Coats Regulatory News (COA)

2 August 2022

Coats Group plc

2022 Half Year Results

Accelerating and Transforming

19% Sales growth and 180bps increase in EBIT margin

Coats Group plc ('Coats,' the 'Company' or the 'Group'), the world's leading industrial thread manufacturer, announces its unaudited results for the 6 month period ended 30 June 2022.

Financial Highlights

Strategic Highlights

Outlook

We expect to see more normalised growth in the second half of the year as the stock replenishment of the first half gives way to more typical demand patterns. We will continue to use timely pricing actions to fully offset inflationary pressure, leveraging our unparalleled global footprint and critical position in the supply chain to serve our diversified customer base.

We are also delivering ahead of expectations on our strategic projects to transform the business. Our focus on the premium and athleisure markets in A&F, and our diversified end markets in PM, positions Coats well in the current macro-economic environment.

As a result of these factors, we now anticipate the Group's full year 2022 performance to be moderately ahead of our previous expectations.

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

During the first half of 2022, we saw outstanding results for the Group. We have made good progress in accelerating profitable sales growth and transforming the portfolio to improve margins. Despite inflationary pressures and supply chain challenges, Coats delivered timely pricing actions, productivity and self-help programmes to deliver significantly improved margins now well beyond pre-COVID levels. I am proud of the entire Coats team for delivering very strong financial and operational results.

Strategic projects are well underway with one of our new facilities in Mexico expected to be fully operational by the end of 2022. We have also restructured a significant portion of our Corporate activities, moving these closer to our operations and customers. We remain on track to deliver incremental adjusted operating profit of $50 million from these projects by 2024, with $15 million now expected in 2022 which is ahead of our initial expectations.

We completed the exciting acquisition of Texon International on 20th July. Texon's focus on sustainability and innovation coupled with its exposure to the highly attractive premium athleisure market, present attractive commercial opportunities to leverage Coats' existing footprint.

Conference Call

Coats Management will present its half year results in a webcast at 0930 BST today (Tuesday 2 August 2022). The webcast can be accessed via https://www.investis-live.com/coats/62e26a65fce10e2b000b6b34/mnbv The webcast will also be made available in archive form on www.coats.com.

About Coats Group plc

Coats is the world's leading industrial thread company. At home in some 50 countries, Coats has a workforce of over 17,000 people across six continents. Revenues in 2021 were US$1.5bn. Coats provides complementary and value-adding products, services and software solutions to the apparel and footwear industries. It also applies innovative techniques to develop high technology performance materials threads, yarns, fabrics and composites in areas like personal protection, telecoms, energy, transportation, and household and recreation. Headquartered in the UK, Coats is a constituent of the FTSE 250 and FTSE4Good Index Series. It is a participant in the UN Global Compact, a member of the Ellen MacArthur Foundation, has approved short term Science Based Targets to 2030 and is committed to developing a long-term target to reach net-zero emissions by 2050, the highest level of ambition on climate change under the Science Based Target initiative. The pioneering history and innovative culture of Coats enable the delivery of its purpose to connect talent, textiles and technology to make a better and more sustainable world. For further information go to www.coats.com. 

Cautionary statement

Certain statements in this half 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

Accelerating and Transforming

Our focus is to accelerate profitable sales growth, and transform the Company to be even more successful in a post-pandemic world.

The first half of 2022 has seen outstanding results for the Group as we continued to accelerate profitable growth and build on our position as the global market leader. The Group saw the momentum witnessed in Q4 2021 continue with sales 19% higher year on year on a CER basis. Apparel & Footwear ("A&F") delivered 21% growth driven by pricing actions, industry inventory restocking, buffer buying to support supply chain disruption and continued underlying market recovery. Performance Materials ("PM") growth of 16% was driven by strong pricing and double digit growth in both Personal Protection and Composites. 

The supply chain issues that were seen in 2021 persisted into 2022, and have been exacerbated by the war in Ukraine. Our unparalleled global footprint, and focus on customer imperatives of speed, quality and flexibility, enabled Coats to address strong first half demand while simultaneously mitigating inflationary pressures through pricing and productivity initiatives, highlighting the critical role that thread plays in the manufacturing process and overall value and reliability we provide to our customers. Rolling lockdowns in China were managed through the rotational use of our four factories while H1 year on year performance benefited from our India operation being fully operational compared to the same period last year. 

The Group delivered adjusted operating profit of $125 million (reported $111 million) and adjusted operating margin of 15.6%, which were comfortably above 2019 levels. A&F adjusted operating margins were 18.2%, while PM delivered an improvement to 8.2% which was continued positive progress and driven by actions to address labour availability issues in the US as well as the commencement of our strategic projects. Non-US PM margins remain healthy double digits.

Coats has a strong track record of cash conversion and this has continued in 2022 with a robust adjusted Free Cash Flow for the period of $30 million, despite normal H1 working capital cycle outflows (ahead of inflows in H2). This resulted in net debt (excluding operating leases) increasing to $195 million and a leverage of 0.8x. Proforma leverage post completion of the Texon acquisition remains comfortably within the 1.0x to 2.0x target range, and is expected to reduce further as both the Coats and Texon business deliver strong cash generation. 

Our programme of transformation saw significant activity in the first half of 2022 including:

• Acquisition of Texon

• Sale of our Brazil and Argentina business

• Exit from Russia

• Exit of direct operations in South Africa

• Significant momentum on strategic projects.

Acquisition of Texon

The acquisition of Texon was completed on 20 July for an enterprise value of $237 million and a total net cash contribution of $211 million. Texon supplies high quality structural components, including heel counters, toe puffs and insoles, to the global footwear market.

A market leader in innovation and sustainability, and supplying to the world's leading brands, Texon presents attractive commercial opportunities to leverage Coats' existing footprint and strengthen our existing presence in the highly attractive athleisure footwear market.

Texon has targeted zero-waste by 2025 to complement its suite of sustainable product offerings which include Vogue, Reform 2.0 and Verde. In addition to footwear components, Texon has complementary offerings for consumer applications, including plant-based leather alternatives, and the recently launched ProWeave, a revolutionary knitted and woven material for footwear uppers.

Texon is expected to deliver high single digit growth in an attractive and fragmented market. In 2021, it generated revenue of $132 million.

Sale of Brazil and Argentina business

We completed the disposal of our business in Brazil and Argentina in May. As a result of the disposal and the reclassification of results to discontinued operations there has been a positive annualised impact of circa 50bps uplift to the Group's adjusted operating margins. 

The exit from the Brazil and Argentina business is in line with Coats' strategic initiatives, announced in March, to accelerate profitable sales growth and transform the company.

Strategic projects

In March this year we announced that the Group has commenced a number of strategic projects to improve margins by optimising the portfolio and footprint, mitigating structural labour availability issues in the US and improving the overall cost base efficiency. The resulting benefits are anticipated to deliver incremental adjusted operating profit of $50 million by 2024.

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

A number of our strategic initiatives are in relation to optimising our portfolio and footprint, as well as specifically mitigating structural labour availability issues in the US. The majority of these benefits will come from the establishment of new state of the art facilities in Mexico, and during the first half of 2022 we have moved quickly and the initial development is now well progressed in terms of fit-out and machinery. We are in the process of hiring and training the work force required to run the facility and we expect operations to commence in October with a full ramp up expected by the end of the year.

In addition we are making some smaller changes to our footprint tail to optimise operations outside of the US. For example we recently announced the closure of our Poland warehouse with all warehouse operations being moved to Romania. We have also exited direct operations in South Africa and all operations in Russia, at minimal cost to the business. 

The financial benefits of these projects will largely be seen in 2023 and 2024. 

Improving the overall cost base efficiency

A further key focus of our strategic projects is improving the overall cost base efficiency of the Group, in particular focusing on our higher cost locations (UK and US). In the first half of 2022 we reviewed our cost base and many of our corporate activities, and as a result have moved these closer to the operations and customers. We have made significant positive progress in this area during the period and have achieved savings of $5 million in H1 with a further $10 million expected to be achieved in H2 giving a total saving of $15 million for FY 2022, which is above our initial guidance of between $5 - $10 million in 2022.

Strategic project costs of $10 million have been incurred to date and primarily consist of cash severance costs of $7 million and non-cash right-of-use asset impairment charges in relation to UK and US office exits of $2 million.

The overall expectation for strategic project benefits remains an incremental $50 million adjusted operating profit, by 2024, with the cash costs to achieve these of $35 million.

Strategic enablers: Sustainability, Digital and Innovation

Our strategic enablers of Sustainability, Digital and Innovation continue to underpin our strategy to accelerate profitable sales growth and to deliver sustainable stakeholder value.

Sustainability

A key part of our company purpose is to make a better and more sustainable world. When we launched our sustainability strategy, 'Pioneering a sustainable future', in 2019, we laid out ambitious targets for 2022 and 2024. In 2021, we increased momentum and competitive advantage by further evolving our sustainability strategy:

2022 is the year that our original sustainability targets mature. We are making strong progress and at the half year we are largely on track to be able to deliver on them by year end.

We have made especially strong progress in water and waste where our teamwork during 2022 under our Cleaner and Lighter programme established numerous projects that are now delivering results in multiple geographies. For example, at H1 2022 we have reduced our global water usage by 37% since FY 2018 versus our target of 40% by end 2022. The benefits in water reduction come mainly from challenging established practices and finding ways to stretch the capabilities of our machinery to work more efficiently. We have managed to significantly reduce waste by focussing on circular use of materials that previously entered waste streams, both in our internal processes and in liaison with our suppliers and customers. In both these areas we are now close to achieving our year-end target, ahead of schedule.

Having already achieved our energy intensity target in 2021 we have continued to make progress and have achieved a further 3% reduction in the last six months. We continue to implement a number of energy saving projects, and our detailed consumption monitoring programme is now operational across many of our major sites and is delivering savings opportunities.

Our recycled products achieved sales of $65 million in H1 2022 (up c.40% vs 2021) and we are actively extending the programme beyond those key brands who were the earliest adopters to the wider market, as demand continues to be significant.

Digital

In 2022, our Digital & Technology priorities are centred around enhancing our cybersecurity and leveraging our recent investments to improve customer experience even further. This year, Coats is increasing investments in next generation cybersecurity tools and adding headcount in this critical area to reinforce our defences against the increasing cybersecurity threat landscape. In recent years, Coats has made considerable investments to improve customer experience. Our current projects include the enhancement of our ordering and the testing of a video-based service to provide real time technical support to customers.

Innovation

We continue to create innovative new solutions to solve our customers' current and emerging challenges. In H1 2022 we launched 11 new products across both A&F and PM (H1 2021: 12 new products), delivering incremental revenues of $12.1 million (FY 2021: $11.4 million).

The first six months of 2022 has seen further progress with various product offerings, including:

Dividend

The Board is mindful of the importance of returns to shareholders and, as a result of the excellent first half performance, and ongoing confidence in the strategy, it is pleased to declare an interim dividend of 0.70 cents per share, up 15% vs the 2021 interim dividend (0.61c). The interim dividend will be paid on 16 November 2022 to ordinary shareholders on the register at 21 October 2022, with an ex-dividend date of 20 October 2022. The proposed full year dividend will be announced in March 2023 alongside the Full Year 2022 results.

Outlook

We expect to see more normalised growth in the second half of the year as the stock replenishment of the first half gives way to more typical demand patterns. We will continue to use timely pricing actions to fully offset inflationary pressure, leveraging our unparalleled global footprint and critical position in the supply chain to serve our diversified customer base.

We are also delivering ahead of expectations on our strategic projects to transform the business. Our focus on the premium and athleisure markets in A&F, and our diversified end markets in PM, positions Coats well in the current macro-economic environment.

As a result of these factors, we now anticipate the Group's full year 2022 performance to be moderately ahead of our previous expectations.

Operating review

H1 2022 Operating Results overview

Group revenues of $801 million increased 14% vs 2021 on a reported basis, and 19% on a CER basis. This was driven by pricing actions to offset ongoing heightened inflationary pressures, a continued strong market recovery, and benefitting from brands, retailers and manufacturers building back inventory levels post the Covid pandemic and increased buffer stock buying in anticipation of supply chain challenges continuing.

Group adjusted operating profit of $125 million increased 35% (2021: $97 million), with operating margins up 180bps to 15.6% (2021: 13.8%). On a reported basis operating profit was $111 million (2021: $93 million).

Adjusted earnings per share ('EPS') for the period increased to 4.3 cents (2021: 3.3 cents) as operating profits grew significantly as a result of the volume growth in the period and delivery of savings from the strategic projects, alongside a reduction in the underlying effective tax rate.

Apparel & Footwear ('A&F')

Our A&F business benefited from strong pricing/mix to offset inflationary pressures, along with industry inventory restocking, buffer buying to support supply chain disruption and continued underlying market recovery. In addition to these industry dynamics we have continued to leverage our key customer relationships, strong sustainability credentials, market-leading product ranges and technical services, and its flexibility and agility in a turbulent supply chain environment. 

The division saw strong growth of 21% on a CER basis (16% reported), demonstrating the flexibility of our global footprint and ability to support customers during the Covid recovery and ongoing uncertainty in global supply chains. Our global accounts programme, in which we dedicate customer relationship resources to our key brands and retailers, saw significant new customer and programme wins; sales growth with Inditex and Ralph Lauren was driven by recycled thread, specification wins with Uniqlo and J Crew, and increased business with Nike and VF.

All of our regions (US, Europe and Asia) benefited from positive end market sentiment led by our ongoing ability to supply. Trends towards Sports and Athleisure as well as casualisation continued to accelerate whilst online adoption, a shift towards premium products and supply chain digitisation advanced further. Supplier consolidation, nearshoring and the customer need for speed were also prominent trends and unsurprisingly, our customers continue to place increasing emphasis on their own sustainability agendas. 

All of the key A&F sub-segments had strong revenue growth in 2022; A&F thread up 21%, Zips and Trims up 28%, and Coats Digital up 13%. 

Adjusted operating profit for A&F increased 30% vs 2021. Adjusted operating margin was up 130bps to 18.2% vs 2021. This was as a result of excellent commercial and operational delivery, increased volumes and improved factory utilisation, pricing actions and procurement self-help initiatives more than offsetting heightened inflationary pressures.

Performance Materials ('PM')

From 2022 the Group has divided PM into Personal Protection (c.40% of divisional revenue), Composites (c.25%) and Performance Thread (c.35%). Performance Thread will be made up of the majority of the former Household & Recreation, Transportation and Other Industrial Applications sub-segments. The medium-term growth rates expected for each sub-segment are high single digits for Personal Protection, double-digit for Composites, and global GDP growth for Performance Thread. There is no change to the overall growth expectations of the division of mid-high single digit growth medium term.

The division saw further customer share gains as well as new customer wins across all sub-segments, such as composite floorboards for GM and seat trims for Mercedes Benz EV platform, as end market sentiment picked up.

Overall, PM revenues grew 16% on a CER basis (9% reported), which was driven primarily by price increases required to offset inflation. Revenue growth performance vs 2021 was underpinned by strong demand in Composites (up 29%) despite some supply chain issues in EMEA, and Personal Protection (up 28%) again due to strong demand but also operational improvements in the US yarns business. Performance Thread was flat vs 2021 due to weaker consumer demand in Household and Recreation and labour availability issues in the US, while ongoing operational issues in the US are being addressed. 

Adjusted operating profit increased 77% on a CER basis to $18 million and at an adjusted operating margin level, PM margins were up 280 bps to 8.2%. PM margins for the period continued to trend upwardly, and whilst still impacted in the US by labour availability issues and labour inflation, US margins have improved significantly due to the positive impact of the strategic project actions that have started to take effect in the period. Excluding the US business, PM margins were healthy double digit, albeit slightly lower than 2021 (14%) as result of specific temporary supply chain disruption issues within EMEA.

Geographical performance

We saw strong growth vs 2021 across all regions driven by pricing actions, improving end market sentiment, industry restocking and Coats' strong customer proposition.

In Asia, we saw revenue increase by 19%, driven by key A&F markets. We saw strong recovery in our India market following significant Covid disruption in 2021. Indonesia and Bangladesh were notable performers in the period as exporter demand was very buoyant, and our smaller markets of Sri Lanka and Pakistan delivered well despite macro-economic uncertainties within those countries as they remained attractive sourcing markets. Our largest markets of China and Vietnam were both impacted to some extent by Covid disruption in the period, either directly through localised lockdowns in China, or the resulting supply chain disruption in Vietnam. Despite this, these markets still delivered strong year on year growth, demonstrating their resilience as global sourcing markets.

Our Americas business saw revenues grow by 13% vs 2021 with strong performance in Colombia, Honduras and Mexico. In addition, our US Personal Protection business performed well as demand remained strong and operational delivery improved significantly, whereas the Performance Thread business remained broadly flat. 

In Europe, we saw revenues grow by 31% vs 2021 on a CER basis. This strong performance was driven by positive momentum in PM in telecom composites and transportation as fibre optic sales remained robust. In A&F, Zips saw strong demand during the period. The CER sales growth in the region also benefited from foreign exchange in Turkey as a result of the weakening Turkish Lira and our ability to continue to price largely in USD, and the impact of the adoption of hyperinflation accounting in that territory. 

Financial Review

Revenues

Group revenues increased 14% on a reported basis and 19% on a CER basis, as all key markets performed strongly in the period. All commentary below is on a CER basis unless otherwise mentioned.

Revenues and profitability in 2021 had already returned to pre-Covid levels (2019) so commentary below focuses on year-on-year performance only. 

Operating profit

At a Group level, adjusted operating profit increased from $97 million in 2021 to $125 million and adjusted operating margins were up 180bps to 15.6%. The table below sets out the movement in adjusted operating profit during the year:

The direct and indirect volume impact of the significant demand recovery referred to earlier was a tailwind on profits and margins in the period, as the increased utilisation of factories led to efficient recovery of manufacturing overheads.

As a result of increasing oil prices in the latter part of 2020, and throughout 2021 and 2022, we saw year-on-year inflationary headwinds on raw material costs, sea freight as a result of container availability, and other costs such as labour and energy. As in previous periods we were successful in mitigating these inflationary pressures with productivity benefits and pricing / surcharges. We expect these inflationary pressures to continue throughout 2022; the pricing actions taken to date position us well to continue to offset these as our past track record has clearly demonstrated.

SD&A costs have continued to be controlled well and remain broadly flat year-on-year. Despite an increase in distribution costs as a result of the higher volumes, and continued inflation of our cost base, we have maintained a tight cost focus and also benefited from the initial $5 million of savings in relation to our strategic projects that commenced in late 2021. 

As a result of these factors, the Group's adjusted operating margins significantly increased to 15.6% (2021: 13.8%).

On a reported basis, Group operating profit (including exceptional and acquisition-related items) was $111 million (2021: $93 million). See below for a breakdown of these exceptional items. Exceptional and acquisition-related items are not allocated to segments, and as such the segmental profitability referred to above is on an adjusted basis only.

Foreign exchange

As the Company reports in US Dollars and given that its global footprint generates significant revenues and expenses in a number of other currencies, a translational currency impact can arise. For the half year, the impact was headwinds of 5% on sales and 7% on adjusted operating profit. These headwinds were primarily due to depreciation in the Euro, Indian Rupee, Pakistan Rupee and Thai baht and the year-on-year translation impacts arising, but also in part due to initial the adoption of hyperinflation accounting in Turkey. At current exchange rates (30 June 2022) we expect c.3 - 4% translation headwinds at the Full Year (excluding any future hyperinflation impact which is difficult to forecast).

Free cash flow

The Group delivered an adjusted free cash flow of $30 million in the period (2021: $49 million). This was a robust performance, despite being behind 2021, which benefited from certain non-recurring items for example the non-payment of staff bonuses as a result of the Covid-impacted performance in 2020. Capital expenditure has remained disciplined ($16 million) and working capital has been well controlled despite some investment in inventory levels (up $19 million year-on-year) to support our service levels during the strong demand recovery, as well as the upward inflation pressures on purchases. In line with normal working cycles we expect working capital inflows to occur in the second half of the year. 

Non-operating results

Adjusted earnings per share ('EPS') for the period increased to 4.3 cents (2021: 3.3 cents). This increase was due to the significant increase in adjusted profit before tax (up from $88 million to $110 million), and a continued improvement in the effective tax rate to 30% (H1 2021: 31%). The increase in adjusted profit before tax was due to the increase in adjusted operating profit ($28 million increase), with some offset from a net finance charge which was $5 million higher year-on-year (see below for further details).

Net finance costs in the period were $15.3 million (pre-exceptional), a $5 million increase year-on-year (2021: $9.9 million). The key drivers of the increase in the year were a $0.6 million increase in interest on bank borrowings due to increasing interest rates on the floating elements of debt. In addition, there was a $7 million adverse movement year on year in relation to foreign exchange rate movements, largely as a result of Sterling weakness during the period end (where we hedge a number of costs and cash flows). These were partially offset by a $1.8 million decrease in interest on pension scheme liabilities as a result of the surplus position on an IAS19 basis as at 31 December 2021.

The taxation charge for the period was $33.1 million (2021: $27.4 million). Excluding the impact of exceptional and acquisition-related items and the impact of IAS19 finance charges, the effective tax rate on pre-tax profit was 30% (H1 2021: 31%).

The reported tax rate was 34% (H1 2021: 32%), which includes the impact of exceptional and acquisition related items.

Profit attributable to minority interests was $14.6 million and was predominantly related to Coats' operations in Vietnam and Bangladesh (in which it has controlling interests in both). This was 15% above the 2021 level ($12.8 million), but lower than the overall adjusted operating profit growth for the Group (up 28% on 2021 on a reported basis), which reflects the relative strength of performance of those markets during the period (in particular ongoing Covid supply chain disruption in Vietnam).

Exceptional and acquisition-related items

Net exceptional and acquisition-related items before taxation were $13.3 million (2021: $3.7 million). These include strategic project costs of $9.8 million and acquisition-related items of $3.5 million.

Strategic project costs of $9.8 million relate to the commencement of a number of strategic initiatives during 2021; and primarily consist of cash severance costs of $7 million and non-cash right-of-use asset impairment charges in relation to UK and US office exits of $2 million.

Acquisition-related items of $3.5 million consisted of the amortisation of intangible assets acquired in previous acquisitions ($1.6 million), and transaction costs in relation to the initial costs of the acquisition of Texon announced in July. 

Discontinued items

On 10 May, it was announced that Coats had signed an agreement to sell its business in Brazil and Argentina to Reelpar SA, an entity backed by a Sao Paulo Private Equity Firm. This sale was subsequently completed on 27 May 2022. 

As a result of the strategic exit from Brazil and Argentina, the operating results of this business prior to sale has been reported within discontinued operations during the current and prior years (current year operating losses of $3 million), which has resulted in an overall increase to Group operating margins of around 50bps.

As a result of the deal, we have disposed of net assets of $49 million (of which $44 million relates to working capital) for a cash payment to the purchaser and fees of $19 million. In addition, $15 million of historic FX losses have been recycled to discontinued operations. This loss on disposal resulted in an overall $23 million loss for the period for the Group (H1 2021: profit $62 million).

An exit from the Brazil and Argentina business is in line with Coats' strategic initiatives, announced in March, to accelerate profitable sales growth and transform the company.

Cash flow

The Group delivered $30 million of adjusted free cash flow in the period (2021: $49 million). Free cash flow is measured before annual pension deficit recovery payments, acquisitions and dividends, and excludes exceptional items.

Adjusted free cash flow performance was below 2021 largely as a result of some non-recurring cash benefits in 2021, for example the non-payment of staff bonuses for 2020, as well as an increased but albeit well controlled net working capital outflow ($48 million outflow) driven by a number of inflationary pressures on our cost base and an investment in inventory to support supply chain disruption. It is noted that our annual adjusted free cash flows are typically weighted to H2 as a result of normal working capital cycles we see during the year. 

Capital expenditure was above 2021 ($13 million) at $16 million, as we maintain a selective approach to investing in the most appropriate growth opportunities. Minority dividend payments of $8 million were incurred (2021: $13 million) which relate to the repatriation of cash from local operations to the Group. Tax paid was $28 million, slightly above 2021, largely due to some timing benefits in 2021.

The Group delivered a free cash outflow of $49 million in the period (2021: $13 million inflow), which primarily reflects the adjusted free cash flow of $30 million, offset by UK pension payments of $23 million (being $17 million of ongoing deficit recovery payments and administrative expenses, and $6 million catch up of deferred 2020 payments), shareholder dividends ($22 million), exceptional costs of $10 million, cash outflows regarding the sale of Brazil and Argentina business ($9 million discontinued operations, and $15 million payment to buyer).

As a result of the above free cash flow, net debt (excluding the impact of lease liabilities) as at 30 June 2022 was $195 million (31 December 2021: $147 million). Including the impact of lease liabilities, net debt as at 30 June 2022 was $284 million (31 December 2021: $246 million).

Capital expenditure

Capital expenditure for the period was $16 million (2021: $13 million). In order to continue to support our longer-term growth strategy and further reinforce our strong environmental compliance credentials, we anticipate capital expenditure to be in the $35-45 million range for 2022, as previously guided.

Pensions and other post-employment benefits

The net surplus for the Group's retirement and other post-employment defined benefit liabilities (UK and other Group schemes), on an IAS19 financial reporting basis, was $189 million as at 30 June 2022, which was $168 million higher than 31 December 2021 ($21 million surplus). This increase 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 30 June 2022 of $268 million (31 December 2021: $108 million; 30 June 2021: $19 million). The increase in the surplus during the six months ended 30 June 2022 of $160 million predominantly relates to net actuarial gains of $160 million (higher discount rate due to significantly higher corporate bond yields offset to some extent by asset losses due to the high degree of hedging in place in the portfolio), employer contributions (excluding administrative expenses) of $20 million offset by foreign exchange translation movements.

UK triennial update

The effective date for the latest UK scheme triennial valuation was 31 March 2021. This valuation was successfully completed and agreed with the Trustees during the prior year, ahead of schedule, with a resulting Technical Provisions deficit of £193 million which is £59 million lower than the previously agreed valuation in 2018. As a result of this valuation, future contributions remain at the previously agreed levels of £22 million ($27 million) per annum (indexing) up until 2028, and result in the pay down of the deficit slightly earlier than originally planned. The Group will continue to pay the scheme administrative expenses and levies of around $5 million per annum. Together with the remaining catch up of deferred 2020 contributions, 2022 payments are expected to be around $44 million.

We continue to maintain strong and collaborative relations with the scheme around strategic planning and have established a joint working group between the Company and Trustees to review further opportunities for de-rising the scheme, beyond the significant positive progress that has already taken place in this area.

Balance sheet and liquidity

Group net debt (excluding lease liabilities) as at 30 June 2022 was $195 million ($285 million including lease liabilities), which was higher than 31 December 2021 ($147 million), and reflects disciplined cash management as noted above, offset by payments in relation to the sale of the Brazil / Argentina business, ongoing pension deficit repair payments, shareholder dividends and exceptional cash costs in relation to strategic projects.

At 30 June 2022, our leverage ratio (net debt to EBITDA; both excluding lease liabilities) was 0.8x and remains well within our 3x covenant limit, and slightly below the lower end of our target leverage range of 1-2x. Our interest cover covenant also maintained significant headroom at 30 June 2022 at 24.8x vs a covenant of 4x. These covenants are tested twice annually at June and December, and are monitored throughout the year. Committed headroom on our banking facilities was approximately $240 million at 30 June.

As a result of the Texon acquisition completed in July, our proforma leverage remains comfortably within our target leverage range of 1-2x.

Going concern

On the basis of current financial projections and the facilities available, the Directors are satisfied that the Group has adequate resources to continue for at least the next 12 months 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 can be seen in note 1.

INDEPENDENT REVIEW REPORT TO COATS GROUP PLC

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2022 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement and related notes 1 to 21.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2022 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 1, the annual financial statement of the group will be prepared in accordance with United Kingdom adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34: Interim Financial Reporting, as adopted by the UKEB.

Conclusion Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with this ISRE (UK), however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of the directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly financial report, we are responsible for expressing to the group a conclusion on the condensed set of financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

This report is made solely to the company in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

London, United Kingdom

1 August 2022

Condensed consolidated financial statements

Condensed consolidated income statement

For the half year ended 30 June 2022

* Represented to reflect the results of the Brazil and Argentina business as a discontinued operation (see note 1).

Condensed consolidated statement of comprehensive income

For the half year ended 30 June 2022

Condensed consolidated statement of financial position

At 30 June 2022

Condensed consolidated statement of changes in equity

For the half year ended 30 June 2022