1 January 2011 are approximately £495 million (NZ$971 million), with circa 67% of the opening investment portfolio (excluding Coats and cash) at 1 January 2011 now realised. A schedule showing the proceeds from disposals since 1 January 2011 is set out in an appendix.

Investment Portfolio (excluding Coats)

As at 22 February 2013, GPG's investment portfolio including former subsidiary and associated undertakings had a valuation of £216 million (NZ$424 million), representing the mark to market value of its listed investments and the current book value of its non-listed investments. A summary of the major holdings in the current investment portfolio is outlined below:

* Listed investments at market value translated at exchange rate ruling on 22 February 2013

** Tandou and non-listed investments, which includes GPG's investment in Tourism Property Investment Group (10.0%) and a freehold site formerly owned by Gosford Quarry Holdings, are shown at book value

The Board continues to pursue a programme to maximise the value of its investment portfolio, measured to take into account both timing and execution and operating risk. Investors will form their own view on the likely realisation value for the remaining investments but the overall rate of conversion of carrying values into cash proceeds has been encouraging to date. In particular, the recent sale of GPG's 48% shareholding in Capral has removed uncertainty in relation to one of GPG's more illiquid historical positions. The Board has completed a further review of carrying values of its investment assets and has determined that net impairments totalling £3 million (NZ$6 million) should be made including the reversal of previous impairments relating to Capral of £10 million (NZ$20 million). These net impairments are reflected in the full year results.

In relation to GPG's remaining investment portfolio, it is not appropriate to discuss publicly the range of initiatives that continue to be implemented in order to maximise and ultimately unlock value. Nevertheless, a number of work in progress items relevant to some of the remaining investments are noteworthy:

·; Tower is GPG's most significant remaining investment, wherein we remain the single largest shareholder (33.6%). Tower confirmed on 19 February 2013 that, following the sale of its Health business, it had obtained High Court orders in relation to the proposed return of approximately NZ$120 million of capital to shareholders pursuant to a scheme of arrangement. GPG's share of that return, which is in the form of a pro-rata cancellation of shares, is NZ$40 million (£21 million). The proposed scheme of arrangement is due to be voted on by members of that company on 21 March 2013. Tower's strategic review continues and the company's stated ambition to become a more focused insurance business has GPG's full support. Another step towards achieving this strategy occurred on 26 February 2013, wherein Tower announced the sale of its Investments business for NZ$79 million. Subject to completion of this transaction, GPG expects that Tower will have the ability to implement additional capital management initiatives over and above the current capital return outlined here.

·; Ridley Corporation is expected to complete the sale of its Salt division at the end of February 2013. GPG believes this transaction will more effectively position the company as a focused agri-business within the Australian market and consequently enhance its investor appeal.

·; On 15 February 2013, PrimeAg Australia announced that it had agreed to sell approximately 60% of its portfolio of land and water entitlements for some A$125 million in cash. Additionally, and separate from the recent sale, the PrimeAg board has resolved to distribute available excess cash which, based on market expectations, is understood to be in the order of a further A$125 million. However this is subject to confirmation by the company. PrimeAg anticipates an initial distribution, post shareholder approval, in mid April 2013. A subsequent distribution relating to the recent land and water portfolio sale is expected to occur in early August 2013. These anticipated distributions are in addition to the A$0.15 per share distributed during the second half of 2012.

·; On 22 February 2013, GPG agreed to sell its entire shareholding in Tandou to a number of unrelated parties. Proceeds from this transaction are expected to total A$15 million.

GPG has significant capital tax losses both in the UK and Australia. To the extent that GPG generates capital gains from the balance of its realisation programme, it is anticipated that the proceeds can be returned to the UK without significant tax leakage.

Coats

Coats' overall result for 2012 was a loss attributable to GPG of £72 million (US$113 million) (2011 profit: £44 million, US$71 million). This loss included the impact of the final outcome of the European Commission fine (£76 million charge) and other exceptional costs after tax of £28 million. Hence, Coats' net profit after tax attributable to GPG, excluding exceptional items, totalled £32 million (2011: £50 million).

Coats' sales of US$1,653 million (£1,043 million) were 3% below the prior year. The challenges faced by Coats were communicated to shareholders at the half year. However, the full year results do reflect the anticipated recovery in the second half with sales on a like-for-like basis increasing in both the Industrial (2%) and Crafts (8%) businesses. For 2012, sales per working day at constant currencies showed a year-on-year increase of 2% for the Coats Group.

The business achieved an increased level of cash conversion, with free cash flow (excluding the US$175 million European Commission fine payment) increasing from US$18 million (£11 million) to US$45 million (£28 million). This was after reorganisation spend of US$21 million (£13 million) (2011: US$14 million (£9 million)) and capital spend of 0.7 times (2011: 0.9 times) depreciation.

As previously announced, Coats has now embarked on a further rationalisation of European Crafts and is taking the actions necessary to vacate freehold properties which are not delivering the return on capital to justify their retention. Over the course of this project it is expected that funds generated from the disposal of these properties will cover the costs arising from the accelerated rationalisation.

Prospects for the underlying Coats business for 2013 and beyond are good, with nascent signs of recovering confidence in world markets being a positive indicator for the drivers of demand for Coats.

The book value of Coats in the GPG consolidated balance sheet at 31 December 2012 was £48 million (US$78 million). This represents a decrease of £102 million from the balance reported at the previous year end. The movement during the year included inter alia the charge relating to the final resolution of the European Commission fine (£76 million), other exceptional costs after tax (primarily reorganisation projects) of £28 million, foreign exchange losses taken directly to reserves of £22 million and actuarial losses of £23 million, partially offset by the attributable profit after tax before exceptional items of £32 million. The foreign currency losses arose mainly as a result of the strengthening of the US dollar against the currencies in which Coats' assets are denominated. The funding position of the Coats UK Pension Plan is specifically dealt with in more detail under 'Pensions'.

A full review of the year for Coats and its financial position is included in a separate section of this report.

Capital notes

Two issues of capital notes remained outstanding at the commencement of 2012. Notice of early repayment of the notes with an initial election date of 15 December 2013 was given in September 2011 and this issue, with a principal value of NZ$77 million (£39 million), was purchased on 15 March 2012. The remaining capital notes having an initial election date of 15 November 2012 and a principal value of NZ$350 million (£178 million) were repurchased on that date. There are, therefore, now no outstanding capital notes.

Pensions

The carrying values of the Coats UK Pension Plan ("Coats Plan"), Coats' other employee benefit obligations and the two GPG pension schemes: Brunel and Staveley ("the GPG Pension Schemes") on an IAS19 financial reporting basis (which, irrespective of assets held, requires the liabilities to be discounted using the yield on high quality corporate bonds; which in the UK is generally taken to be those with a AA credit rating) are summarised in the table below:

As previously acknowledged, these accounting outcomes have a significant impact on the balance sheet of GPG. While the accounting presentation has its place, it only reflects the particular circumstances at the reporting date. Discount rate changes and temporary movements in markets can give rise to large fluctuations in scheme accounting surpluses and deficits and the measurement is based on very prescriptive rules. In judging the commercial impact of the schemes on the Group, the Board places greater emphasis on the cash contributions required by the respective funding arrangements. Changes to these contribution plans are generally driven by the triennial valuation process. The current status of the funding arrangements for GPG's three UK schemes is as follows:

·; as announced in July 2012, the April 2011 funding valuation of the Staveley scheme was agreed during the year and the sponsor company is now making regular contributions. The deficit on the funding basis was £20 million and, taking into account the scheme actuary's assumptions on future investment returns, this is in the process of being made good. A one-off payment was made in July 2012 of £5 million from which point monthly contributions of £0.1 million over eight years commenced;

·; negotiations over the Coats Plan valuation as at April 2012 continue and management expects these to be concluded during the first half of 2013. The last valuation of the Coats Plan (as at April 2009) resulted in a funding deficit of £101 million (NZ$198 million) which Coats agreed to make good by contributions of £7 million (NZ$14 million) per annum over a period of ten years. It is anticipated, when the 2012 valuation is finalised, that contributions in respect of past service will increase by approximately £7 million per annum to some £14 million per annum;

·; no contributions are currently being made to the Brunel pension scheme and the next triennial valuation (effective date 31 March 2013) is due to be completed by 30 June 2014. Given the Company's current value realisation programme and a likely funding deficit at 31 March 2013, the Trustee and the Companyare engaged in discussions regarding the continuing form of support for that scheme.

The accounting standard dealing with employee benefits (IAS19) has been revised and that revised standard will be adopted by GPG from 1 January 2013. This will have a significant impact on the consolidated income statement from 2013 onwards, although there will be no impact on the Group's net defined benefit obligation nor cash flow. The key impacts on the consolidated income statement will be from the replacement of expected returns on plan assets and liabilities with an interest charge derived from the prior year discount rate and the net defined benefit asset or liability at the beginning of the current year and the recognition in operating profit of pension scheme administration costs paid out of plan assets. Had the amended IAS19 been applied in 2012, the estimated full year impact would have been a reduction in operating profit of £5 million and an increase in net interest costs of £22 million. This would have led to a corresponding improvement of £27 million in the actuarial loss arising within reserves. The additional charges primarily relate to the UK pension schemes and, consequently, the associated tax relief recognised in the income statement would be minimal.

The Board continues to develop its plans for how to manage the obligations to the GPG Pension Schemes in the context of the GPG value realisation strategy and the re-launch of Coats. The agreement of the Staveley funding valuation, including the backing of some £70 million in net assets as at 31 December 2012, was a positive step in this process. Furthermore, based on advice received, the Board believes that the Group's obligations to the Brunel scheme are limited to the covenant directly provided by its sponsor company; this represents £54 million. Thus, the current support provisions provide the Trustees of the GPG Pension Schemes with a contingent claim over net assets of approximately £124 million (NZ$243 million).

As reported previously, the Board intends that the support currently provided by GPG to back the GPG Pension Schemes should be maintained. As a result, it is expected that investment portfolio realisation proceeds equivalent to at least £124 million (NZ$243 million) will be required to be retained by the GPG group and will not be available for distribution to shareholders.

Further details in respect of Coats' non-UK employee benefit obligations are provided in the attached report from Coats.

Overhead costs

Net operating expenses arising in the 2012 financial year of £21 million for the Parent Group are further analysed as follows:

The other staff incentives represent the cost of staff retention and reward programmes and future redundancies. As previously reported, these costs are in part dependent on the outcome of the investment portfolio realisation programme. The estimated cost is being spread over the period the related services are being provided. Following the announcement in October 2012 of the transition to New Coats, work streams have been established to ensure the efficient rundown of GPG's corporate offices and the migration of administration responsibility to the Coats management team. Later in 2013, this is likely to involve a merger of all activities with those of Coats. There were, at the year end, 15 permanent members of staff other than Directors within the Parent Group: 3 investment professionals, 9 covering finance, company secretarial and administration; and 3 support staff.

Capital Management

All decisions relating to capital management are taken by the Board with the intention of achieving the best overall value for shareholders. The Group has been running an on-market share buyback programme since September 2012. As at 22 February 2013, shares with a market value of £34 million (NZ$67 million) had been acquired leaving up to a further £36 million (NZ$71 million) to be purchased, subject to shareholder appetite. There are no plans for a final or interim dividend at this time. Further capital management initiatives will be outlined to shareholders at or prior to the forthcoming Annual General Meeting of shareholders.

At the year end the Parent Group cash was held in the following currencies:

The policy of migrating surplus funds into NZD is being continued. The slight fall in the absolute level of NZD funds during 2012 is in part due to the purchase of the two tranches of outstanding capital notes and the cost of servicing them prior to acquisition.

Board Changes and Corporate Governance

On 19 January 2012, Scott Malcolm was appointed an independent Non-Executive Director of the Company. The Board comprises five Non-Executive Directors, of whom three are considered to be independent. This composition is in line with the UK Corporate Governance Code issued by the UK Financial Reporting Council and provides a board of appropriate calibre and experience to pursue the current strategy, while at the same time providing a suitable corporate governance framework. In addition, the Board has the appropriate committee structures and procedures, including a board performance review. The constitution of the Board is currently under review and changes are planned as part of the Coats transition.

Annual General Meeting

The Annual General Meeting is intended to be held on Thursday, 23 May 2013 in Auckland. Further details of the exact location and timing of the meeting will be provided in the Notice of Meeting which GPG intends to send to shareholders in April 2013.

I should like to thank the management team and staff of GPG and Coats, who have all contributed to GPG's achievements in 2012, and to their commitment to enhancing value for all GPG shareholders.

Rob Campbell

Chairman

27 February 2013

Note: All amounts stated in NZ$ are for illustrative purposes only, based on the NZ$ : GBP exchange rate on 31 December 2012, NZ$1.9621 : £1.00.

COATS

Summary and highlights

*see note 1 to the Coats financial information - basis of preparation

**see Coats consolidated income statement

***see note 6 to the Coats financial information

All figures included in this document are at actual exchange rates, unless otherwise stated

Coats Group Chief Executive's review

I am pleased to report that Coats' underlying results for the year are in line with market expectations and demonstrate encouraging progress in strengthening our foundations for future growth. This robust performance was underpinned by Coats' position as a global market leader with presence in a broad range of end markets and geographies.

Full year sales of $1,653.4 million (2011 - $1,701.6 million) and a pre-exceptional operating profit of $127.0 million (2011 - $143.6 million) were achieved in 2012 despite, as anticipated, market conditions remaining challenging. At constant exchange rates, which give the best view of underlying performance, full year sales increased by 2%. After a weaker first half driven by customer destocking and raw material cost increases, the second half saw improvement versus both the second half of 2011 and the first half of 2012. Sales in the second half increased by 4% year-on-year at constant exchange rates. Second half pre-exceptional operating profit showed a marked improvement on the prior year with growth of 16% at constant exchange rates and operating margins rising from 7.2% to 8.0%. Post exceptional items, the operating loss for the year was $4.7 million (2011 - $131.6 million profit).

The business achieved an increased level of cash conversion, with the net cash inflow from normal operating activities increasing to $171.8 million (2011 - $150.3 million) and free cash flow (excluding the $174.8 million European Commission fine payment) increasing from $18.0 million to $44.8 million. This was after reorganisation spend of $21.4 million (2011 - $13.7 million) and capital spend of 0.7 times (2011 - 0.9 times) depreciation. Year end net working capital as a percentage of sales reduced from 17.6% to 17.1% at constant exchange rates.

Attributable profit for the year, however, was significantly impacted by $120.4 million of exceptional operating and finance charges (in excess of the provision held at 31 December 2011) in respect of the European Commission fine, following the European General Court's decision in June 2012, and accelerated reorganisation costs of $24 million.

Operating results

Despite a stronger second half, sales for the year at actual exchange rates were 3% down on 2011 and pre-exceptional operating profit was 12% down. Year-on-year comparisons were negatively impacted by the very strong first half for the Coats Group in 2011 and currency fluctuations also had an adverse impact. However, in the second half of the year, the year-on-year sales growth of 4% and the pre-exceptional operating profit increase of 16% ($9.3 million) at constant exchange rates demonstrate an improving performance, albeit against a softer 2011 comparable period.

Sales per working day (at constant exchange rates) for the Coats Group were 2% up on 2011. Sales per working day for the Industrial and Crafts Divisions were up 1% and 7% respectively.

*2011 like-for-like restates 2011 figures at 2012 exchange rates

**Pre reorganisation, impairment, and other exceptional items (see note 2 to the Coats financial information)

Post exceptional items, the operating loss for the year was $4.7 million (2011 - $131.6 million profit).

Industrial

Industrial divisional sales are largely driven by underlying demand for clothing and footwear in developed economies as well as changes in inventory levels in the related retail supply chains. Demand over the year has been impacted by uncertain economic conditions, particularly in Europe, and by tight inventory control by clothing and footwear retailers. In addition, Industrial sales in Latin America were impacted by a deteriorating economic situation in the key Brazilian market, with local apparel and footwear production being replaced by imports. The division operates across a wide range of markets and, as a result, currency fluctuations can have a significant impact on sales. Sales for the year fell by 4% at actual exchange rates, reflecting the strength of the US dollar against currencies such as the Brazilian real, the Indian rupee and the euro, but grew by 1% at constant exchange rates. Although profitability for the full year for the division was 6% down on 2011 at constant exchange rates, profitability on that basis for the second half was 14% up year-on-year.

Crafts

Crafts divisional sales benefitted from expanded shelf space won with large retail customers and strong growth in handknittings. Divisional sales increased by 1% at actual exchange rates and by 6% at constant exchange rates. However, there was pressure on margins across the division both from changes in product mix and the impact of raw material input costs incurred in the second half of 2011 flowing through into the income statement in the first half of 2012. Profitability for the Crafts Division for the full year was 10% down on 2011 at constant exchange rates, but improved 35% year-on-year in the second half due to the effect of price increases implemented across both regions. In Europe, the Middle East and Africa ("EMEA"), although the consumer environment was weak overall, sales were encouragingly up 5% on a like-for-like basis after years of decline. At actual exchange rates, EMEA Crafts sales of $167.7 million were $3.1 million down on 2011 but operating losses improved, being $4.4 million lower than the prior year.

Further details on Industrial and Crafts performance on a constant exchange rate basis are included in the Operating Review.

Investment

Over the course of 2012, investment continued to be made to support the growth of the business and to improve its operational performance.

Investment in new plant and IT systems amounted to $38.8 million (2011 - $50.5 million), representing 0.7 times (2011 - 0.9 times) depreciation (including computer software amortisation) of $52.8 million (2011 - $57.0 million). This capital expenditure was focused on the Industrial Division, including capacity and productivity improvements in Asia, and supporting growth initiatives across Coats, including investment to support Coats' digital strategy.

Reorganisation costs of $39.9 million (2011 - $14.6 million) were incurred during the year, of which approximately $24 million related to the accelerated programme to bring forward projects originally planned for future years. The focus of reorganisation in 2012 has been on:

·; restructuring low operating margin Crafts business in EMEA to reduce fixed costs and drive improved profitability; and

·; rationalisation of the EMEA zips business to enhance operational efficiency.

The further refocusing of EMEA Crafts is expected to have an adverse effect on turnover due to the elimination of unprofitable areas of activity, but should support improvements to operating performance.

Prospects

The global economy is likely to remain mixed and uncertain during 2013. While some modest economic growth can be expected in North America and growth in Asian markets should remain relatively strong, activity in EMEA is likely to be subdued. It is expected that raw material costs will continue to trend marginally upwards, and payroll and other inflationary pressures will be a feature in many of the countries in which Coats operates.

Year-on-year improvement in Industrial sales is expected during 2013, with contributions from both price and volume. Passing on cost increases via price rises remains an important factor in maintaining profitability. Underlying demand for clothing and footwear from consumers is expected to remain stable during the year and the expectation is that there will not be further material reductions in retailer inventories. Growth is expected in the speciality (non-apparel and footwear) markets, which continue to grow globally.

The Crafts Division achieved sales growth of 6% in 2012 at constant exchange rates and, while the reorganisation activity will deliver an improvement in profitability, it is expected that continued high customer inventory levels in Brazil will dampen growth in Latin America, contributing to year-on-year sales growth being more limited. Further improvement in margins is anticipated in the second half as the benefits of price increases being implemented in the first half of 2013 and European cost reductions begin to take effect. As referred to above, the further rationalisation of the EMEA Crafts business in 2013 will adversely impact sales growth as non-core product ranges are exited, but should facilitate improved operating results.

Restructuring activity in 2013 is expected to be in line with that set out in GPG's November 2012 Interim Management Statement, which noted that reorganisation charges in total for 2012 and 2013 were projected to be up to $75 million. This accelerated programme brings forward projects planned for future years, however, overall net cash outflows on these accelerated projects are expected to be largely offset by disposal proceeds (before tax) of some $50 million from surplus properties.

In conclusion

Coats occupies a strong position as a market leader with a robust and defendable business model and stable operating margins, even in challenging market conditions. The company operates on a truly global basis with its own well-known brands and has deep and long-standing relationships with the leading retailers and manufacturers in apparel and footwear, speciality customers, crafts retailers and consumers.

The business is focused on accelerating profitable and cash generative growth across its three discrete end markets - apparel and footwear, speciality and textile crafts. These markets, together with an unparalleled geographic footprint, ensure that Coats is well hedged, both geographically and through sector diversification.

The business has well-invested operations in more than 70 countries, together with a highly engaged workforce of more than 20,000 people across six continents.

Coats' growth strategy is underpinned by a pioneering history and culture and the business continues to show industry leadership: providing complementary and value added products and services to the apparel and footwear industries; extending the crafts offer into new markets and online; and applying innovative techniques to develop products in new areas such as tracer threads, aramids and fibre optics.

Coats has seen a period of substantial investment by GPG in developing a world class manufacturing footprint and, more recently, in new product development, digital technology and other enabling assets. We are confident that these actions will sustain and build Coats' market leadership, revenue and profit growth.

Paul FormanGroup Chief Executive, Coats plc

27 February 2013

Operating Review

Industrial Trading Performance

*2011 like-for-like restates 2011 figures at 2012 exchange rates

**Pre reorganisation, impairment, and other exceptional items (see note 2 to the Coats financial information)

*** In line with changes in 2012 to the Coats Group's internal management structure, results for Crafts Asia and Rest of World are now reported in the Industrial Division, and the comparative figures for 2011 and first half 2012 have been restated accordingly

In the following commentary, all comparisons with 2011 are on a like-for-like basis

Asian sales growth of 3% for the year as a whole was impacted by weak demand in European end-user markets. However, sales growth of 6% was achieved in the second half, with benefits from volume growth in segments catering to domestic rather than export demand in territories such as India, as domestic markets continue to expand. Coats' long-standing relationships with global apparel and footwear suppliers and brand owners continue to help underpin the business.

Sales in the Americas were impacted by the poor economic situation in Latin America. In the key market of Brazil, notwithstanding some currency depreciation during the year, local apparel and footwear production continued to be replaced by imports. In North America, there was good sales growth in speciality segments such as fibre optics and aramids, but this was offset by significant reductions in the defence sector.

In EMEA, consumer demand was weak throughout 2012 and the first half was also impacted by retailers exercising caution in terms of inventory management.

For the full year, pre-exceptional operating profits for the Division were 6% lower than 2011 at like-for-like exchange rates. The 14% improvement in profitability in the second half reflects sales growth, easing of raw material price increases and improving gross margins, plus the benefit of soft comparatives in 2011 when a contraction of customer inventory levels in the second half impacted profits. Operating profit margin in the second half improved from 9.0% in 2011 to 10.0%.

Crafts Trading Performance

*2011 like-for-like restates 2011 figures at 2012 exchange rates

**Pre reorganisation, impairment, and other exceptional items (see note 2 to the Coats financial information)

*** In line with changes in 2012 to the Coats Group's internal management structure, results for Crafts Asia and Rest of World are now reported in the Industrial Division, and the comparative figures for 2011 and first half 2012 have been restated accordingly

In the following commentary, all comparisons with 2011 are on a like-for-like basis

Sales growth of 7% in the Americas in 2012 reflects volume increases achieved through gains in shelf space with large retail store customers in North America. This growth was achieved in both handknittings and consumer sewings. However, Latin America's performance was adversely impacted by customer overstocking in handknittings from 2011, followed by a warm winter in 2012.

The overall EMEA crafts market remained weak, particularly traditional consumer sewings in Southern Europe, where austerity measures and cuts in public spending continue to dampen consumer confidence. However, there was strong demand for handknittings, the largest product category, which led to sales growth of 5% for the year after years of decline. The continued focus on digital channels, class-leading product ranges and service levels gave additional sales impetus and supported the very positive EMEA sales growth in the second half of the year. The further rationalisation of the business in 2013 will adversely impact top line sales, but should facilitate improved operating results before exceptional charges.

Pre-exceptional operating profits for the division for the full year were 10% lower than 2011. The 35% improvement in profitability in the second half reflected the impact of price increases implemented across all regions during the first half of 2012 and volume growth, as well as the easing of the impact of raw material price increases in the second half. Operating profit margin in the second half improved from 2.8% in 2011 to 3.5%, notwithstanding adverse changes in product mix. However, the profit of the division continued to be held back by losses in EMEA, which are being addressed by the previously referred to accelerated reorganisation activity.

Coats Group Finance Review

Exceptional items

Net exceptional costs charged to profit before taxation totalled $167.5 million (2011 - $12.0 million), of which $120.4 million (2011 - $1.0 million credit) related to the European Commission fine.

In June 2012, the European General Court dismissed Coats' appeal against the €110.3 million fine imposed by the European Commission in 2007. An exceptional charge of $120.4 million was incurred in the year to recognise the previously unprovided element of the fine and interest accrued from the date of the original European Commission decision in 2007. Within the consolidated income statement, $84.6 million represents an exceptional item within operating profit and $35.8 million represents an exceptional item within finance costs. Coats refinanced its senior debt facilities in October 2011, making allowance for the possibility of an unfavourable judgment. It therefore had adequate banking facilities in July 2012 to enable it to settle the fine and associated interest. 

Coats is subject to a lawsuit in the US that followed on from the original decision by the European Commission. While that decision focused on conduct in the European Union relating to fasteners, the consolidated class action complaint filed by US plaintiffs in the Eastern District of Pennsylvania against Coats and three other manufacturers makes allegations under US antitrust laws relating to sales of zippers and other fasteners from January 1991 until September 2007 in the US. Coats considers that the plaintiffs' case is without merit and is vigorously defending it.

A further $47.1 million (2011 - $13.0 million) of operating exceptional items have been incurred, including reorganisation costs of $39.9 million (2011 - $14.6 million) and $8.0 million (2011 - $2.5 million) of US environmental costs. As noted in previous reports, the US Environmental Protection Agency has notified Coats & Clark, Inc. ("CC") that it is a potentially responsible party under the US Superfund law for investigation and remediation costs at the Lower Passaic River Study Area ("LPRSA") in New Jersey, in respect of an alleged predecessor's former facilities which operated in that area prior to 1950. CC has joined a Cooperating Parties Group ("CPG") of approximately 70 potentially responsible parties that have agreed to fund the study of the LPRSA. During the year, the members of the CPG, including CC, alsoagreed to fund the remediation of part of the LPRSA, and CC's interim allocation of the cost of this remediation is estimated at approximately $0.7 million. The $8.0 million charge is primarily connected with this, CC's latest estimated share of LPRSA study costs, and associated legal and consultancy costs (see note 2 to the Coats financial information for further details).

Non-operating results

Investment income was $2.6 million (2011 - $7.3 million), with the differential largely due to $4.1 million compensation received in 2011 in relation to a compulsory state financing arrangement in Latin America in the 1980s and 1990s.

Excluding exceptional items, finance costs of $19.4 million were $2.6 million higher than in 2011, primarily due to a $2.0 million lower net return on pension scheme assets and liabilities. The impact of payment of the European Commission fine on overall finance costs is not significant given that, during the period of the appeal, guarantees (with an associated finance cost) were provided to the European Commission for the full amount of the fine plus interest.

A tax charge of $46.6 million (2011 - $45.6 million) has been incurred. Excluding all exceptional items plus any associated tax effect and prior year tax adjustments, the effective tax rate on pre-tax profits of $111.3 million (2011 - $136.2 million) is 46% (2011 - 35%). The increase in the underlying tax rate reflects the lower profitability in Latin America. No tax relief is available on the European Commission fine and associated interest.

The $2.7 million loss from discontinued operations (2011 - $1.8 million) primarily relates to provisioning for historical UK employer liability claims.

The net loss attributable to GPG was $113.0 million (2011 - $71.2 million profit). Excluding exceptional items and their associated tax effect, the Coats Group generated a net profit of $50.6 million (2011 - $81.1 million).

Cash flow

EBITDA (defined as pre-exceptional operating profit before depreciation and amortisation) was $179.8 million (2011 - $200.6 million).

The net cash inflow from normal operating activities improved to $171.8 million (2011 - $150.3 million). This reflects a net working capital inflow of $7.0 million (2011 - $29.5 million outflow) generated by lower inventory levels and improvements in creditor terms.

Spend on reorganisation and capital projects totalled $60.2 million (2011 - $64.2 million) representing 1.1 times (2011 - 1.1 times) depreciation.

Interest (excluding the exceptional interest of $35.8 million) and tax paid totalled $62.6 million (2011 - $60.7 million).

Excluding the $174.8 million payment of the European Commission fine and associated interest, a free cash flow (being the change in net debt resulting from cash flows) of $44.8 million (2011 - $18.0 million) was generated which would have resulted in net debt reducing from $238.4 million at the 2011 year end to $192.8 million. Including the impact of the fine and associated interest payment, net debt in fact increased to $367.6 million.

A key metric for the Coats Group is the leverage ratio of net debt to EBITDA. Under the definitions of net debt and EBITDA prescribed in Coats' senior debt facility, net debt at 31 December 2012 was 2.1 times EBITDA (2011 - 2.1 times); well within Coats' covenant limits of 3.0 times.

Balance sheet

Equity shareholders' funds fell from $233.7 million at the end of 2011 to $77.9 million. This primarily reflects the $113.0 million attributable loss and a $35.9 million actuarial loss taken directly to reserves in respect of all of the Coats Group's retirement benefit arrangements.

Pension and other post-employment benefits

Coats' UK scheme has been commented on within the GPG Chairman's statement.

At 31 December 2012, Coats' US scheme showed a gross surplus of $78.0 million (2011 - $72.1 million) and a recoverable surplus of $37.3 million (2011 - $33.7 million). An employer contribution holiday for this scheme continues to be taken based on actuarial advice. The recoverable surplus for this scheme is predominantly included in non-current assets.

There are various pension and leaving indemnity arrangements in other countries (primarily in Europe) where the Coats Group operates. The vast majority of these schemes, in line with local market practice, are not funded but are fully provided in the Coats Group financial information and are predominantly included in current and non-current liabilities.

APPENDIX

GUINNESS PEAT GROUP plc

Net Proceeds from portfolio divestments from 1 January 2011 to 22 February 2013

On behalf of the Board, Guinness Peat Group plc

R J Campbell

Director

27 February 2013

Registered in England No. 103548

Enquiry details are:

* Restated to reflect the results of Gosford Quarry Holdings Ltd, Touch Holdings Ltd, CIC Australia Ltd and Parent Group

investment operations as discontinued operations.