Improving margins, strong free cash flow and continuing market share gains

Strategic Highlights

• Strategic projects delivered a further $21 million of efficiencies, with 2023 guidance increased from $20 million to $30 million and overall project savings on track for $70 million by 2024 for $50 million cash cost
• Delivered $5 million of integration efficiencies from Texon and Rhenoflex integration in the first half, with full year run-rate synergies now expected to be $15 million, increased from $11 million in 2024
• As a result of strategic actions, increased adjusted operating margin of 15.0%, up 30bps on H1 2022 on a proforma basis (including acquisitions)
• Continued portfolio optimisation activity, with agreement announced in July 2023 to divest low margin European Zips business
• New Sustainability Hub opened in Madurai, India to work alongside Shenzhen, China on driving further innovation in sustainable materials and supporting recycled and renewable materials transition
• Further good progress towards deficit cash payment “off trigger” for UK pension scheme, with potential to increase free cash flows within short to medium term

Financial Highlights

• Reported revenue down 11%, including contributions from 2022 Footwear acquisitions
• Organic revenue 19% lower against strong comparators, adversely impacted by widespread industry destocking in Apparel and Footwear, and previously disclosed customer contract insourcing in Performance Materials
• Continuing market share gains in both Apparel and Footwear thread and components, and key contract wins in Performance Materials
• Resilient operating margins reflect accelerated efficiencies from strategic projects and from integration of Footwear acquisitions, together with ongoing pricing benefits, with input costs moderating in some areas
• Strong free cash flow of $52 million, despite significantly lower volumes, as a result of efficiencies and excellent working capital control. Half year net debt (excluding lease liabilities) of $399 million, with 1.6x leverage3, comfortably within 1-2x target range
• Interim dividend of 0.81 cents per share, up 15% vs 2022; reflecting our confidence in delivering progress for the benefit of all our stakeholders in 2023 and beyond

Outlook

As expected, the first half reflected the continuation of the widespread industry destocking in Apparel and Footwear, against a very strong prior year comparator, together with the previously disclosed customer contract in-sourcing in Performance Materials. While we have continued to make market share gains and underpin performance through our actions during the half, we are now expecting a more gradual improvement in market demand during the second half. As a result, we continue to expect our full year trading to be in line with market expectations, albeit towards the lower end of the analyst forecast range.⁵ Further, we remain confident that due to our actions, and supported by increasing market volumes, we will achieve our 2024 margin goal of c.17%.

Our leadership positions in industrial threads and footwear components, wide geographic footprint, strong digital platform and technical support capabilities, enable us to offer a differentiated customer proposition. This, when combined by our investment in innovation and our growing, industry-leading sustainably sourced and manufactured products, means we are well positioned to grow our revenue and margin over the longer term, with ongoing strong cash generation supporting investment in our strategy.

Commenting on the results Rajiv Sharma, Group Chief Executive, said:

“Coats’ trading performance in the first half of 2023 was against a strong prior year comparator and the backdrop of widespread industry destocking.

We have continued to make significant progress on our strategic objective of making Coats a stronger, fitter and more focused Group. Our clearly-differentiated customer proposition enabled us to further increase our market share in Apparel and Footwear and secure key contract wins in Performance Materials. We opened a new Sustainability Hub in India to develop next-generation materials for sustainable threads and continued to optimise our portfolio with an agreement to divest our low-margin European Zips business. Our financial results demonstrate the effectiveness of our actions in driving our margin performance and free cash flow.

On our strategic projects, we delivered a further $21 million of efficiencies in the half and are increasing our 2023 guidance from $20 million to $30 million, with overall project savings on track for $70 million by 2024. Additionally, we now expect increased full-year run-rate synergies from the integration of Texon and Rhenoflex of $15 million in 2023, up from $11 million in 2024 previously.

Our leadership position in industrial threads and footwear components, when combined with our investment in innovation and sustainably-sourced and manufactured products, positions us well to grow our revenue and margin and deliver ongoing strong cash generation in line with our strategy.”

^1. Adjusted measures are non-statutory measures (Alternative Performance Measures). These are reconciled to the nearest corresponding statutory measure in note 15. Constant Exchange Rate (CER) metrics are H1 2022 results restated at H1 2023 exchange rates. Organic figures are on a CER basis and exclude contributions from Texon and Rhenoflex acquisitions.
^2. Reported metrics refer to values contained in the IFRS column of the primary financial statements in either the current or comparative period.
^3. Leverage calculated on a proforma and frozen GAAP basis and therefore excludes the impact of IFRS 16 on both adjusted EBITDA and net debt and includes a full 12 months of EBITDA for Texon and Rhenoflex.
^4. From continuing operations.
^5. Current company compiled analyst forecast range for Group adjusted operating profit in the year to 31 December 2023 is $240 million to $261 million.

Conference Call

Coats management presented its interim results in a webcast at 09.45 BST (Tuesday, 1 August 2023). The webcast is made available for replay here.

About Coats Group PLC

Coats is a world leader in thread manufacturing and structural components for apparel and footwear, as well as an innovative pioneer in performance materials. These critical solutions are used to create a wide range of products, including ones that provide safety and protection for people, data and the environment. Headquartered in the UK, Coats is a FTSE250 company and a FTSE4Good Index constituent. Revenue in 2022 was $1.6 billion. Trusted by the world’s leading companies to deliver crucial, innovative, and sustainable solutions, Coats provides value-adding products including apparel, accessory and footwear threads, structural footwear components, fabrics, yarns and software applications. Customer partners include companies from the apparel, footwear, automotive, telecoms, personal protection, and outdoor goods industries. With a proud heritage dating back more than 250 years and spirit of evolution enabling it to constantly stay ahead of changing market needs, Coats has operations across some 50 countries with a workforce of 17,000, serving its customers worldwide. Coats connects talent, textiles, and technology, to make a better and more sustainable world. Worldwide, there are four dedicated Coats Innovation and Sustainability Hubs, where experts collaborate with partners to create the materials and products of tomorrow. It participates in the UN Global Compact and is committed to Science Based sustainability targets for 2030 and beyond, with a target of achieving ‘net zero’ by 2050. Coats is also committed to achieving its goals in Diversity, Equity & Inclusion, workplace health & safety, employee & community wellbeing, and supplier social performance.

Cautionary statement

Certain statements in this interim report are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. Because these statements contain risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain. For the purposes of Article 2 of Commission Implementing Regulation (EU) 2016/1055, the person responsible for arranging for the release of this announcement on behalf of Coats Group plc is Jackie Callaway, Chief Financial Officer.

Group Chief Executive’s review

Purpose and Strategy

Coats is the world’s leading industrial thread and footwear components company. Our purpose is to connect talent, textiles and technology to make a better and more sustainable world. Our strategy is to accelerate profitable sales growth by leveraging innovation, sustainability, digital technologies and our global scale to create world class products and services, delivering value to our stakeholders.

2023 Interim Results Overview

Introduction

As expected, it has been a challenging first half with reported revenue down by 11%, including the contribution from the 2022 Footwear acquisitions. This was driven by lower Group organic revenue of 19%, which was adversely impacted by widespread industry destocking in Apparel (20% organic decrease) and Footwear (23% organic decrease) in particular, together with the previously disclosed customer contract in-sourcing in Performance Materials (14% organic decrease). This performance also reflects very tough comparator numbers, around the peak of unprecedented growth from customer restocking in the prior period, following the lifting of COVID restrictions. Industry inventory levels are continuing to moderate. However, the precise timing of the recovery in volumes is difficult to predict with certainty, although Coats is increasingly well-positioned to benefit from this.

We have continued to make significant progress against our strategic objectives, despite the industry headwinds. We further increased our estimated market share in apparel threads in the half by around 100 bps (to c.24%). We also estimate an increase in footwear market share by around 100 bps in threads (to c.28%) and components (to c.24%), giving a blended c.26% footwear market share. We are able to increase our market share year-on-year, as consistently demonstrated, because we are the global leader in industrial threads and footwear components, offering a differentiated customer proposition that others cannot replicate. This includes our global presence, which offers customers flexibility and responsiveness, as well as our strong digital platform and technical support capabilities. In addition, our investment in innovation enables us to bring to market a growing and industry-leading range of in-demand, sustainably sourced products. This is complemented by an ongoing programme to make our own operations demonstrably sustainable, which is driven by consumers and the requirements of leading, global brands.

We have continued to invest in bringing new sustainable products to market. In the first half, we opened a new Sustainability Hub in Madurai, India to sit alongside our recently re-purposed Shenzhen, China Hub. These Hubs are working together to innovate next generation materials for sustainable threads. In addition, having set new shorter term sustainability targets for our own operations at the last full year results, we are putting in place measures to reach our targets, with reductions in Scope 1 and Scope 2 emissions already tracking ahead of the 2030 target trend line.

In the context of the significantly lower sales volumes in the half, and our continued investments, we are pleased with our adjusted operating profit performance of $107 million (H1 2022; $125 million), with an adjusted operating margin of 15.0% (H1 2022: 15.6%). This is only 50bps lower compared to the prior period, and 90bps higher than H2 2022. On a proforma basis operating margins were up 30bps year-on-year, including the contribution from our July and August 2022 acquisitions in the first half 2022 performance. This result includes the beneficial impact of our strategic projects, which commenced in March 2022, and which we have continued to progress at pace. These self-help measures have delivered a further $21 million of efficiencies in the half and we have increased our full year guidance from $20 million to $30 million (in addition to the $20 million of savings delivered in 2022). Overall project savings are on track for $70 million by 2024. We have also benefited from being able to largely maintain our 2022 pricing, without increasing customer churn. This has been achieved during a period where we have seen moderating input costs in some areas, such as raw materials and freight, although wage inflation, in particular, remains elevated. Customer loyalty reflects our market differentiation, including the quality of our products and our high-levels of customer service. Reported operating profit was $72 million (H1 2022: $111 million).

We remain confident that due to our actions, and supported by increasing market volumes, we will achieve our 2024 margin goal of c.17%. In addition we remain on track to deliver our medium term organic revenue growth CAGR of c.6%

Our Footwear components acquisitions have not been immune from the significant industry destocking in the half, performing in line with the Footwear division as a whole. Notwithstanding this, our rationale for these acquisitions remains intact. Our Footwear division is now the leading global component and thread supplier to the highly attractive footwear market, within a fragmented supply chain. In addition, the division has a strong focus on the faster growth and premium-priced quality, sports and athleisure brands with an enhanced portfolio of sustainable products from recycled and biomaterial sources. Indeed, we are seeing great potential from the cross-selling of our broad range of complementary products, as customers look to consolidate their supply chain with a longstanding and trusted supplier, and there are several long lead-time opportunities currently in train with leading brands. We have also delivered $5 million of initial efficiencies from the integration of Texon and Rhenoflex in the half, also favourably impacting our operating margin. We now expect to deliver $15 million of run-rate efficiencies by the end of the year, ahead of our previous $11 million targeted savings by 2024. Our enhanced portfolio of footwear components and thread means, as previously announced, that we are reporting these results for the first time according to three new divisions: Apparel, Footwear and Performance Materials.

What is also pleasing is that during the half we have generated positive free cash flow, despite the significant volume headwinds. We generated adjusted free cash flow of $52 million (H1 2022: $30 million). Net debt (excluding lease liabilities) at 30 June 2023 was $399 million (31 December 2022: $394 million), with proforma leverage of 1.6x net debt/EBITDA, remaining comfortably within our target range of 1-2x net debt/EBITDA.

UK Pensions

We continue to make significant positive progress in relation to the de-risking of our defined benefit UK pension position. Our aspiration remains, in the medium term, to fully insure the Scheme and remove it from the Group balance sheet, in a cost effective manner.

Since we updated in March 2023, where we highlighted the new on / off trigger mechanism agreed with the Trustees of the Scheme, we have seen further improvements in the funding position to a deficit of £25 million (being 99% of the technical deficit valuation). We have also agreed with the Trustees an amendment to the on / off trigger mechanism to reflect the latest mortality assumptions. This has reduced the funding range for the on / off triggers to 98-100% (previously 99-101%), further increasing the probability of the off trigger being reached in the near future. This has the potential to significantly reduce or eliminate the existing levels of cash contributions made into the Scheme, and thereby increase free cash flows generated by the Group, within the short to medium term.

Strategic Projects

Building on our long track record of delivering efficiencies, we have continued to progress our strategic projects, originally announced in March 2022 at pace. These will optimise our footprint, manage our cost base lower and deliver operating efficiencies, as well as mitigate structural labour availability issues in the US. These projects are beneficial to the Group’s margin in a period of industry-wide headwinds, and position us to deliver growth and margin enhancement once markets recover.

The scope of these projects was expanded in March 2023, and we expect to deliver total savings of $70 million by 2024, for a total cash cost of $50 million. In the half, we delivered a further $21 million of efficiencies and we have increased our guidance for incremental benefits in the year from $20 million to $30 million.

Optimising the portfolio and footprint and mitigating structural US labour availability issues

Our initiatives in the US and Mexico are designed to optimise our footprint, deliver operating efficiencies and mitigate structural labour availability in the US. Our new, state-of-the-art facility at Huamantla, Mexico, which opened towards the end of FY 2022, is now fully operational and performing well. This operates alongside our existing plant at Orizaba, which has received significant new investment, and these projects have been completed on-time. As part of the fit-out of these factories, we have installed new, proprietary technology which reduces the number of manufacturing processes and lowers energy consumption, while increasing our flexibility to meet customer needs. In addition, the build and fit-out of our second new plant at Toluca, Mexico is now complete, with commissioning expected during the second half.

Improving the overall cost base efficiency

A further focus is on improving the overall cost base efficiency of the Group, with particular emphasis on our higher cost UK and US locations. We have been moving a number of our corporate and overhead activities closer to our operations and customers. The implementation of this project was accelerated in FY 2022 with all actions now completed.

Transformation of Asian Operations, focusing on China and India

The project to transform our Asian operations has a particular focus on China and India. This project is designed to optimise our footprint and efficiency in our long-established Indian operations, while bringing a greater focus to the increasingly important domestic market in China. Work in both countries has commenced and is in line with schedule. In India, there have been headcount reductions, with office and warehouse space being consolidated. In China, there have also been headcount reductions with lower-margin zip production in the process of being outsourced to a third party supplier, with completion expected before the end of the year.

Texon and Rhenoflex

The 2022 acquisitions of Texon and Rhenoflex have increased our presence in the footwear market and, when combined with our existing footwear thread business, has made us the global market leader in the supply of components to the highly attractive footwear market, within a fragmented supply chain.

Despite the current de-stocking headwinds, our strategic rationale for buying these businesses remains intact. These include a strong focus on fast-growth, premium-priced, sports and athleisure brands, a portfolio of highly-differentiated and innovative components, as well as predominantly brand-specified positions which typically last over the production life of the end-product. In addition, there is an existing focus on innovation and sustainability, with a leading portfolio of increasingly in-demand sustainable products, including recycled and plant based components. The scale and product differentiation we have in this market, positions us well to add to our leading market share. We are working on a number of long-lead time opportunities with prominent brands on footwear products, that are being directly enabled by our enhanced presence, complementary capabilities and customer relationships.

At the time of acquisition, we said we would deliver an initial $11 million of annualised cost efficiencies from the integration of the combined business in 2024. These efficiencies principally relate to the consolidation of duplicated roles and back-office functions and the delivery of procurement efficiencies. In the first half, we delivered $5 million of efficiencies, and now expect to deliver $15 million of run-rate efficiencies in the full year, ahead of our original plan.

Our planning for the next phase of integration is under way, which will comprise a consolidation of the division’s footprint, and we expect to announce these plans at the full year 2023 results. We have already consolidated our operations in Vietnam, bringing together our existing footwear threads operations with our state-of-the-art footwear components sites, part of the Texon and Rhenoflex acquisitions. The integrated Vietnamese business is 100% owned by Coats and now provides a single point of contact for footwear thread and component customers, innovative new production technologies and efficiency benefits.

Looking beyond current market conditions, we are well-positioned in attractive footwear markets with significant, long term growth characteristics. Having now owned the footwear component businesses for around a year, we are also increasingly confident that there is significant opportunity for long-lead revenue synergies and further market share gains, as well as significantly greater cost efficiencies than initially planned.

Focusing on Attractive Markets

Our strategy is to drive profitable sales growth with a focus on attractive markets. This includes optimising our portfolio and footprint and divesting businesses in less attractive markets, where there is a lower margin opportunity. Consistent with this, we have pursued a programme of divestments and business exits in prior periods, as well as the previously announced divestment of our smaller business operations in Mauritius and Madagascar in January 2023.

Continuing this progress, in July 2023 we announced an agreement to divest our low margin European Zips business for a cash consideration of around $1 million after typical debt-like items and the transaction is expected to complete in Q3 2023. In the year ended 31 December 2022, the business generated revenue of around $50 million with adjusted operating margins well below the Group average.

Strategic Enablers: Innovation, Sustainability and Digital

Our strategic enablers are Innovation, Sustainability and Digital and these underpin our strategy to accelerate profitable sales growth whilst delivering sustainable value to our stakeholders. We have progressed our enablers in the half, as follows:

Tydzień Innowacji

We innovate to deliver differentiated, highly-engineered products with a focus on driving profitable growth. Much of our innovation is closely linked to sustainability, a key driver in our markets. Sustainability impacts our markets in a number of different ways, including through the increased adoption of products made from recycled or bio-materials, more efficient production techniques, increasingly lightweight and more protective products as well as technologies that enable the end-of-life recycling of products. We innovate according to long term technology roadmaps and in close collaboration with customers.

All our divisions contribute to the pipeline of new and innovative products, with a few highlights as follows:

• Following launch towards the end of 2022, our EcoCycle product, a water dissolvable concept which enables easy and low-cost separation of textile and non-textile products in end-of-life garments, has been developed for specific application to denim garments;
• We have a number of projects underway to develop next-generation materials for garments, including the use of recycled and bio-materials;
• Using Rhenoprint,™ a market-leading process that generates zero waste in the manufacture of structural components, we have been able to launch a footwear toe puff which, for the first time, contains recycled material. In addition, using the same process, we have started to produce footwear heel counters with a significantly greater recycled material element;
• Our Ecostrobe chemical and water-free process has enabled us to launch our first fully recycled polyester footwear insole. This differentiated product has now gone into production for initial customers;
• Within our Personal Protection business, we have launched a line of Signal Lucence Pro trims, with early customer interest. This high visibility tape, which is integrated in protective clothing for firefighters, has three levels of visibility, offering fluorescent, reflective and glow-in-the-dark attributes. This combination in one product is an industry first, enhancing wearer safety;
• In addition, we have launched our first dark grey line of reflective tape for protective clothing. The tape meets all safety regulations, as well as being more integrated into protective clothing in a way that traditional silver-coloured trims are not. This meets a growing demand from larger companies for smart, as well as compliant employee protective workwear.

Zrównoważony rozwój

Part of our company purpose is to make a better and more sustainable world, enabling us to help people and the planet. This focus also helps us to differentiate our offerings, making us a supplier of choice in the rapidly growing market for sustainable apparel and footwear products. Also, by using less resources and being more efficient, this reduces our costs, facilitating greater headroom for investment, including further innovation and sustainability applications.

Our long term commitment is to be Net Zero by 2050, initially by achieving our existing 2030 SBTi goals, which are to reduce our scope 1 and 2 emissions by over 46%, with scope 3 reduced by 33% over the same time frame. We also aim to have 70% of our global energy consumption from renewables by 2030, with no Coats products to be made from new, oil-extracted materials. We will adopt a circularity approach, creating products and packaging solutions that enable recycling and reuse, within our own operations and across the wider garment industry. We have made particularly good progress with our scope 1 and 2 emission reduction targets, being ahead of the 2030 target trend-line. Progress against other SBTi goals is on track to meet our 2030 goals.

In March 2023, we announced new medium-term sustainability targets with an FY 2022 baseline. The targets have continued our focus on people, water, emissions and waste reduction, as well as product innovation and materials transition. During the period, we have started to focus on implementing the measures that will enable us to achieve these new 2026 targets, as part of our Net Zero journey.

Despite the widespread industry destocking in the first half, we have continued to increase sales of our range of 100% recycled products, where we are the clear global market leader. Revenue from our recycled products increased in the period by 15% on a CER basis to $70 million, offsetting market headwinds, as customers continue their transition to sustainable materials.

In line with GHG Protocols for reducing CO2e emissions, we are changing our disclosure from reporting recycled sales revenue to a materials transition approach, based on the volume of primary raw materials that we purchase. This will expand the scope of our disclosure beyond our premium range of sewing threads, covering many more sustainable end-use categories for sewing thread, as well as footwear component materials for the first time, with the revised disclosure implemented from FY23. Our target is to transition to 60% of sustainable primary raw materials by 2026.

In March 2023, as part of a previously announced $10 million investment over five years to help accelerate achievement of Coats ambitious sustainability targets, we opened our new Sustainability Hub in Madurai, India. This sits alongside our recently re-purposed Shenzhen, China Hub. The Hubs are working together to innovate next generation materials for sustainable threads for apparel, footwear and performance materials applications, supporting the transition to recycled and renewable materials. From the same sustainable investment fund, we are also introducing innovative water-free, dyeing technology into a number of our manufacturing facilities in the second half of the year, as well as those of certain collaborating brands.

Digital

Enhancing our global digital infrastructure and capability is a key piece of our strategy, and a differentiator in our markets. It delivers key customer service benefits and embeds relationships, as well as bringing greater efficiency and flexibility to our operations.

During the half, we continued to expand usage of our digital customer ecosystem, ShopCoats, following enhancements made in the prior year. ShopCoats offers customers efficiency and business improvements through its automated bulk and sample ordering and status management capabilities. We have also continued our critical focus on data protection and security by rolling-out a number of IT system initiatives across our global operations.

As well as adopting digital technology within our own operations and connecting these with our customers’ systems, Coats Digital, part of Apparel, sells software to third party customers, with a recurring theme of making operations more efficient, including using less resources.

Dividend

Notwithstanding, the widespread destocking in the half, we have generated good levels of free cash flow and continue to have a strong Balance Sheet. We are well-positioned in our markets and seeing continued market share gains, with further growth and margin opportunities as the market stabilises. With these factors in mind, the Board has decided to pay an interim dividend of 0.81 cents per share, a 15% increase on the prior year. The interim dividend will be paid on 15 November 2023 to ordinary shareholders on the register at 20 October 2023, with an ex-dividend date of 19 October 2023.

The Board will continue to review the level of dividend payment to shareholders, on the basis of the performance of the business and its longer term potential, including margin and earnings progression, as well as cash generation.

ENDS