Coats Regulatory News (COA)

7 March 2024

Coats Group plc

2023 Full Year Results

Strong EBIT margin performance - 17% achieved in H2 - one year ahead of 2024 target with continued market share gains

Coats Group plc ('Coats,' the 'Company' or the 'Group'), the world's leading industrial thread and footwear components manufacturer, announces its audited results for the year ended 31 December 2023.

Strategic Highlights

Financial Highlights

Outlook

The Group expects to make good progress in 2024 underpinned by modest revenue growth, with a weighting to the second half, as Apparel and Footwear gradually recover, and with increasing tender activity in Performance Materials. Our continued focus on controlling our costs, including the benefits of strategic projects, increases our confidence in achieving our 17% Group EBIT margin target in 2024.

The Group's long term track record of outperforming the markets we serve is based on our scale, global footprint, innovation, strong digital platform and technical support capabilities, all of which are becoming more relevant to customers and supportive of our revenue growth ambitions. We expect these growth drivers to be augmented by a gradual market recovery and by continued investment in sustainability and operational efficiency which together give us confidence in delivering strong profit growth and cash generation over the medium term.

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

"There is much to be confident about in Coats' trading performance in the year. Against the backdrop of widespread industry destocking, we gained market share, grew our margin and our adjusted free cash flow. We have also seen that the consumer in general has remained resilient in these challenging markets, albeit with variation by territory.

Encouragingly, as the year progressed sales trends improved, in part due to the timing of the commencement of the current destocking cycle last year. Second half organic revenue was 10% lower compared to a 19% decline in the first half. This improving H2 trend was driven by Apparel, where there is evidence that customer inventory levels are normalising. Within this result, we remain the clear global market leader in 100% recycled thread, reflected in increased revenue of 44% at constant currency, despite lower volumes across the industry.

Our margin increased 160bps to 16.7% (2022: 15.1%) and we achieved our 2024 17% margin target in the second half of 2023, one year ahead of plan. This strong performance, despite the market conditions, was in part driven by savings from our strategic projects, as well as our acquisition-related synergy activities, and supplemented by a rigorous focus on cost control.

We are particularly pleased with our strong cash generation. We increased our adjusted free cash flow to $131 million in the year, reflecting tight cash management and well-managed working capital.

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."

Conference Call

Coats Management will present its full year results in a webcast at 10.00 GMT today (Thursday, 7 March 2024). The webcast can be accessed via www.coats.com/investors/fy2023. The webcast will also be made available in archive form on www.coats.com.

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 2023 was $1.4 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 to constantly stay ahead of changing market needs, Coats has operations across some 50 countries with a permanent workforce of more than 15,000, 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 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 an aspiration 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. To find out more about Coats visit www.coats.com.

Cautionary statement

Certain statements in this full year 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.

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 Full Year Results Overview

Introduction

We are proud that our 2023 financial performance has delivered many positives, despite a challenging market back drop. We are also proud to have been included in the list of the top 25 World's Best Workplaces by Fortune and Great Place to Work during the year, which is based on an assessment of a range of employee-related factors and attributes.

Reported revenue was 9% lower, in a year that saw widespread industry destocking. Group organic revenue was 14% lower, including like-for-like contributions from Texon and Rhenoflex post their respective acquisition dates. This was an improving trend compared to the first half performance, which was 19% lower on an organic basis. Within this destocking cycle, which was brought about by the impacts from post-COVID supply chain disruption, the consumer has continued to be resilient.

The improving H2 organic trend was driven by Apparel (organic revenue 12% lower in the full year; H1 20% lower) where there is evidence that the anticipated gradual market recovery is underway as customer inventory levels normalise. Destocking commenced later in Footwear, and here the recovery is lagging that of Apparel (organic revenue 16% lower in the full year; H1 23% lower). Performance Materials (organic revenue 17% lower in the full year; H1 14% lower) experienced a lower level of cyclical destocking than Apparel and Footwear. However, it was adversely impacted by customer insourcing of production and previously disclosed customer phasing issues in some US end markets.

While we cannot control the industry backdrop, we are extremely pleased with our continued ability to gain market share. In Apparel we estimate our global market share grew in the year to c.25% (2022: c.23%), an increase in share of c.200bps. In Footwear we estimate our global market share also grew by c.200bps to c.27% (2022: c.25%), with both footwear threads and structural components contributing. Performance Materials offers specialist products across multiple end markets and delivered significant new contract wins in the year, in particular with premium automative OEMs and tier one suppliers. These market share gains across the Group are testament to the strategy we have been pursuing. Our global presence, leadership positions, quality products, flexibility and responsiveness to customers enables us to align ourselves with many of the fastest-growing global brands. This means we can deepen existing relationships, as well as grow our customer portfolio. These brands benefit from our efficient digital platform and technical support capabilities, as well as our ongoing investment in innovation, and a growing portfolio of sustainable products. Our focus on making our own operations sustainable gives brands added confidence to do business with us. This is proving to be a winning formula.

We have also worked hard to deliver further savings in our operations, and we have produced another strong performance. In the face of significantly lower volumes, our adjusted EBIT margin for the full year increased 160bps to 16.7% (2022: 15.1%). We are pleased to have achieved our 2024 17% Group adjusted EBIT margin target in the second half of 2023, one year ahead of plan. As a result, adjusted EBIT was maintained at $233 million (2022: $233 million), despite the significant revenue reduction. The outstanding margin performance was driven in part by savings from our strategic projects, as well as our acquisition-related synergy activities. Our strategic projects delivered accelerated in-year savings of $37 million, taking the cumulative total to $57 million. We continue to expect to deliver cumulative strategic project savings of $70 million in 2024, in line with our guidance. Our acquisition-related synergies have delivered a total of $16 million of synergies by the end of the year (annualised $19 million), well ahead of our pre-acquisition expectations ($11 million in 2024). Away from these projects, our focus on good cost control and driving day-to-day savings has been constant, including the delivery of significant procurement savings, and this has also contributed to the strong margin. Reported EBIT was $184 million (2022: $181 million), which is after exceptional and acquisition-related items largely in relation to the execution of our strategic projects and our 2022 Footwear acquisitions.

We have also maintained an effective pricing strategy, adapting to market conditions as overall inflation rates have begun to reduce. This has helped us deliver both market share gains and margin enhancement. Input costs have moderated in some areas, including lower raw material prices and freight, and we will continue to adapt our pricing strategy accordingly. Customer loyalty is linked to the quality and differentiation of our products, our high levels of customer service and, in some cases, by the degree with which we are integrated with customer systems and processes.

As we had hoped, we are also starting to see success from the cross-selling of our enhanced range of Footwear capabilities to customers, following the 2022 acquisitions. This bodes well for future growth in this division. We continue to see a number of opportunities to be a 'one-stop shop' for our customers' needs.

Our focus on margins also helped us deliver strong cash generation. We delivered increased adjusted free cash flow in the year of $131 million (2022: $114 million), reflecting tight cash management, including well controlled working capital. We ended the year with reduced net debt (excluding lease liabilities) of $384 million (2022: $394 million), and leverage at 1.5x net debt/EBITDA. This continues to be in the middle of our target range of 1-2x net debt/EBITDA.

In December 2023, we activated the agreed "off trigger" mechanism to suspend deficit repair payments for our UK defined benefit pension scheme, following a one-off £10 million payment. As a result, 2024 cash generation will include a £2 million per month tailwind, while deficit repair payments remain switched off, resulting in a c.$30 million cash flow benefit for the business over a full year. We continue to work towards fully de-risking the UK pension scheme over the medium term.

Strategic Projects

Our strategic projects were announced in March 2022 to optimise our footprint, lower our cost base and deliver operating efficiencies, as well as mitigate structural labour availability issues in the US. In part, our success in driving these projects forward and accelerating the delivery of savings has contributed to the strength of our margin during a period of industry-wide volume headwinds, and has put us in an excellent position to benefit from market recovery.

During 2023, we accelerated delivery of savings from these projects with $37 million achieved in the year, amounting to a total of $57 million of savings since 2022. We continue to expect to deliver total savings of $70 million by 2024. We now expect to deliver these savings for $35-40 million, considerably less than the previous guidance of $50 million cash costs (cumulative cash costs to date of $26 million, net of $11 million property proceeds).

During the year, our initiatives continued in Performance Materials' US and Mexico operations to optimise our footprint, deliver operating efficiencies and mitigate US structural labour availability issues. Following on from the opening of our new, Mexican state-of-the-art facility at Huamantla towards the end of 2022, and investment in our existing site at Orizaba in 2023, our second new plant at Toluca, Mexico commenced pilot production towards the end of the year. Production at this site will increase gradually during 2024. With production and operations being transferred progressively from the US, we have also been reducing and consolidating our US footprint from five sites to two, and this process is continuing in 2024.

The other major focus of our strategic projects has been the transformation of our Asian operations, with a particular focus on China and India. This project has optimised our footprint and efficiency in our long-established Indian operations, while bringing a greater focus to the increasingly important domestic market in China, where there are opportunities with local brands. In India, work has been undertaken to consolidate warehouse and office space, with a reduction in headcount enhancing efficiency. In China, we have reorganised the Shenzhen facility, improved its lay out and reduced headcount. The outsourcing of zip production in China was also completed before the end of the year, as expected. Finally, we have commenced the consolidation of our under-utilised UK-based footwear production site into our existing site in Indonesia. With increasing numbers of customers setting-up in-country, this will move us closer to customers and lower production, energy and freight costs, as well as reduce CO2e emissions.

Alongside our strategic project footprint actions, we have continued to review our overall portfolio to ensure we remain focused on the most attractive markets, where we have leading positions. As part of this initiative, we divested the small operations in Madagascar and Mauritius in January 2023, as well as completing the divestment of our European Zips business on 31 August 2023, for a cash consideration of around $1 million on a debt free basis.

Footwear Acquisitions

Our 2022 acquisitions of Texon and Rhenoflex, combined with our existing footwear thread business, has made us the leading global supplier of threads and structural components to the footwear market.

Not only do we have a strong market position with the benefits of scale, but we also have a focus on fast-growing sports and athleisure brands which attract premium pricing. Our brand-specified positions have considerable longevity, typically lasting through the life of the product. As described in more detail below, our Footwear business - consistent with the predecessor brands - has a focus on innovation and sustainability, with a leading portfolio of sustainable products. This also enables growth ahead of the market.

One of the many attractions of combining these businesses has been the potential to cross-sell our enhanced range of products to customers, with whom we have longstanding relationships. We are now beginning to see the initial benefits of our cross-selling efforts. For example, we have succeeded in adding structural components to a well-known US performance brand's footwear product, where we already supply thread. In addition, we have achieved similar success with two leading Chinese brands. We have also 'upsold' our Rhenoprint,? sustainable structural component process to a mid-market global sports wear retailer, who is an existing structural component customer.

Our Footwear scale, position and exciting range of products enabled us to increase our market share in the year despite lower volumes across the industry. This positions us well for when the market recovers.

Our cross-selling and market share gains have been achieved while we have been focusing on completing the initial phase of business integration. At the time of acquisition, we expected to deliver $11 million of annualised cost savings in 2024 from combining the businesses. These savings principally relate to the consolidation of duplicated roles and back-office functions, and the delivery of procurement savings. We have delivered a total of $16 million of savings by the end of the year (annualised $19 million), well ahead of our plan. Having increased the adjusted EBIT margin from 12% pre-acquisition to a 16% margin in 2023, we have achieved a margin that is consistent with our pre-acquisition business case, despite much lower volumes in the market during the year. This outcome is the result of the actions we have taken, including integration synergies, pricing and mix-effects as well as continuous improvement activities.

Strategic Enablers: Innovation, Sustainability and Digital

Our strategic enablers are Innovation, Sustainability and Digital and these underpin our strategy to accelerate profitable sales growth while delivering sustainable value to our stakeholders. We have continued to progress our enablers during the year, with pleasing results.

Innovation

Our innovation drives product differentiation and profitable growth. It is carried out in collaboration with customers and derived from our long-term technology roadmaps. The primary focus of our innovation is sustainability, most notably around the adoption of products made from recycled products and bio-materials. However, it also encompasses more efficient production techniques, increasingly lightweight products with enhanced protective characteristics, and end-of-life recycling technologies.

Examples of our innovation, which have been recently launched, include the following:

We manage our innovation strategy for the long term, with individual product developments often multi-year from inception to launch. We have continued to invest in innovation through the current destocking cycle, with ongoing investment meaning we continue to have a product portfolio that is well-positioned to benefit from our evolving markets, as consumer and customer requirements change.

Sustainability

Sustainability is at the very heart of our business. It encompasses the products we create and sell through innovation, as well as how we manage our operations. Our investment in sustainability is a compelling proposition to the increasing number of brands who demand sustainable products, driven by consumer sentiment. These brands also want to align with a supply chain having compliant, sustainable operations. This investment therefore helps us increase our market share over time, as well as reduce our costs, as we become more efficient and use less resources. 

We have set medium term targets to help us reach our Net Zero commitment by 2050, with our Net Zero targets submitted for SBTi approval during 2023. Our Net Zero commitment will be achieved initially through our 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. By 2030 we also aim to have 70% of our global energy consumption from renewables and all our products sourced sustainably, eliminating the use of all product made from new, oil-extracted materials. To achieve this we are adopting a circularity approach, creating products and packaging solutions that enable recycling and reuse, within our own operations and across the wider garment industry. 

In March 2023, we announced new and challenging interim sustainability targets for 2026, using an 2022 baseline1. The seven targets reflect the ongoing focus on our people, water, emissions and waste reduction categories, as well as product innovation and materials transition. We have improved our performance against these targets during 2023, in relation to the prior year baseline. In particular, we have met our 2026 target for reduction in scope 1 and 2 CO2e emissions, albeit this was impacted by lower production volumes during the year.

Materials transition is an important metric, as it enhances our revenue growth and reduces our Scope 3 CO2e emissions. In line with GHG Protocols, we have changed our disclosure approach for the first time from recycled sales revenue to a materials transition approach, based on the volume of primary raw materials that we purchase. This has expanded our disclosure to cover more sustainable end-use categories for sewing thread, as well as footwear component materials. During the year, the proportion of sustainable materials within our overall production increased to 29%, (2022: 25%) driven by increased recycled polyester fibres and filaments in our thread products. Our target is to transition to 60% of sustainable primary raw materials by 2026, and 100% by 2030. We remain the clear global market leader in the sales of 100% recycled thread products and our 2023 revenue increased by 44% to $172 million at constant currency, in a year of lower production volumes across the industry.

During 2023 we inaugurated our new Sustainability Hub in Madurai, India. This unit has a full range of upstream processing equipment that will allow it to take new, more sustainable, raw material types and process them into innovative threads. The Hub has a number of partnerships already in place, with more to come, working closely with established companies and start-ups that have innovative material solutions that meet our criteria. 

The Madurai Sustainability Hub has built a strong team of sustainability and innovation experts and professionals and recruited and trained local talent from various fields, such as textile engineering, chemistry, biotechnology, design, marketing, and management. It collaborates with external partners, such as universities, research institutes, NGOs, and industry associations, to access the latest knowledge and technologies. The Hub works closely with our established Innovation Hub in Shenzhen, China, which takes threads developed in Madurai and turns them into prototype finished products. Many of the developments under way relate to innovative bio-materials, but work is also being undertaken on recycled or more sustainable plastic-based materials.

Reflecting the progress we made driving sustainability during 2022, we received an improved Carbon Disclosure Project (CDP) Climate Change rating in February 2024 of B (previously B-). Our CDP Water rating remained at B.

We are proud to have been included in the list of the top 25 World's Best Workplaces by Fortune and Great Place to Work (GPTW) in November 2023. To put this achievement into context, we are one of only two UK-listed companies to have received this accolade in 2023. GPTW selects companies based on their dedication to creating exceptional workplace cultures, prioritising people, fostering a culture of trust and empowering colleagues worldwide to achieve their full potential.

1 2022 baseline restated to reflect divestments. Effluent Compliance metric now measured on the percentage of tested effluent analytes meeting the specification limits under ZDHC Guidelines; a standard set above local regulatory requirements.

Digital

Our digital offering is another differentiator for the business. We are able to invest in our digital operations by virtue of our scale, and this investment gives our customers a seamless service from our operations around the world. Our cloud-based digital backbone gives us greater visibility of data and enables greater operational efficiency for us and for our customers, with business conducted at the touch of a button. As our operations and those of our customers become more integrated, it increases customer retention and loyalty.

We have migrated 100% of enabled customers to our ShopCoats digital customer ecosystem. This offers highly efficient automated processes, including ordering, sample production, processing and status management capabilities. From its inception in 2021 to the end of the year, the ShopCoats digital system has processed just under $1.3bn of customer orders, with the number of orders received through ShopCoats increasing over time.

Our Coats Digital business, part of Apparel, sells software to third party customers, with an overarching theme of making operations more efficient. With a growing focus on operational efficiency, interest in our software products is also increasing. The business had an excellent year, gaining more than 30 new customers and increasing its recurring software-as-a-service (SaaS) based revenue.

Board Update

At the upcoming AGM, the Board is proposing a resolution to re-appoint David Gosnell, Chair of the Group, as a Director of the Company. The Board has concluded unanimously that a three year extension to David's tenure as Chair to 2027, is in the best interests of the Company and shareholders. This will be subject to his re-election at the 2024 AGM and annually thereafter. Such an extension would provide continuity, enabling David to oversee the current period of significant development to conclusion. This includes completion of the integration of the major 2022 footwear acquisitions and the Group's strategic projects, as well as further potential de-risking of the pension scheme. The Board is also going through a period of evolution, with two recent Non-Executive Director appointments and the forthcoming Senior Independent Director, and Audit Committee Chair transitions, as Nicholas Bull steps down from the Board at the 2024 AGM.

David was appointed Chair in 2021. However, as he has served as a Non-Executive Director from 2015, this resolution would extend his Board appointment beyond the usual nine year term. The Board considers this to be compliant with provision 19 of the Code which allows an extension for a limited time where the Chair was an existing director, subject to a clear explanation being provided. The Board considers that David continues to demonstrate objective judgment and promotes constructive challenge amongst Board members. In addition, Nicholas Bull and Steve Murray, in his role as incoming Senior Independent Director, directly consulted with shareholders holding around 70% of the Company's shares at 31 January 2024 to explain the rationale for this proposal and seek their views. The shareholders indicated clear support for David continuing as Chair, with the majority supportive of a three year extension, subject to annual re-election at the AGM.

Dividend

Notwithstanding the widespread industry destocking in the year we delivered a good financial performance, including an increased margin and strong levels of free cash flow. Including further progress made on pension schemes during the year, the Group's Balance Sheet continues to be in a strong position. We are well-positioned in our markets; we continue to gain market share, and we see further growth and margin opportunities as the market gradually recovers.

With these factors in mind, the Board has decided to propose a final dividend of 1.99 cents per share, a 15% increase on the prior year. This equates to a full year dividend of 2.80 cents per share, also an increase of 15%. Subject to approval at the AGM, the final dividend will be paid on 30 May 2024 to ordinary shareholders on the register at 3 May 2024, with an ex-dividend date of 2 May 2024.

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, within the context of our capital allocation policy.

Operating Review

2023 Operating Results Overview

Group revenue of $1,394 million decreased 9% on a reported basis, 6% on a CER basis, and 14% on an organic basis. There was an improving trend through the year with H1 organic revenues down 19% vs 2022, and H2 revenues down 10%. The organic revenue decline for the full year, against a very strong prior year comparator, reflects the continuation of the widespread industry destocking in Apparel and Footwear. In addition, there was the previously disclosed customer contract in-sourcing and certain customer phasing issues in US end markets in Performance Materials. The improving Group trend in the second half of the year was primarily driven by signs of the anticipated gradual recovery in Apparel. Destocking commenced later in Footwear, and here the recovery is lagging that of Apparel.

Group adjusted EBIT of $233 million increased by 4% on a CER basis (2022: $225 million CER), despite market headwinds on the top line, with adjusted EBIT margins up 160bps to 16.7% (2022: 15.1%). We are pleased that our 2024 Group adjusted EBIT margin target of 17% was delivered during the second half of the year. The year-on-year increase in adjusted EBIT margins reflect the impact of lower volumes due to market conditions being more than offset by some input cost deflation (whilst maintaining pricing) and the ongoing accelerated benefits from strategic projects and integration synergies, as well as strict cost discipline. On a reported basis EBIT was $184 million (2022: $181 million), after $49 million of exceptional and acquisition-related items (2022: $52 million) which predominantly related to the execution of our strategic projects and 2022 footwear acquisitions.

Adjusted earnings per share ('EPS') were unchanged at 8.0 cents (2022: 8.0 cents) despite market conditions and rising interest rates. As reported above, there was a significant year-on-year increase in the Group adjusted EBIT margin, alongside tight management of our interest costs and tax charge, with a reduction in minority interest payments. Reported EPS of 5.2 cents (2022: 4.8 cents) was 7% higher, also including the impact of exceptional and acquisition-related items.

Our Group cash performance remained strong with adjusted free cash flow of $131 million (2022: $114 million), as we focused on margins and cash generation. Our Balance Sheet remains in a strong position, with net debt (excluding lease liabilities) of $384 million (2022: $394 million), with leverage of 1.5x (2022: 1.4x on a proforma basis). 

Revised Divisional Reporting from 1 January 2023

As a result of the 2022 acquisitions of Texon and Rhenoflex, our new organisational and reporting structure, effective 1 January 2023, is comprised of three divisions (segments): Apparel, Footwear and Performance Materials. The Footwear division consists of the existing Coats footwear thread business (formerly part of Apparel & Footwear), and the acquired footwear components businesses, Texon and Rhenoflex.

As announced at our 2022 Capital Markets Day, the medium-term sales growth CAGR for the new operating divisions are anticipated to be 3-4% for Apparel, c.8% for Footwear, and 6-9% for Performance Materials, resulting in medium-term Group growth of c.6%. The target for the Group 2024 adjusted EBIT margin is c.17%, comprising 15-16% for Apparel, >20% for Footwear, and 13-14% for Performance Materials. As noted above, we are pleased to report that we have already delivered our 2024 Group adjusted EBIT margin target during the second half of 2023. 

Apparel

Coats is the global market leader in supplying premium sewing thread to the Apparel industries. We are the trusted value-adding partner, providing critical supply chain components and services, and our portfolio of world-class products and services exist to serve the needs and requirements of our customers and brand owners.

Revenue of $689 million (2022: $818 million) was down 12% on a CER basis (16% reported). As anticipated, revenue was lower year-on-year, against a very strong prior year comparator, and reflected the continuation of widespread industry destocking, after a surge of post-COVID inventory restocking in H1 2022, as well as buffer-buying due to supply chain disruption. We have seen improving trends through the year as it is clear the destocking period is largely over, as customer inventory levels normalise, with early but encouraging order trends now evident. 

Despite challenging market conditions, the Apparel business benefited from market share gains, with an increase in our estimated market share by c.200bps to c.25%. We were also able to maintain pricing, and leverage moderating input costs in some areas. We continue to be very well-positioned in our markets, as the global partner of choice for our customers, with market-leading product ranges and customer service, and a clear leadership position in innovation and sustainability.

Our proactive procurement strategy has put us in a good position to benefit from raw material price moderation. The focus on material transition to recycled products has helped to scale our recycled product offering and minimise cost premiums associated with these products. This, alongside our agile supply chain network, has enabled us to help our customers and brands achieve their sustainability goals, helping us take market share and maintain prices.

With market conditions expected to continue to gradually improve, our strong market position, global presence, differentiation and focus on leading brands provide further opportunities for growth and market share gains.

Adjusted EBIT of $120 million (2022: $130 million) decreased 4% vs the prior year on a CER basis, significantly less than the overall revenue decline. The adjusted EBIT margin was 150bps higher at 17.5% on a CER basis (2022: 16.0%), already slightly ahead of our 2024 margin target. Savings from our self-help actions, including strategic projects, and procurement benefits more than offset the adverse impact from lower sales volumes.

Footwear

We are the trusted partner to the footwear industry, shaping the future of footwear for better performance through sustainable and innovative solutions. The combination of Coats, Texon and Rhenoflex makes us a global champion with a portfolio of highly engineered products with strong brand component specification, primarily targeted at the attractive athleisure, performance, and sports markets.

Despite continued industry destocking, Footwear benefited from market share gains. We increased our estimated market share by c.200bps to c.27% for threads and structural components combined. Customer pricing also remained robust, even as some input costs began to moderate. We have been realising the benefits of the Texon and Rhenoflex acquisitions, with commercial opportunities being pursued. In challenging market conditions, our leading global position has allowed us to leverage the strength of our customer relationships and market leading product ranges.

Footwear revenue increased 24% to $368 million (2022: $300 million) on a CER basis (23% reported), which includes contributions from Texon and Rhenoflex post their respective acquisition dates in July and August 2022. This was against a very strong prior year comparator and included an adverse impact from the continuation of widespread industry destocking that commenced in Q4 2022. Excluding the pre-acquisition contribution from Texon and Rhenoflex, organic revenue decreased 16%. Encouragingly, we believe the industry destocking cycle is largely complete, as customer inventory levels normalise, and we expect to see signs of a gradual volume recovery during 2024, although lagging the Apparel recovery. 

Despite the market headwinds, we continued to deliver share gains and programme wins, reflecting our position as a trusted partner with our global accounts programme, in which we dedicate resources to key brands and retailers.

The athleisure, performance and sports markets within Footwear continue to be attractive. Supplier consolidation and nearshoring, including China de-risking, are becoming prominent trends, with brands also placing increasing emphasis on sustainability and innovation. With market conditions expected to gradually improve in 2024, these important, longer-term trends provide Footwear with further opportunities for growth and share gain.

Adjusted EBIT was $84 million with adjusted EBIT margins up 10bps to 22.8% despite significantly lower sales volumes and the initial dilutive impact of the acquisitions. As a result, our 2024 margin target for the Footwear Division has been reached, a year earlier than planned. The acquisitions of Texon and Rhenoflex remain on track to be accretive, post-synergies. On a proforma basis, including the pre-acquisition contribution of the July and August 2022 acquisitions, margins were up 510bps year-on-year. This is as a result of strong commercial delivery in a difficult market environment, pricing benefits being maintained in the context of some lower input costs, the delivery of acquisition-related synergies and general cost discipline. Acquisition integration has so far focused on commercial and general & administrative costs, as well as on procurement, delivering $16 million of efficiency savings by the end of the year ($19 million annualised). This is ahead of our initial guidance ($11 million savings by 2024).

Performance Materials ('PM')

We are experts in the design and supply of a diverse range of technical products that serve a variety of strategic end use markets. Building on over 250 years of leadership in thread, we incorporate specific design features to provide highly engineered solutions for our customers. The division operates across Personal Protection, Composites and Performance Threads. Personal Protection offers multi-hazard industrial applications for industrial, energy, firefighting and military wear. Composites provides products and solutions for fibre optic cables and oil & gas piping sectors, and light weighting solutions for automotive components. Performance Threads has applications in a range of sewn products including safety-critical automotive airbags and seat belts, outdoor goods, household products like bedding and furniture, hygiene-sensitive consumer goods like feminine hygiene products and tea bags.

The Group discloses three PM sub-segments: Personal Protection (38% of 2023 divisional revenue), Composites (18% of 2023 divisional revenue) and Performance Thread (44% of 2023 divisional revenue). Medium-term revenue growth expected for each sub-segment are high single digits for Personal Protection, low double-digits for Composites, and growth in line with global GDP for Performance Threads. The overall medium-term growth target for the division is a 6-9% growth CAGR.

PM revenue declined 17% to $336 million in 2023 (2022: $420 million) on an organic and CER basis (20% on a reported basis), with Personal Protection decreasing by 25% on a CER basis, Composites decreasing by 21% (CER) and Performance Threads lower by 6% (CER). The largest factor driving the decrease was the insourcing of production by a large US customer in personal protection, which resulted in $30 million lower revenue compared to 2022. There was previously disclosed customer phasing issues in some US markets as well as destocking at some US telecommunication customers in Composites.

Despite market conditions, there were significant new customer wins across PM's sub-segments. These included gains at two large US Personal Protection manufacturers and a global agreement with a large cable manufacturer in the Composites subsegment. Within Performance Threads there were new contract wins at two premium automotive OEMs and a tier 1 supplier, as well as at a global feminine hygiene product manufacturer.

Adjusted EBIT was 10% lower vs 2022 on an organic and CER basis at $29 million (2022: $34 million), reflecting the significantly lower sales volumes. However, adjusted EBIT margins increased on an organic and CER basis by 60 bps to 8.6% (2022: 8.1%) due to the contribution of strategic project savings, recovery in EMEA margins (following a temporary supply issue last year), and self-help actions. PM margins included c.$5 million of duplicate running costs in relation to the US / Mexico plant transitions. Excluding these costs, PM margins were 190bps higher at 10.0%.

Geographical Performance

In line with divisional performance, there was a year-on-year revenue decline on a CER organic basis in all geographic regions, due to the market headwinds. However, there were improving trends in Asia and EMEA during the second half of the year. 

Asia revenue, 59% (2022: 59%) of Group, decreased 8% CER to $823 million (2022: $912 million), which included a 5% points contribution from the acquisitions made in H2 2022. All key Asian markets were impacted by the large scale industry destocking in the Apparel and Footwear divisions although, as noted earlier, we are starting to see early encouraging signs of a gradual recovery within Apparel.

Our Americas revenue, 18% (2022: 22%) of Group, decreased 28% CER to $246 million (2022: $341 million). All key markets were impacted by the challenging market conditions in 2023, although with comparatively more solid performances in Colombia and Mexico. The US was also impacted by customer insourcing of a significant PM contract in H2 2022, and certain customer phasing issues in US end markets in Performance Materials.

In EMEA, 23% (2022: 19%) of Group, revenue increased 26% CER to $325 million (2022: $285 million), which included a 28% contribution from the Texon and Rhenoflex acquisitions. Excluding acquisitions, performance was driven by positive momentum in PM in telecommunication composites and transportation, as fibre optic sales remained robust in EMEA. The Organic revenue decline of 2% also benefited from the weakening Turkish Lira, as we continue to price largely in US Dollars, and pass on the significant local currency devaluation. 

Financial Review

Revenue

Group revenue from continuing operations decreased 9% on a reported basis and 6% on a CER basis. On an organic basis revenue decreased 14%, which includes like-for-like contributions from Texon and Rhenoflex post their respective acquisition dates. All commentary below is on an organic basis unless otherwise stated.

Operating Profit

At a Group level, adjusted EBIT from continuing operations was maintained year-on-year at $233 million and adjusted EBIT margins increased 160bps to 16.7%, despite ongoing market headwinds. The table sets out the movement in adjusted EBIT during the year.

There were significant volume headwinds as a result of widespread industry destocking in the Apparel and Footwear businesses, as well as the adverse impact of the customer contract in-sourcing and end market phasing impacts in the US in Performance Materials. 2023 performance is also measured against very strong prior year revenue comparators, as there was a continued post-COVID demand surge (driving supply chain overstocking) particularly during the first half of 2022. From the second half of 2022, as anticipated, there was a slow-down in demand due to destocking in Apparel and then Footwear. The direct and indirect volume impact of this, together with the very strong 2022 comparators (particularly in H1), resulted in significant direct and indirect volume headwinds. These headwinds have been gradually receding in the second half in Apparel, with evidence that we are largely through the widespread destocking in our markets of the last c.18 months.

Our proactive approach to pricing during 2021 and 2022, when inflationary pressures accelerated at unprecedented levels, has meant that we have continued to see roll-over pricing gains year-on-year, although the impact of pricing has been broadly neutral in the second half. We have started to see an easing of some key raw material input and freight costs during the latter part of 2022, and this has continued through 2023. The favourable impact from this has acted as a partial offset to some of the volume impacts in the year.

Selling, Distribution and Administration (SD&A) costs are below last year, despite ongoing inflationary impacts in some areas, as we controlled our costs in challenging market conditions. We have also benefited from a further $37 million of efficiency savings (total savings to date are $57 million, including $20 million delivered in 2022), in relation to our strategic projects announced in March 2022, with the expected savings accelerated. Since these projects began, we have increased the total savings we expect to deliver by 2024 to $70 million (from $50 million) through expanding the scope of the projects, with a focus on our Asian operations. 

Our 2022 acquisitions, Texon and Rhenoflex, delivered a total of $16 million of synergy benefits by the end of the year ($15 million incremental benefits in 2023). These acquisitions have experienced similar industry destocking headwinds as the wider Apparel and Footwear businesses, and we have delivered accelerated integration synergies in response, as an underpin to performance. Total annualised synergies are $19 million (original expectations of $11 million in 2024).

The Group's adjusted EBIT margins increased by 160bps to 16.7% on a CER basis (2022: 15.1%), with the impact of the year-on-year volume declines being offset by the benefits of controllable factors.

On a reported basis, Group EBIT, including exceptional and acquisition-related items, increased to $184 million (2022: $181 million). A breakdown of these items is provided below. Exceptional and acquisition-related items are not allocated to divisions and, as such, the divisional profitability referred to above is on an adjusted basis.

Foreign exchange

The Group reports in US Dollars and translational currency impacts can arise, as its global footprint generates significant revenue and expenses in a number of other currencies. For the year, this was a headwind of 3% on revenue and adjusted EBIT. As previously announced, these adverse translation impacts were primarily due to the previous adoption of hyperinflation accounting in Turkey which saw significant depreciation towards the end of the half. Aside from the impact of the Turkish Lira, and the resulting volatility of hyperinflation accounting, underlying headwinds were modest and driven primarily by the depreciation of Chinese, Egyptian and Pakistan currencies. At latest exchange rates, we expect a minimal impact on revenue and adjusted EBIT for 2024 (excluding any future hyperinflation impact in Turkey, which cannot be forecasted with accuracy).

Non-operating Results

Adjusted EPS was maintained year-on-year at 8.0 cents (2022: 8.0 cents), despite market headwinds. Within this, adjusted EBIT was unchanged year-on-year at $233 million, at significantly increased margins. Interest costs were slightly lower, despite rising interest rates and increased debt in H2 2022 to fund the Footwear acquisitions. Our effective tax rate reduced to 29% (2022: 30%), and there were lower minority interest payments. Reported EPS of 5.2 cents (2022: 4.8 cents) was 7% higher year-on-year, after exceptional and acquisition related items.

Net finance costs decreased slightly to $29 million (pre-exceptional) (2022: $30 million), despite rising interest rates and the full year impact of the 2022 acquisition-related debt.

Key increases to the interest charge were:

Offsetting this were some significant decreases:

The adjusted taxation charge for the period was $58 million (2022: $60 million). Excluding the impact of exceptional and acquisition-related items, the effective tax rate on pre-tax profit reduced to 29% (2022: 30%). The reported tax rate was 35% (2022: 37%), after exceptional and acquisition related items.

Profit attributable to minority interests is predominantly related to Coats' operations in Vietnam and Bangladesh, in which it has controlling interests. These primarily operate in Apparel and Footwear markets and were exposed to the wider industry destocking in the year. Profit attributable to minority interests decreased to $18 million (2022: $22 million).

Exceptional and Acquisition-related Items

Net exceptional and acquisition-related items before taxation were $49 million (2022: $53 million). These include strategic project costs of $18 million (net of a $6 million property profit), and other acquisition-related items of $21 million.

Strategic project costs of $18 million relate to the strategic initiatives commenced during 2022; and primarily consist of severance costs of $11 million, legal / advisor / closure costs of $7 million, non-cash impairments of $6 million, offset by a profit of $6 million from the sale of property. These costs have supported the acceleration of project benefits, with $37 million of incremental adjusted EBIT delivered in the year (with $57 million incremental savings on the projects to date).

$6 million of costs have been incurred in relation to the delivery of acquisition-related synergies which, as mentioned above, are ahead of expectation, with a total of $16 million of savings now delivered since acquisition ($19 million annualised).

Other acquisition-related items of $21 million consisted of the amortisation charges from the newly recognised intangible assets from the Texon and Rhenoflex acquisitions, and the amortisation of intangible assets acquired with previous acquisitions. 

Discontinued operations

On 30 June 2023 the Group entered into an agreement to sell its European Zips business to Aequita, a German family office. The sale was subsequently completed on 31 August 2023.

The exit from the European Zips business was in line with Coats' previously announced strategic initiatives to optimise the Group's portfolio and footprint, and improve the overall cost base efficiency. The results of the European Zips business is presented as a discontinued operation in the consolidated income statement for the year ended 31 December 2023, together with a loss on disposal of $27 million.

Amounts for year ended 31 December 2022 in the consolidated income statement have been represented accordingly to reclassify the results of the European Zips business from continuing operations to discontinued operations. Note 13 provides further details of the sale. This has resulted in a reduction in previously reported 2022 revenues of $46 million and $2 million adjusted EBIT.

Cash flow

The Group delivered strong $131 million (2022: $114 million) adjusted free cash flow from continuing operations, driven by a working capital inflow, in part reflecting a focus on cash generation through the destocking cycle. Adjusted free cash flow is measured before annual pension deficit recovery payments, acquisitions, disposals and dividends, and excludes exceptional items.

We have managed net working capital closely, with a focus on inventory, without compromising service levels. We also continued our disciplined approach to payables and receivables management during the year, as an input to working capital efficiency.

Capital expenditure was $31 million (2022: $34 million), as we continued to maintain a selective approach to investing in growth opportunities, as well as in strategic projects, which will favourably impact long-term returns. We anticipate 2024 full year capital expenditure to remain in the $30-40 million range, as we continue to invest in support of our growth strategy, in productivity and in our environmental performance. However, this level of investment will remain dependent on the demand recovery profile during the year.

Minority dividends of $20 million (2022: $18 million) were paid, as cash was repatriated from those relevant overseas entities to the Group. Tax paid was $61 million (2022: $55 million). Interest paid was $34 million (2022: $25 million) reflective of higher interest rates and the acquisition debt taken out in H2 2022.

The Group delivered an overall free cash inflow of $15 million (2022: $247 million outflow). This primarily reflects the adjusted free cash inflow of $131 million, offset by:

Net debt (excluding lease liabilities) at 31 December 2023 was $384 million (31 December 2022: $394 million). Including lease liabilities, net debt was $471 million (31 December 2022: $500 million).

Pensions and other post-employment benefits

The pre-tax surplus for the Group's retirement and other post-employment defined benefit liabilities (UK and other Group schemes), on an IAS 19 financial reporting basis, was $63 million at 31 December 2023, which was $7 million lower than 31 December 2022 ($70 million surplus). This decrease was primarily due to movements on the UK scheme.

The Coats UK Pension Scheme, which is a key constituent of the Group defined benefit liabilities, had a surplus on an IAS 19 basis at 31 December 2023 of $102 million (31 December 2022: $118 million). The decrease in the surplus during the year ended 31 December 2023 of $15 million predominantly relates to net actuarial losses of $72 million. This was offset by employer contributions (excluding administrative expenses) of $43 million, a reduction in withholding tax and foreign exchange translation movements.

UK funding update

We continue to maintain strong and collaborative relations with the Scheme Trustees around strategic planning and have established a joint working group between the Company and Trustees to review further opportunities for de-risking the scheme, beyond the significant positive progress that has already taken place. This included the successful partial buy-in transaction with Aviva, representing full insurance of the benefits of c.20% of the scheme liabilities in December 2022.

The Aviva buy-in is consistent with Coats' medium term aspiration of fully insuring the Scheme and removing it from the Group balance sheet, in a cost effective manner.

When the Technical Provisions (funding) deficit for the Scheme was last formally assessed at 31 March 2021, as part of the triennial valuation cycle, it showed a £193 million deficit. As a result of this valuation, future contributions were maintained at the previously agreed levels of £22 million ($27 million) per annum (indexing) up until 2028. The Group agreed to continue to pay the Scheme administrative expenses and levies of around $5 million per annum.

Updates since then have confirmed that the funding deficit has fallen significantly and is now fully funded on a technical provisions basis. This significant improvement has been due to ongoing employer contributions, favourable movements in the market (increasing discount rates) and the de-risking actions that we and the Trustees have taken, for example the buy-in transaction referred to above. 

As a result of this significantly improved funding position, and reflective of the collaborative working relationship with the Trustees, in early 2023 we agreed a mechanism to switch off / switch on the regular cash contributions to the scheme based on monthly estimates of the latest funding position. Further to this switch off / switch on agreement and further improvements in the funding position during the year, in December 2023, the Group agreed to pay the scheme a one-off lump sum payment of £10 million ($13 million) to move it into an expected surplus position against the technical provisions funding basis and enable the switch off threshold to be comfortably met.

This agreement will result in a free cash flow benefit of £2 million ($2.5 million) per month while the payments remain switched off. The deficit repair payments will remain switched off so long as the scheme's assets remain above 99% of its technical provisions.

Balance sheet and liquidity

Group net debt (excluding lease liabilities) at 31 December 2023 was $384 million ($471 million including lease liabilities), a reduction on 31 December 2022 ($394 million). This reduction reflects strong and disciplined cash management as noted above, offset by acquisition-related items, ongoing pension deficit repair payments, exceptional cash costs in relation to strategic projects, cash spent on Employee Benefit Trust share purchases and shareholder dividends.

The Texon acquisition, which was completed in July 2022, was funded by a $240 million temporary acquisition facility. As previously announced, in January 2023, we refinanced this acquisition facility via the US Private Placement (USPP) market with $250 million of notes split between 5 and 7 years tenor at highly competitive interest rates (between 5.3% and 5.4%). This maintains our total committed debt facilities at $835 million with well diversified source and tenor; being $360 million revolving credit facility, $225 million of original USPP notes (2024 and 2027 tenors), as well as the new $250 million of USPP notes (2028 and 2030 tenors). The committed headroom on our banking facilities was approximately $315 million at 31 December 2023. 

At 31 December 2023, our leverage ratio (net debt to EBITDA; both excluding lease liabilities) was 1.5x (2022: 1.4x on a proforma basis) and remains well within our 3x covenant limit, and towards the middle of our target leverage range of 1-2x. There was also significant headroom on our interest cover covenant at 31 December 2023 which was 8.2x, with a covenant limit of 4x. The covenants are tested twice annually in June and December and monitored throughout the year.

Going concern

On the basis of current financial projections and the facilities available, the Directors are satisfied that the Group and the Company has sufficient resources to continue in operation for the period from the date of this report to 30 June 2025, and, accordingly, consider it appropriate to adopt the going concern basis in preparing the financial statements. Further details of our going concern assessment, financial scenarios and conclusions are set out in note 1.

Coats Group plc

Consolidated income statement

* Represented to reflect the results of the European Zips business as a discontinued operation (see note 1).

Consolidated statement of comprehensive income

* Pension surplus amounts at 31 December 2022 for the Coats UK and US pension schemes have been restated to reflect a change in measurement as further described in note 1. There is no impact on ether profits or cash flows for the year ended 31 December 2022.

Consolidated statement of financial position

* Pension surplus amounts at 31 December 2022 and 31 December 2021 for the Coats UK and US pension schemes have been restated to reflect a change in measurement as further described in note 1. There is no impact on ether profits or cash flows for the year ended 31 December 2022.

Consolidated statement of changes in equity

For the year ended 31 December 2023