27th Feb 2007 07:00
Guinness Peat Group PLC26 February 2007 Guinness Peat Group plc The following unaudited consolidated results of Coats Group Limited ("the Group") for the year ended 31 December2006 are released by Guinness Peat Group plc ("GPG") for information only. Richard RussellCompany SecretaryGuinness Peat Group plc 27 February 2007 Contacts:Blake Nixon (UK) 00 44 20 7484 3370Gary Weiss (Australia) 00 61 2 8298 4305Tony Gibbs (New Zealand) 00 64 9 379 8888 Coats Group Limited: unaudited results* for the year ended 31 December 2006 Financial summary 2005 2006 Unaudited Unaudited Restated* * US$m US$mRevenue 1,615.1 1,636.7 Operating profit before reorganisation, impairment and other exceptional 122.4 126.5items(see note 2) Operating profit 79.9 99.8 Profit before taxation 57.1 84.2 ** Net profit attributable to equity shareholders 29.9 58.3 ** Net debt 345.7 363.3 Net gearing 76% 86% • Improved performance from Industrial Thread offset by lower Crafts sales • Asia like for like sales growth of 12% • Restructuring of Industrial Thread near completion * See note 1** Restated, see note 1 CHAIRMAN'S STATEMENT Results Coats overall performance in 2006 was similar to 2005, however at divisionallevel a major improvement in industrial thread was offset by weakness in the UShandknittings market. Pre-exceptional operating profit (before reorganisation, impairment and otherexceptional items) was $122.4 million compared to $126.5 million in 2005. Thisreflects a 2% improvement in second half profits compared to previous year afteran 8% decline in the first half. Lower sales of fancy yarn in North Americacontinued to be a major factor affecting crafts profitability but in the secondhalf this was exacerbated by generally weak demand for crafts in Europe. Incontrast, industrial sales and profit margins continued the improvement seen inthe first half. In addition to the impact of lower sales, crafts profits were impacted byinventory write-downs and other one-off charges. The year-on-year decline wasmagnified by the build up of North American retailers' handknittings stockswhich had benefited 2005 but which was reversed in 2006. On a more positivenote, the industrial business - which makes up 64% of Coats' sales and where themajority of recent investment and reorganisation has been directed - madesubstantial progress as a result of productivity gains in Western markets andsales growth in Asia. The individual results for crafts and industrial over the last three yearsprovide an additional perspective on the current year's performance: 2006 2005 2004External sales $m Crafts 585.0 640.5 590.4 Industrial thread & zips 1030.1 996.2 987.7 Total 1,615.1 1,636.7 1,578.1 Like-for-like sales growth Crafts -12% +3% +8% Industrial thread & zips +2% -1% - Total -3% +1% +3% Pre-exceptional operating profit $m Crafts 18.8 58.0 41.2 Industrial thread & zips 103.6 68.5 49.3 Total 122.4 126.5 90.5 Pre-exceptional operating margin Crafts 3% 9% 7% Industrial thread & zips 10% 7% 5% Total 8% 8% 6% Net earnings attributable to equity shareholders fell by $28.4 million to $29.9million due to a $42.5 million negative swing on foreign exchange gains /losses, which was only partially offset by lower reorganisation costs ($51.6million compared to $62.4 million) and higher profits on property disposals($21.3 million compared to $17.2 million). EBITDA (defined as pre-exceptional operating profit before depreciation andamortisation) of $185.5 million was 2% ahead of the previous year's total of$182.5 million. Net operating cash flow before reorganisation costs remainedstrong at $172.3 million compared to $231.2 million in 2005, which included anexceptional reduction in net working capital of $55.4 million. Although theyear-end working capital position was slightly above the previous year,underlying management of working capital continued to improve with the averageworking capital / sales ratio falling to 22% from 24% in 2005. Spending on reorganisation and capital projects remained high at $132.8 million(2005 - $135.6 million), but including the realisation of $60.2 million from thesale of surplus property (2005 - $56.6 million) this was comfortably covered byinternally generated cash flow. Net debt fell by $17.6 million to $345.7million. Investment, reorganisation and disposals Investment in new plant and systems amounted to $78.3 million (2005 - $81.3million). The bulk of investment was directed towards upgrading existingoperations with the balance consisting of additional capacity to meet growth inAsia. Total spending in Asia accounted for approximately half of the total. In cash terms, reorganisation spend of $54.5 million was level with 2005 butthis partly reflected the cash outflows on projects for which provisions werealready established and the P&L charge of $51.6 million was significantly lowerthan the previous year's total of $62.4 million. Approximately 70% of the chargein 2006 was directed towards site closures and overhead reduction in Europe.Total numbers employed in the Group fell by 4% to 23,781 at the end of the yearand over 80% of employees are now located in low cost markets. As in previousyears, reorganisation cash outflows were covered by proceeds from the sale ofproperties, which in most cases had become surplus as a result of the Group'sreorganisation program. Spending on acquisition of businesses and minority shareholdings in existingsubsidiaries, net of disposals, amounted to $7.5 million (2005 - net inflow of$5.4 million). The net total covers several relatively small transactions, themost significant of which was the acquisition of HP, a crafts wholesaler inDenmark with annual sales of approximately $12 million. Once fully integrated,HP will complement last year's acquisition of Almedahls and strengthen Coats'position as the leading crafts business in Scandanavia. Prospects The consistent progress achieved by the industrial business over the last threeyears is encouraging and further improvement is planned - both from costreductions in Western markets as the benefits from recent investment andreorganisation are fully delivered, and also from sales growth in Asia. Globaldemand - which is mainly dependent on consumer purchases of clothing andfootwear - is expected to remain reasonably firm but certain regions, notablyEurope and South America, will continue to be impacted by growth in imports fromAsia. Trading conditions in all regions remain highly competitive. The outlook for handknittings - which accounts for just under 40% of Coatscrafts sales of $585.0 million - is mixed. Although underlying consumer demandfor classic and basic yarns remained relatively stable during 2006, the declinein fancy yarns impacted retailer confidence in the whole handknittings categoryand there has to be some uncertainty over the level of 2007 sales. In any eventthere should be some recovery in profitability due to the reduction ofmark-downs and other one-off charges which affected 2006. In other crafts categories, demand has also been weaker but opportunities totake full advantage of Coats' overall market leadership position are beingpursued. New ranges of consumer sewings, crochet and embroidery are beingdeveloped which will form the basis of a harmonised global offer in contrast tothe largely country-specific ranges which currently make up the majority ofsales. Not only should this result in more efficient supply chains, but the morefocused offer will enable greater levels of marketing support to be concentratedon growing market share. However, the benefits of these projects are unlikely tocome through until 2008/9. The Group's program of relocating and upgrading industrial thread capacity hasbeen successful and has made a substantial contribution to the improvement inindustrial profitability. Given the nature of the industry, it is likely thatthere will continue to be an ongoing need to close or downsize plants in certaincountries while expanding in others but reorganisation costs in 2007 and beyondare expected to be lower than the average of the last three years. Goingforward, a greater proportion of reorganisation projects will be related toreduction of selling and administration overheads as well as reorganisationwithin the crafts business. At the same time, after the catch-up investment ofthe last three years, it is anticipated that net capital expenditure will tendto move closer towards the level of depreciation. There have been no significant developments in the European Commissioninvestigation since the half year. During 2007, the outcome of the Commission'sinvestigation into European fasteners - the last outstanding part of the generalinvestigation into thread and haberdashery markets which began in 2001 - shouldbe announced. In addition, the Court of First Instance is expected to rule onCoats' appeal against the fine levied in 2004 in respect of needles. As statedin previous reports, it is believed that any anticipated eventual payment offines is adequately covered by existing provisions. Overall, the Board remains confident of the potential for improvement in Coatsresults as the heavy restructuring program of the last three years continues todeliver benefits. The industrial business should continue to gain from itsstrong position in the high growth markets of Asia. In addition, itsprofitability in Europe and North America will be less constrained by excesscapacity and uneconomic units although competitive pressures remain high,particularly in zips. The crafts business should be able to improveprofitability in the medium term, although the extent of recovery in the shortterm will depend on the level of handknittings demand as well as the speed atwhich the new ranges in other crafts categories can be rolled out. Finally, in terms of net earnings, the reduced level of reorganisation costshould begin to allow the improvements in operating profit achieved over thelast three years to flow through to the bottom line. Gary Weiss Chairman 27 February 2007 OPERATING REVIEW Sales by region 2005 Exchange Acquisitions / 2005 2006 Like-for-like retranslation * disposals like-for-like reported increase/ $m $m $m $m $m (decrease) %External salesAsia and Rest of world 463.9 (3.4) 460.5 516.7 +12%Europe 545.4 8.4 11.5 565.3 525.3 -7%North America 431.3 1.5 432.8 363.5 -16%South America 196.1 15.1 211.2 209.6 -1%Total 1,636.7 21.6 11.5 1,669.8 1,615.1 -3% *Impact of restating 2005 figures at 2006 exchange rates. Asia and Rest of world Sales +12% Coats' operations in Asia are mainly focused on industrial thread with sales andprofits growing strongly throughout the region, reflecting the benefit ofrelationships with global retailers and brand owners as well as the continuedgrowth in apparel exports. In addition to the impact from higher sales volumes,margins benefited from the ramping up of production at the new plants in China. Europe Sales -7% Sales of industrial thread and zips in total continued to suffer from netcustomer migration, although there were individual growth markets within EasternEurope. Fashion trends also had a negative impact on zip sales compared to theprevious year. Industrial sales in total fell by 8% on a like-for-like basis,but despite this the business moved into profit as a result of reorganisationbenefits although margins remained well below Group targets. Crafts sales, which make up approximately half of the total sales in the region,fell by 6% once the benefit from exchange rates and acquisitions is excluded.Handknitting sales weakened in the second half after a relatively good firsthalf, while other categories were weaker throughout the year. Along with thereduction in sales, transitional costs due to the move to a new supply chain hada significant impact on operating profit which for the region as a whole offsetthe gains made by the industrial business. North America Sales -16% Industrial sales fell by 3%, reflecting a relatively strong performance in aregion which is still experiencing net customer migration. More importantly,after several years of losses the business moved into profit as benefits fromearlier reorganisation and investment finally came through. However marginsremained well below Group targets. Crafts sales, as in Europe, account for approximately half of the regional totalbut handknittings have a greater weight in the product mix. Mainly as a resultof the weakness in the fancy yarns segment, full year North American craftssales fell by 26%. Although second half crafts sales were not as weak as thefirst half (which fell by 35%), inventory write-downs and other one-off chargesled to a substantial reduction in regional profits. South America Sales -1% Industrial sales continued to be under pressure from the strengthening of localcurrencies against the US dollar and consequent increase in import penetration.However margins were protected by improvements in productivity. The crafts business in South America represents approximately 40% of total salesin the region. In contrast to Europe and North America, crafts sales and profitsfor the full year increased slightly but demand trends in the second half werenoticeably weaker than in the first half. Overall, regional profit was slightly up on essentially flat sales. Investment income, finance costs Finance costs, net of investment income, were $24.9 million compared to $17.2million in the previous year, which included foreign exchange gains of $11.8million. The Group's borrowings are now largely denominated in US dollars, withremaining local currency debt in general covered by assets in the same currency.Net interest payable, after including $2.7 million of interest receivable shownin investment income, was $37.0 million, in line with the previous year, whilstthe credit from the net return on pension scheme assets and liabilitiesincreased by $7.4 million to $15.7 million. Tax The tax charge of $26.3 million (2005 - $39.5 million) represents a rate of 46%(2005 - 47%) on pre-tax profit of $57.1 million (2005 - $84.2 million). Thecurrent year's charge benefited from a $7.5 million credit on prior yearadjustments whereas the charge in 2005 included an additional charge of $14.8million. Excluding those adjustments, the tax rate was 59% for 2006 compared to29% in the previous year. The exceptionally high rate in 2006 was mainly due toan increase in non-deductible exceptional costs. Pension and other post-employment benefits The Group operates a defined benefit plan in the UK and there is a similararrangement in the USA. The UK scheme shows a recoverable surplus of $22.9million (2005 - $27.2 million) and the USA scheme shows a recoverable surplus of$36.9 million (2005 - $28.9 million). The UK and USA surpluses are included innon-current assets. During the year the UK scheme's triennial valuation wascompleted and as a consequence an employer contribution holiday continues to betaken. There are various pension and leaving indemnity arrangements (primarily inEurope) where the Group operates. The vast majority of these schemes, in linewith local market practice, are not "funded" but are fully provided in the Groupaccounts and are predominantly included in current and non-current liabilities. Balance sheet Equity shareholders' funds increased from $397.9 million to $434.5 million,reflecting the $29.9 million net attributable profit plus net gains of $6.7million taken directly to reserves. Minority interests fell by $7.2 million to$19.5 million largely as a result of acquisition. In conjunction with thereduction in net debt from $363.3 million to $345.7 million, net gearing wasreduced from 86% to 76%. Consolidated income statement (unaudited) 2006 2005 Unaudited Unaudited Restated*For the year ended 31 December 2006 Notes US$m US$mContinuing operationsRevenue 1,615.1 1,636.7 Cost of sales (1,084.8) (1,084.0) Gross profit 530.3 552.7 Distribution costs (299.9) (306.2)Administrative expenses (176.4) (165.6)Other operating income 25.9 18.9 Operating profit 2 79.9 99.8 Share of profits of joint ventures 2.1 1.6 Investment income 4.4 7.0 Finance costs 3 (29.3) (24.2) * Profit before taxation 57.1 84.2 Taxation 4 (26.3) (39.5) Profit from continuing operations 30.8 44.7 Discontinued operationsProfit from discontinued operations 3.2 15.0 Profit for the 34.0 59.7year Attributable to:EQUITY SHAREHOLDERS OF THE COMPANY 29.9 58.3Minority interests 4.1 1.4 34.0 59.7* Finance costs have been restated following an amendment to IAS 21 (see note 1). Consolidated balance sheet (unaudited) 2006 2005 Unaudited Unaudited Restated*At 31 December 2006 Notes US$m US$mNon-current assetsIntangible assets 260.9 257.5Property, plant and equipment 510.8 482.5Investments in joint ventures 16.2 16.4Available-for-sale investments 4.9 3.5Deferred tax assets 9.5 4.6Pension surpluses 61.3 57.5Trade and other receivables 27.6 23.4 891.2 845.4 Current assetsInventories 307.6 286.9Trade and other receivables 308.5 302.7Available-for-sale investments 0.2 8.8Cash and cash equivalents 7 76.4 77.8 692.7 676.2 Non-current assets classified as held for sale 4.8 30.2 Total assets 1,588.7 1,551.8 Current liabilitiesTrade and other payables (328.3) (313.5)Current income tax liabilities (10.6) (4.5)Bank overdrafts and other borrowings (127.9) (122.0)Provisions (167.1) (150.0) (633.9) (590.0) Net current assets 58.8 86.2 Non-current liabilitiesTrade and other payables (25.9) (28.0)Deferred tax liabilities (10.7) (12.1)Borrowings (294.2) (319.1)Retirement benefit obligations: Funded schemes (1.0) (2.1) Unfunded schemes (112.4) (113.3)Provisions (56.6) (62.6) (500.8) (537.2) Total liabilities (1,134.7) (1,127.2) Net assets 454.0 424.6 EquityShare capital 4.2 4.2Share premium account 412.1 412.1Hedging and translation reserve 17.0 0.7 *Retained profit/(loss) 1.2 (19.1) *EQUITY SHAREHOLDERS' FUNDS 5 434.5 397.9Minority interests 5 19.5 26.7Total equity 5 454.0 424.6 * Reserves have been restated following an amendment to IAS 21 (see note 1). Consolidated cash flow statement (unaudited) 2006 2005 Unaudited UnauditedFor the year ended 31 December 2006 Notes US$m US$mCash inflow/(outflow) from operating activitiesNet cash inflow generated by operations 6 117.8 176.9Interest paid (37.0) (36.4)Taxation paid (35.8) (39.8)Net cash generated from operating activities 45.0 100.7 Cash inflow/(outflow) from investing activitiesDividends received from associates and joint ventures 2.3 2.8Acquisition of property, plant and equipment and intangible assets (78.3) (81.3)Disposal of property, plant and equipment and intangible assets 60.2 56.6Acquisition of financial investments (0.9) (9.3)Disposal of financial investments 8.6 2.4Acquisition of subsidiaries (10.7) (7.6)Disposal of subsidiaries 3.2 13.0Net cash absorbed in investing activities (15.6) (23.4) Cash outflow from financing activitiesDividends paid to minority interests (4.4) (7.1)Decrease in debt and lease financing (33.3) (119.5)Net cash absorbed in financing activities (37.7) (126.6) Net decrease in cash and cash equivalents (8.3) (49.3)Net cash and cash equivalents at beginning of the year 57.1 113.5Foreign exchange gains/(losses) on cash and cash equivalents 1.3 (7.1)Net cash and cash equivalents at end of the year 7 50.1 57.1 Reconciliation of net cash flow to movement in net debtNet decrease in cash and cash equivalents (8.3) (49.3)Cash outflow from change in debt and lease financing 33.3 119.5Change in net debt resulting from cash flows 25.0 70.2New finance leases (0.3) (3.6)Transfer of preference shares from equity under IAS 32 - (28.0)Other (3.9) (3.9)Foreign exchange (3.2) 5.8Decrease in net debt 17.6 40.5Net debt at start of year (363.3) (403.8)Net debt at end of year 7 (345.7) (363.3) Consolidated statement of recognised income and expense (unaudited) 2006 2005 Unaudited Unaudited Restated*For the year ended 31 December 2006 Notes US$m US$m Gain on cash flow hedges 2.2 4.6Exchange differences on translation of foreign operations 17.0 (12.6) *Actuarial (losses)/gains in respect of retirement benefit schemes (9.4) 47.4Tax on items taken directly to equity (0.6) 0.3Net income recognised directly in equity 9.2 39.7 *Profit for the year 34.0 59.7 *Transferred to profit or loss on cash flow hedges (2.8) 0.8Other transfers - (2.1)Total recognised income and expense for the year 5 40.4 98.1 Attributable to:EQUITY SHAREHOLDERS OF THE COMPANY 36.6 96.7Minority interests 3.8 1.4 40.4 98.1 * see note 1 for details of the restatement. Notes 1 Basis of preparation Coats Group Limited is incorporated in the British Virgin Islands. It does not prepare consolidated statutory accounts and therefore the financial information contained in this announcement does not constitute full financial statements and has not been, and will not be, audited. The financial information for the year ended 31 December 2006 has been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards ("IFRS") endorsed by the European Union, and the accounting policies adopted have been consistently applied to the restated financial information presented for the year ended 31 December 2005. The accounting policies adopted have been applied consistently to the restated financial information presented for the year ended 31 December 2005. Subsequent to the publication of the results for the year ended 31 December 2005, an amendment to IAS 21 on The Effects of Changes in Foreign Exchange Rates has been endorsed by the European Union, whereby currency translation gains and losses arising on inter-company loans that are not in the functional currency of either party can now be dealt with through reserves rather than in the income statement. The impact of this accounting policy change is as follows: 2005 Unaudited US$m Finance costs as previously reported (30.1) IAS 21 adjustment for 2005 5.9 Finance costs as restated (24.2) Hedging and translation reserve as previously reported 5.0 IAS 21 adjustment as at 31 December 2004 1.6 IAS 21 adjustment for 2005 (5.9) Hedging and translation reserve as restated 0.7 Retained loss as previously reported (23.4) IAS 21 adjustment as at 31 December 2004 (1.6) IAS 21 adjustment for 2005 5.9 Retained loss as restated (19.1) Coats Group Limited follows the accounting policies of its ultimate parent company, Guinness Peat Group plc. The principal exchange rates (to the US dollar) used are as follows: 2006 2005 Average Sterling 0.54 0.55 Euro 0.79 0.81 Year end Sterling 0.51 0.58 Euro 0.76 0.85 2 Operating profit is stated after charging/(crediting): 2006 2005 Unaudited Unaudited US$m US$m Exceptional items: Reorganisation costs and impairment of property, plant and 51.6 62.4 equipment Profit on the sale of property (21.3) (17.2) Foreign exchange losses/(gains) 12.2 (18.5) Total 42.5 26.7 3 Finance costs 2006 2005 Unaudited Unaudited US$m US$m Interest on bank and other borrowings 39.7 41.3 Foreign exchange gains - (11.8) Net return on pension scheme assets and liabilities (15.7) (8.3) Other 5.3 3.0 Total 29.3 24.2 4 Taxation 2006 2005 Unaudited Unaudited US$m US$m UK taxation based on profit for the year: Corporation tax at 30% 23.0 30.3 Double taxation relief (23.0) (30.3) Total UK taxation - - Overseas taxation: Current taxation 39.2 32.6 Deferred taxation (5.4) (7.9) 33.8 24.7 Prior year adjustments: Current taxation (5.9) 11.6 Deferred taxation (1.6) 3.2 (7.5) 14.8 26.3 39.5 5 Reconciliation of equity Equity Minority Total equity shareholders' interests funds Unaudited Unaudited Unaudited US$m US$m US$m At 1 January 2006 397.9 26.7 424.6 Total recognised income and expense for the period 36.6 3.8 40.4 Dividends paid - (4.4) (4.4) Other - (6.6) (6.6) At 31 December 2006 434.5 19.5 454.0 6 Reconciliation of operating profit to net cash inflow generated by operations 2006 2005 Unaudited Unaudited US$m US$m Operating profit 79.9 99.8 Depreciation 55.8 50.4 Amortisation of intangible assets (computer 7.3 5.6 software) Reorganisation costs (see note 2) 51.6 62.4 Other exceptional items (see note 2) (9.1) (35.7) (Increase)/decrease in inventories (6.1) 3.9 Decrease in debtors 9.8 34.2 (Decrease)/increase in creditors (9.5) 17.3 Provision movements (14.7) (11.7) Other non-cash movements 7.3 5.0 Net cash inflow from normal operating activities 172.3 231.2 Net cash outflow in respect of reorganisation costs and other exceptional (54.5) (54.3) items Net cash inflow generated by operations 117.8 176.9 7 Net debt 2006 2005 Unaudited Unaudited US$m US$m Cash and cash equivalents 76.4 77.8 Bank overdrafts (26.3) (20.7) Net cash and cash equivalents 50.1 57.1 Other borrowings (395.8) (420.4) Total net debt (345.7) (363.3) 8 Balance sheet consolidated by Guinness Peat Group plc (unaudited) The balance sheet consolidated by Guinness Peat Group plc ("GPG") as at 31 December 2006 differs from that disclosed as follows: Coats Group Included in Limited Coats Group US$:GBP at GPG fair value GPG's consolidated Limited 0.5102 adjustments balance sheet Unaudited Unaudited Unaudited Unaudited US$m £m £m £m Intangible assets 260.9 133 14 147 Other non-current assets 630.3 322 - 322 Current assets 692.7 353 - 353 Non-current assets classified as held 4.8 2 - 2 for sale Total assets 1,588.7 810 14 824 Current liabilities (633.9) (323) - (323) Non-current liabilities (500.8) (256) - (256) Minority interests (19.5) (10) - (10) Equity shareholders' funds 434.5 221 14 235 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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