Coats Regulatory News (COA)

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Victoria Huxster

Coats Group plc

+44 (0)7880 471 350

Nick Kidd

Coats Group plc

+44 (0)7770 735719

Media

Richard Mountain / Nick Hasell

FTI Consulting

+44 (0)20 3727 1374

PROMOTED

Risk of supplier non-performance and/or unavailability and/or price increases of raw materials, labour and freight is promoted to being a principal risk with an emphasis on the freight/logistical challenges element given, in particular, the widespread freight and logistical challenges. Consequently the risk trend for this risk has also increased from stable to increasing.

DEMOTED

Pensions risk has been demoted from a principal risk to a key risk, given that the latest valuation has been completed and signed off with no amendment in deficit recovery payments and with additional robust hedging strategies in place. See page 58 for more information.

FROM STABLE TO INCREASING

Risk of failure to attract, retain and develop talent and capability trend has increased from stable to increasing, in light of the heightened labour availability challenges in various parts of the world.

FROM INCREASING TO STABLE

Mergers and Acquisitions (M&A) programme ambition risk trend has decreased from increasing to stable, in light of the robust process being followed under the regular oversight of the Board.

FROM INCREASING TO STABLE

Risk of ever-increasing customer expectations and the Group's continuing ability to meet and exceed those expectations as part of its strategic growth ambitions has decreased from increasing to stable, due to the very close ongoing attention and actions taken by the management team under the regular oversight of the Board.

FROM INCREASING TO STABLE

The risk trend for Health & Safety has decreased from increasing to stable, in light of the actions taken by the Executive team and the pattern of the various metrics presented to the Board regularly throughout 2021.

Principal risk

Risk trend

Action / mitigation

1. Strategic

M&A programme ambition risk in light of the Group's increasing ambition in the scale of its acquisition programme and its ability to source, satisfactorily acquire and integrate suitable targets.

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 focussed project management resources during both execution and integration phases.

Specific M&A risks and mitigations include 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 focussed 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 2021 and we have a robust pipeline of opportunities.

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

Stable

Faced with unprecedented challenges as the world emerges from Covid, customer expectations continue to evolve across speed to market, productivity, innovation, quality and sustainability. Coats as a global supplier, industry partner and thought leader is well-placed to help our customers meet their own challenges by rising to these higher expectations. To this end, we continue to engage intensively with our customers on a daily basis to understand, anticipate and meet these expectations. In 2021, we carried out customer surveys with manufacturers, brands and OEMs and continue to engage daily with multiple customer and industry stakeholders, influencers and decision-makers. Furthermore, we engaged in an in-depth study with industry experts to anticipate sustainability trends and expectations. This close engagement with customers has allowed us to deliver outstanding customer value during 2021. In collaboration with our customers, we helped them navigate the significant disruption caused by Covid lockdowns in Asia, leveraging our operational footprint and supply agility. In China, we have responded to the speed requirements of the domestic market, eliciting favourable customer feedback and stronger orders. We have also supported customers in their moves to build more resilient and closer-to-market supply models, servicing their needs across multiple markets and new suppliers.

Our sustainability innovations have met and exceeded customer needs, evidenced by the significant increase in sustainable product sales, partnerships with customers like Decathlon in Diversity & Inclusion and the development of new products to progress the industry circularity agenda. Our Technical Services teams in both Apparel & Footwear and Performance Materials continued to support customers in their drive for higher productivity, improved quality and accelerated innovation, delivering over 6,000 direct customer engagements in the year. We have also acted to improve and automate customer service processes, creating more time for customer value-adding activities in key markets. Responding to the accelerating pace of industry change, Coats Digital has invested in SaaS transition for its industry-leading Fashion Tech software solutions as well as developing technology partnerships for greater customer impact.

In 2021, we launched 21 new products across all our industry segments. In our Performance Materials business, we started industrial production of preforms for a leading US automaker, using our Lattice composite technology and our innovative Lattice LiteTM solution has now been adopted by a number of high-profile sports brands for their high end running shoes. At the same time 2021 saw us extend the Lattice range to Lattice ProtectTM which offers lightweight, super strong components for safety shoes. Amongst the other products launched were our new range of reflective tapes - Signal Lucence which is a sew-on tape phosphorescent powered by VizLite DT. These reflective tapes offer a third layer of visibility working when there is reduced light or no primary light. They are lightweight and recharge via UV rays meaning there is no need for batteries.

We continue to develop our innovation ecosystem, building increased capacity to create new product solutions as well as products in collaboration with customers and suppliers. At COP26 we announced the repurposing of our Shenzhen Hub to focus on the research and development of bio-based and recycled materials, working towards our commitment that by 2030 all Coats products will be made completely independently of new oil-extraction materials. We are already making huge strides in this area with our EcoVerde ranges, and in 2021 we launched our EcoRegen lyocell-based product which is made using fibres that are made from sustainably sourced wood pulp, which is a 100% cellulosic material and thus totally biodegradable.

The key mega trends influencing Performance Materials demand intensified in 2021. We have seen continued development of advanced composites with more innovation around processes, resins, fibres, substrates, matrices and finishes to build custom composite parts for numerous end uses. The race to reduce weight in passenger cars continues, with more and more focus on EV and battery ranges. 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 are becoming ever more demanding, looking for increased performance from the materials they use, be this for chemical and corrosion resistance, flexibility, noise control or performing well at temperature extremes. At the same time high-performance materials must be increasingly sustainable, whether this is with moves to more recycled raw materials or increased material durability to minimise waste and product degradation. On top of the direct sustainable benefits of performance materials they are increasingly used to improve other production processes, for example in clean energy production by improving the efficiency of production methods. Guided by our purpose, we will continue to strive to deliver sustainable value and long-term benefits for our customers and all our stakeholders.

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

Increasing

Despite the economic challenges brought by the pandemic, 2021 has seen critical labour shortages and specific skill gaps in the labour markets where Coats operates - particularly the US, Brazil and China, which have become increasingly competitive. In order to ensure that Coats retains, attracts and develops the right talent with the right skillsets, the Board's and senior management team's close focus on talent development and wellbeing continued in 2021.

Following our successful switch to 100% online learning in 2020, we delivered more than 55,000 hours of training to our employees in 2021 through a variety of training platforms. We added some new elements to our suite of learning programmes including Manager Excellence, focussing on critical manager skills through short, relevant sessions of an hour every month for 12 months, and a new Mentoring Programme called Unlock Your Potential in which senior managers are paired with other employees for three months to support them to achieve particular objectives. While introducing some new programmes for our leaders, we continued to offer learning opportunities to our individual contributors and manufacturing employees. We also initiated a capability building project for our commercial team which will be further reinforced in 2022.

As part of our employee listening strategy, which provides an integrated approach to understanding the overall employee experience, we continued with our comprehensive programme of engagement surveys, this time with our new external provider. The results were extremely encouraging. 90% of our employees took part in the survey and our engagement score was 83 - well above the benchmark of 74. We also took part in the external Great Place To Work surveys. By the end of 2021 we were delighted that 81% of our employees belonged to a certified 'Great Place To Work'. Whether or not the teams achieve certification, they all receive feedback from the 'Great Place To Work' organisation on actions they can take to further improve the working environment. We continued to deliver key employee health and well-being interventions in 2021 covering three main areas - Prevention, Protection and Medical Care, and Education. We introduced a range of global as well as local initiatives like mental health and wellness programmes. We also actively monitored the Coats markets considering the minimum wage increases and we continued our work on living wage to ensure that all employees receive a wage that is sufficient to afford a decent standard of living in their country or location.

2. External

Economic and geopolitical risk arising from political, economic and demand uncertainty - across both key Asian and developed markets - including risk to free trade conventions as well as global inflationary pressures.

Increasing

The Group closely monitors the impact of the Covid pandemic on demand as well as monitoring the implications of other areas of economic risk on the Group. Our global reach and local knowledge give us the agility and insights needed to operate and develop our business prudently and successfully during periods of economic volatility. Additionally, the Group's global footprint allows us to quickly respond to any changes in regional supply chains that may arise as a result of the pandemic. Demand has been very strong during 2021; however, the Covid pandemic continues to cause significant uncertainty, particularly around localised disruption to our operations and supply chain, but we have a clear playbook and proven experience in dealing with such localised disruptions and minimising the impacts.

Regional lockdowns like in India and Vietnam during 2021 caused operational challenges for the Group, although our fast response and global footprint meant that we were able to weather these challenges and continue to serve our customers. To the extent that the pandemic has a more prolonged impact on the global economic environment, there may be a negative impact on consumer spending and further potential localised disruption to our operations and supply chain - a risk for which we remain alert and prepared. During 2021 we also faced higher than normal inflation for many, our key raw materials, freight, labour and energy costs. For raw materials, freight and labour, the challenges were not just in relation to the high costs, but went much wider with reduced availability and reliability impacting service lead times. We have taken swift actions to counter this high inflation through a combination of self-help initiatives (productivity improvement and cost control measures) and pricing actions; we have also addressed supply chain disruptions through leveraging our global footprint, long term relationships with global suppliers and holding higher stocks as needed (see further actions referred to in Supply risk on page 54).

Cyber risk

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

Stable

2021 was another year where the pandemic dictated that the workforce remain not just socially distanced, but also that the bulk of the administrative workforce was forced to work remotely. This was accomplished with largely the same procedural and technical controls initiated in 2020, which allowed us to manage the changing risk landscape that become more apparent with the remote workforce and the increase in attacks against the employees themselves and their home networks. To minimise threats, we employed technical controls and further education, informing our workforce about common attacks, social engineering schemes, etc. and informing them to be diligent in adhering to the Group-level processes to keep themselves, their personal information, and the Company's data and systems secure.

Our programme to defend against email-based threats, includes continuous security awareness training, routine phishing simulation campaigns, and deployment of an additional context-based email security solution (Q2 2021). Despite the increase in phishing threats being detected in both 2020 and 2021, we have not seen an increase in phishing-related incidents, largely credited to the existing and additional protections.

Additional enhancements to our cyber programme added in 2021 were an improved cybersecurity asset management solution in Q3 2021 and SASE solution in Q4 2021. The enhanced asset management solution gives further insight to show any coverage gaps to security agents and controls. The SASE solution gives additional visibility, control, and improves end-user experience. Coupling these with our managed Security Operations Centre (SOC), which has been in place for the past three years, we continue to mature our programme to better protect the data of our organization, our customers, and our business partners.

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.

Increasing

During 2021 we have progressed our work on climate change risk analysis by moving from a largely qualitative assessment of risks to a quantitative assessment of the potential financial impacts. This has allowed us to identify those risks that are more material to our business and where it is imperative to focus on remedial actions.

As during 2020, this work has been carried out using the Taskforce on Climate-related Financial Disclosures (TCFD) methodology, published as a technical supplement to their 2017 report. Included within this report on pages 38-45 is our first full report on the recommended TCFD disclosures, including the relevant financial disclosures.

The progress of this work has been reported to the GRMC at each of their quarterly meetings and was reviewed by the ARC in their December 2021 meeting and again in February 2022.

Since we started work on climate risk analysis we have made substantial progress with our climate strategy, which was early on identified as a critical mitigating action, and have developed and had approved Science Based Targets for emissions reduction under the 1.5°C pathway. As a result of these actions, one of the principal transitional risks we identified initially, that of failing to meet customer expectations and thus losing sales, has been effectively mitigated and currently is not a risk. The most significant remaining transitional risk is from the possibility of the introduction of carbon taxes and this is detailed in our TCFD disclosures. Obviously here also delivery of the emissions reduction targets that we have established will have a very significant mitigating effect on any carbon tax regimes that are introduced. There is a risk of failure to achieve our emissions reduction targets because of inadequate opportunities to transition to renewable electricity and a lack of reliable supply of recycled raw materials; however the Company has robust programmes in place to manage these risks.

We have done a first analysis of the growing physical risks and have established the nature and potential scale of these risks, and the localities potentially impacted by flood and extreme heat risks under each of our scenarios. As detailed in our TCFD disclosure, these risks apply to our longer term horizons under higher carbon scenarios and are limited to specific units, mainly in Asia. More detailed work now needs to be done to review these medium to long terms risks with our business continuity plans for these particular sites and determine what, if any, mitigation options exist at each site potentially impacted.

In parallel to this risk analysis work, we have also identified and studied the potential opportunities coming from climate change and these are detailed in our TCFD disclosures on pages 38-45. During 2022, we will also be adjusting our methodologies, where necessary, to the revised TCFD guidelines issues in October 2021 (2021 TCFD Implementing Guidance and 2021 Metrics Targets Guidance 1).

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.

Increasing

The Group conducts scenario analysis and continuity planning in relation to each of our key raw materials, as well as labour and freight, to assess what counter measures can be put in place if certain events were to occur. Regular assessment of financial performance of key suppliers and evaluation of suppliers' own risk management plans is undertaken, and our dependency on key suppliers and raw materials is reviewed frequently. The ramifications of the Covid virus continue to impact global supply chains, limiting availability of certain feedstocks and raw materials. This, coupled with a difficult sea freight market dynamic, has reduced the possibility of arbitrage and agility in global trade to respond to local shortages as they arise. To mitigate that, we continue to assess our global stocking policy for strategic raw materials, taking forward positions where possible where we can foresee shortages and expanding our supplier base where necessary.

The Group applies a similar approach towards freight, where in 2021 the Group saw an extremely volatile freight market with increasing rates for sea and air freight and with a very low reliability level mainly caused by port congestions, equipment shortages and a high demand in the US to import goods from China. To mitigate the risks, the Group is constantly enhancing planning accuracy and has increased the number of global and local forwarders and moved to a monthly tender based on spot rates instead of a long term agreement.

In relation to labour, where 2021 saw labour shortages coupled with labour inflation, the Group, and specifically the Board and the senior executive team, remained intently focussed on talent development and wellbeing as described in more detail in the Talent and capability risk on page 51.

Spanning all these areas, the Group has also moved quickly to implement a combination of self-help initiatives (productivity improvement and cost control measures) and pricing actions as referred to in Economic and geopolitical risk on page 52.

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

Our Sustainability strategy, launched in 2019, is fundamental to our mitigation plan for this risk, as many of the actions required are part of that strategy implementation. The progress on delivery of our strategy is detailed in our annual Sustainability Reports that are published simultaneously with our corporate Annual Reports. Detailed below are the principal actions taken during 2021 that impact and mitigate this risk. We are implementing a harmonised global system to effectively manage our energy and environmental impacts in a documented, systematic way. This includes an environmental management system (EMS) aligned to ISO 14001, and an energy management system aligned to ISO 50001 with many elements of the EMS now digitised.

To assist us to achieve the energy and water targets detailed in the sustainability strategy and to more closely align to ISO 50001, we are implementing an energy management software system that we are currently piloting at five of our sites. This project involves adding hundreds of electricity, gas and water meters in addition to humidity and temperature sensors to understand how we can run production batches more efficiently, whilst minimising the energy and water used to do so. We further improved our monitoring and measurement platform for sustainability reporting, to incorporate a digital analytical tool that assists us to perform deep dives on sustainability metrics down to manufacturing site level. This allows us to target underperforming sites whilst using best practice from those sites consistently meeting interim targets.

These tools will help us meet our 2022 sustainability targets for water, energy and waste. Following the completion of Environmental Health and Safety (EHS) legal compliance audits for all of our global manufacturing units, we now track new and updated EHS legislative requirements, thereby improving our compliance to EHS legal requirements. We also manage all environmental permits and licences we hold in each country we operate in, on a permits management system.

Our environmental incident management system ensures that we have a consistent and transparent way of managing 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 Zero Discharge of Hazardous Chemicals (ZDHC) limits and to meet our 2022 effluent treatment plant targets. As a result of this, and other measures, we improved our compliance to ZDHC in 2021 and continued to make strong progress towards our target of 100% compliance in 2022.

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. These environmental and governance measures are managed through a digital energy and environmental management system.

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 has continued to receive and discuss with management - as a priority at each Board meeting - detailed reviews of health and safety performance and monitoring of progress against established annual health and safety targets and objectives. Senior management and employees throughout the Group likewise remain intently focussed on creating an injury-free work environment.

A key focus for 2021 was to continue our effective pandemic response and to execute our plans for a safe and effective recovery. Through the development and implementation of a comprehensive recovery matrix and continuation of our previously effective workplace controls, we are successfully and safely managing the risk of Covid in the workplace and resuming business as usual where and when it is safe to do so.

While the health of our workforce and effective pandemic response was a key focus of 2021, we also continued pursuing our Journey to Zero safety strategy that was launched in 2019. While focussing on proactive and preventive actions as well as leading indicators, we identified a series of targeted global objectives, including a company-wide Journey to Zero week, various targeted prevention campaigns, a new safety culture survey, and we conducted over 700,000 hours of safety training.

All of our proactive, preventive actions translated into the following results for 2021:

• 24% reduction in work-related recordable injury rate (0.45 vs 0.59 in 2020)

• 6% reduction in lost time case rate (0.34 vs 0.36 in 2020)

• 23% reduction in days lost per lost time injury

• 91% reduction in eye injuries

• 38% reduction in slip/trip injury rates

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, spanning bribery, anti-corruption and anti-competitive behaviour along with a number of other ethics issues, including in relation to partners, contractors and suppliers. These are reinforced with those latter stakeholders through a comprehensive Supplier Code (covering initial due diligence processes, onboarding, training, ongoing compliance and auditing). These policies are reviewed and updated annually. There is extensive online and face-to-face training and regular communications through a range of channels, including through leveraging the support of our global ethical culture champions network. During the pandemic, the ethical culture champions across the Group were asked to reinforce key ethical messages in light of the potential heightened risk of corruption in these uncertain times. Additionally, a sub-committee of the GRMC comprising key business and functional leaders, meets quarterly to consider a range of ethics risks (including closely monitoring key risk indicators for those risks), legislative and regulatory developments and mitigation plans. The risks are also considered at cluster level during regular local risk management meetings.

The Group actively maintains a whistleblower system, enabling employees and others who are aware of, or suspect, unethical behaviour to report it confidentially. wareness of the system, together with the risks and the policies, has been increased through an ongoing Ethical Culture Campaign which operates at a Group and local level. As noted above, we have also now procured an externally hosted whistleblowing hotline, which further strengthens the robust existing whistleblowing arrangements that were already in place. See page 27 for more details.

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 173.

Stable

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

We confirm that to the best of our knowledge:

·

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

2021

US$m

2020

US$m

Short-term employee benefits

10.4

6.0

Share based payments

1.6

0.7

12.0

6.7

Sale of goods

Purchase of goods

2021

US$m

2020

US$m

2021

US$m

2020

US$m

Joint ventures

2.7

5.9

61.1

45.7