Coats Regulatory News (COA)

31 July 2018

Coats Group plc

2018 Half Year results

Coats Group plc ('Coats,' the 'Company' or the 'Group'), the world's leading industrial thread manufacturer, today announces its unaudited results for the six months ended 30 June 2018.

Highlights

Commenting on Coats Half Year 2018 results Rajiv Sharma, Group Chief Executive, said:

'Coats continued its good start to the year, with CER revenue growth of 5% and an adjusted operating profit growth of 12%, achieved by the strong performance of the Industrial Division. We have continued to outperform the market in Apparel and Footwear despite continued mixed demand from retailers by maintaining our customer-led approach to service, digital solutions and corporate social responsibility. We have leveraged our global footprint and customer base to expand our Performance Materials business. Innovation capability has been enhanced by the recent acquisition of Patrick Yarn Mill. In North America Crafts, we have seen an improving trend so far this year however market conditions remain tough.

Our customers require an increased emphasis on speed, quality, value, innovation and corporate responsibility. To accelerate our transition from industrial to digital, we launched the Connecting for Growth transformation programme in February, which will support our next phase of development. Due to the encouraging start made by this programme, where we are realising benefits faster than initially anticipated, I am pleased to report that the net benefits (after reinvestments) in 2018 are now expected to be $10 million (previously $5 million).

We look to build on a strong first half of the year by continuing to outperform the market, deliver productivity improvements, maintain tight control of our cost base, whilst investing in our growth opportunities. As a result of the faster delivery of the net benefits from the Connecting for Growth programme, we now anticipate delivering a full year performance slightly ahead of management's previous expectations.'

Conference call

Coats Management will discuss this report in a webcast / conference call with analysts and investors at 0900 BST today (31 July 2018). The webcast can be accessed via www.coats.com/investors/hy18. The conference call can be accessed by dialling +44 (0)20 3936 2999 and using participant access code '46 87 36'. The webcast will also be made available in archive form on www.coats.com.

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Enquiry details

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About Coats Group plc

Coats is the world's leading industrial thread manufacturer and a major player in the Americas textile crafts market. At home in some 50 countries, Coats employs 19,000 people across six continents. Revenues in 2017 were US$1.5bn. Coats' pioneering history and innovative culture ensure the company continues leading the way around the world, providing complementary and value added products and services to the apparel and footwear industries; applying innovative techniques to develop high technology Performance Materials threads and yarns in areas such as automotive composites and fibre optics; and extending the crafts offer into new markets and online. Headquartered in the UK, Coats is a FTSE 250 listed company on the London Stock Exchange. To find out more about Coats visit www.coats.com.

Summary

Revenues increased 7% in the first half of 2018, with a marginal positive impact of foreign exchange, and 5% growth on a CER basis. This CER growth consisted of 2% organic growth and a 3% contribution from the acquisition of Patrick Yarn Mill (acquired in December 2017).

Industrial revenues grew 7% on a CER basis, driven by continued momentum in the Apparel and Footwear business (up 3%) where our core thread business grew robustly (up 4%) as key Asian markets performed strongly. This performance delivered further market outperformance, alongside continued mixed demand from retailers, and was underpinned by our continued focus on product innovation, digital solutions and our strong corporate responsibility credentials. In addition, the Performance Materials business grew 21% year-on-year, with 5% organic growth and a 16% contribution from the acquisition of Patrick Yarn Mill which continues to perform in line with expectations. Organic growth in Performance Materials was underpinned by continued double-digit growth in hi-tech end uses (for example flame retardant yarns), with some weakness in certain traditional end use segments. Geographically, Industrial organic growth of 3% was underpinned by the key Asia region (up 5%), flat year-on-year revenues in the Americas (including a continued modest decline in the US consumer durables market), alongside comparatively lower growth in EMEA (up 1%) following a strong 2017.

The Crafts division saw revenues decline 4% on a CER basis. The larger North American Crafts business showed a decline of 2%, which was partly due to the adverse impact in the period of the introduction of own-label handknitting products at a major customer (which commenced in H2 2017). H1 2017 revenues were impacted by $10m as a result of the business disruption caused by the tornado that hit the Albany, GA, distribution facility in January 2017. The smaller Latin American Crafts business, which is in the process of being integrated within the Industrial division, showed a decline of 8% in the period due to slower demand in the key markets of Brazil and Argentina.

Group adjusted operating profit increased 12% to $100 million on a CER basis (2017: $90 million) and operating margins were up 70 bps to 12.7% (2017: 12.0%) driven by a strong performance in the Industrial business with some offset in Crafts. On a reported basis, operating profit (which is after exceptional and acquisition related items) decreased 6% to $81 million (2017: $86 million), primarily due to the initial exceptional reorganisation cost incurred in relation to the Connecting for Growth programme. Exceptional and acquisition related items are not allocated to segments and as such segmental performance commentary is based on adjusted operating profit.

Industrial adjusted operating profit grew 16% on a CER basis to $103 million and margins were up 130bps to 14.8%. This was due to volume growth, realising price increases through continually focusing on our customers' needs (e.g. speed, quality, innovation and corporate responsibility), productivity and procurement improvements, and continued cost control which more than offset input cost and other structural inflation. Furthermore, the initial benefits from the Connecting for Growth programme have been realised faster than initially anticipated ($4m net savings, after reinvestments, year-to-date), which has further contributed to margin progression in the period (see details later). The raw material cost increases incurred during the period (partly linked to the rising oil price) and other structural inflation (e.g. wages and energy) have been addressed through price increases, alongside other self-help initiatives. We anticipate these initiatives will reduce the impact of further raw material cost increases in H2. On an organic basis, Industrial operating margins increased by 160bps, which is above the CER increase of 130bps, as the latter was impacted by the anticipated initial dilution of Group and Industrial margins from the Patrick Yarn Mill acquisition. Over time and in line with the business plan, it is anticipated that Patrick Yarn margins will trend towards Group levels.

Adjusted operating margins in the Crafts Division reduced to 1.0% (H1 2017: 5.5%) and adjusted operating profits were down 83% to $1 million (H1 2017: $5 million), although H1 2017 margins benefited partially from the profit insurance cover in relation to lost revenues resulting from the tornado ($10m lost revenues). In addition to volume declines in both North America and Latin America that reduced operating profits, margins were adversely impacted due to lower manufacturing activity levels, as well as the remaining duplicate facility costs incurred as a result of the 2017 tornado. Offsetting these were the realisation of the initial cost synergies in the Latin American business ahead of its eventual full integration with the Industrial business, and the impact of the exit of the non-core lifestyle fabrics business in the period (which contributed $10 million revenues in H1).

The reported Group revenue growth of 7% included a marginal benefit (1%) in relation to foreign exchange due to the US dollar weakening against certain key trading currencies vs 2017, for example the Chinese Yuan, Euro and Mexican Peso. We note that based on current spot exchange rates (30 June 2018) this modest foreign exchange benefit seen in the first half would result in a small overall headwind for the full year.

Financial summary

Adjusted earnings per share ('EPS') for the six months increased 19% to 3.6 cents (H1 2017: 3.1 cents) due to higher adjusted operating profits (12% CER growth), a 200bps reduction in effective tax rate to 31%, and a $3 million reduction in the IAS19 pension finance charge. On a reported basis, the Group generated an attributable profit from continuing operations of $34 million compared to $40 million in H1 2017. The reduction primarily being due to a $15 million increase in exceptional and acquisition related items (net of tax) arising mainly from the initial Connecting for Growth programme reorganisation charges.

There was an adjusted free cash flow of $18 million in the first half of 2018 which reflects the intra-year working capital cycle of the business. This was broadly in line with the same period in 2017 (H1 2017: $21 million), as increased profitability was offset by normalised level of working capital outflow in the first half of the year. On a last twelve months' basis, the Group generated an adjusted free cash flow of $85 million to June 2018 (last twelve months to June 2017: $109 million). The 22% decrease on 2017 was driven by a $10 million increase in capital expenditure (largely in H2 2017) and a normalised level of net working capital outflow of $19 million (last twelve months to June 2017: $13 million inflow due to improvements in days sales and days payables outstanding), offset to some extent by increased profitability. As a percentage of revenues, net working capital as at 30 June 2018, is in line with last year at 13%.

Last twelve months adjusted free cash flow of $85 million is in line with the adjusted free cash flow for the year ending 31 December 2017 of $87 million.

Net debt as at 30 June 2018 was $270 million, marginally higher than 30 June 2017 ($261 million). Adjusted free cash flow for the last twelve months of $85 million has been offset by acquisition spend of $22 million (largely up-front consideration in relation to Patrick Yarn Mill), shareholder dividends of $20 million, ongoing pension deficit recovery payments $32 million, and exceptional costs of $26 million (primarily in relation to the Connecting for Growth programme, and the final earn-out on the Gotex acquisition). An important metric for the operating business is the leverage ratio of net debt to adjusted EBITDA, which improved to 1.2x adjusted EBITDA at 30 June 2018 (1.3x at 30 June 2017).

Return on capital employed (ROCE - see note 15 for definition) improved marginally on 2017 to 35%, as higher adjusted operating profits and controlled working capital were offset by the anticipated increase in capital expenditure.

Connecting for Growth programme

As announced in February, Connecting for Growth is a two year transformation programme designed to drive speed, agility, innovation and lower costs across the organisation, whilst enabling the next phase of growth at Coats and accelerating our transition from the industrial age to the digital age. After reinvestments of c.$10 million per annum, the programme is anticipated to deliver net annualised operating cost savings of $15 million by 2020. Expectations for the full programme savings to be delivered by 2020 remain in line with this previous guidance.

The majority of savings are expected to be achieved from reducing complexity in the existing Group. For example, we have transitioned from market-focused support functions (e.g. Finance, HR, Technology) to realigned globally integrated support functions, we are redesigning the way we service a number of our peripheral markets, and we have moved from a business operated by individual local management teams into 10 scalable clusters.

Encouraging progress has been made since February, and as a result, initial net benefits (after reinvestments), are being realised faster than initially anticipated with $4 million net benefits in the first half of 2018 ($5 million gross savings). After reinvestments, the net benefits in the full year 2018 are now expected to be $10 million (previously $5 million). $17 million of the anticipated $30 million total exceptional reorganisation charge has been incurred to date.

Dividend

Coats has a track record of delivering good levels of free cash through profitable sales growth, delivering self-help initiatives and investing in organic growth opportunities. The Board aims to use this free cash flow to fund its pension schemes, self-finance bolt-on acquisitions, and make returns to shareholders. Over time, and as underlying earnings and cash flows increase, the Board intends to pursue a progressive dividend policy.

The Board has declared an ordinary interim dividend per share of 0.50c, which reflects 14% year-on-year growth (2017: 0.44c), to be paid on 16 November (payment date) to shareholders on the register on 26 October (record date), with an ex-date of 25 October.

The proposed full year dividend will be announced in March 2019 alongside the Full Year 2018 results.

Outlook

We look to build on a strong first half of the year by continuing to outperform the market, deliver productivity improvements, maintain tight control of our cost base, whilst investing in our growth opportunities.

As a result of the faster delivery of the net benefits from the Connecting for Growth programme, we now anticipate delivering a full year performance slightly ahead of management's previous expectations.

Operating Review

Industrial

Industrial revenues grew 8% on a reported basis in the period, 7% on a CER basis, due to continued momentum in Apparel and Footwear (~70% of Group revenues) which grew 3%, along with 21% growth in Performance Materials (5% organic growth and 16% contribution from the Patrick Yarn Mill acquisition).

The strong Apparel and Footwear performance in the period delivered further market outperformance as there continued to be mixed demand from retailers. This outperformance was achieved by maintaining our customer-led approach to innovation and digital solutions, alongside our strong corporate responsibility credentials. Coats' ability to continue to outperform the market was assisted by several factors including deepening its relationships with retailers and brand owners through its global accounts programme, and with manufacturers, through the increasing adoption of digital services. For example, there was the launch of the new Coats.com website in the period and there were further enhancements to our customer facing eCommerce platform (e.g. automated payment reminders via the use of data analytics). In addition, revenue growth was further supported by the launch of innovative new products, for example providing an engineered footwear yarn solution for the China domestic market, and we have seen strong demand for our 100% post-consumer recycled thread (Epic EcoVerde) since its launch last year.

Performance Materials revenues grew 21% in the period on a CER basis (24% reported), which includes a 16% contribution from the acquisition of Patrick Yarn Mill (acquired in December 2017). Organic growth of 5% was underpinned by strong growth in many of our key emerging markets as we continued to drive geographic expansion of existing products across the Coats portfolio, and leveraging Coats' global customer base. However, the US consumer durables market (e.g. "traditional" end uses such as bedding and quilting) remained soft. Growth in hi-tech end uses which now account for more than 50% of Performance Materials revenues (e.g. wire and cable, and engineering performance yarns) remained strong throughout the period delivering double-digit year-on-year growth (15% organic growth). The business also continued to grow revenues in new, innovative products, and over 20% of our organic Performance Materials revenues were in relation to products that did not exist 5 years ago (for example, Coats Synergex and a "cooling" yarn developed by Patrick Yarns for use in apparel sportswear). Overall, following the Performance Materials organic growth of 4% in the January - April period which was reported in May 2018, we have seen the organic growth for the first half of 2018 improve to 5%.

By region, revenue in Asia grew 5% on a CER basis as momentum in key Apparel and Footwear markets (e.g. Vietnam, Indonesia and Bangladesh) continued. Revenues in EMEA rose 1%, which was on top of the strong growth seen in full year 2017 of 14% (which included a 5% contribution from the acquisitions of Gotex and Fast React). This reduced growth was driven by lower zips sales as a result of certain short-term fashion trends, as well as lost revenues from certain peripheral markets that were exited in the period (as part of the Connecting for Growth programme). In the Americas, organic revenue was flat year-on-year as the US consumer durables market remained soft, which was offset by an encouraging performance in certain Latam markets (e.g. Performance Materials revenues in Brazil and Mexico).

Industrial adjusted operating profit increased 16% to $103 million on a CER basis (H1 2017: $89 million) and margins increased 130bps to 14.8%. This reflected volume growth driving a positive operational gearing impact, realising price increases through continually focusing on our customers' needs (e.g. speed, quality, innovation and corporate responsibility), ongoing productivity and procurement savings, and a close control of costs (including $4 million of net benefits from the Connecting for Growth programme). The raw material cost increases incurred during the period (partly linked to the rising oil price) and other structural inflation (e.g. wages and energy) have been addressed through price increases, alongside other self-help initiatives. We anticipate these initiatives will reduce the impact of further raw material cost increases in H2. On an organic basis, margins increased by 160bps which was ahead of the 130bps CER increase, as the latter was impacted by the anticipated initial dilution of Industrial margins from the Patrick Yarn Mill acquisition. Over time, and in line with the business plan, it is anticipated that Patrick Yarn margins will trend towards Group levels.

Crafts

Crafts revenues declined 4% on a CER basis (5% reported decline). The revenue decline was split across both the Handknittings (down 6%) and Needlecrafts (down 2%) categories. By geography, revenues declined 2% in North America (2017 full year 15% decline) due to the adverse impact in the period of the introduction of own-label handknitting products at a major customer (which commenced in H2 2017). H1 2017 North America revenues were impacted by $10m as a result of the business disruption caused by the tornado that hit the Albany, GA, distribution facility in January 2017. Revenues in the smaller Latin America market declined 8% on a CER basis, with some demand softness in the key markets of Brazil and Argentina (following a stronger 2017).

Adjusted operating margins in the Crafts Division reduced to 1.0% (H1 2017: 5.5%) and adjusted operating profits were down 83% to $1 million (H1 2017: $5 million), although H1 2017 margins benefited partially from the profit insurance cover in relation to lost revenues resulting from the tornado. In addition to volume declines in both North America and Latin America that reduced operating profits, margins were adversely impacted due to lower manufacturing activity levels, as well as the remaining duplicate facility costs incurred as a result of the 2017 tornado. Offsetting these were the realisation of the initial cost synergies in the Latin American business ahead of its eventual full integration with the Industrial business, and the impact of the exit of the non-core lifestyle fabrics business in the period (which contributed $10 million revenues in H1).

The division has continued to make good progress in the areas of enhancing its online offerings and new product launches. The new management team is now in place in our North American Crafts business and is in the process of implementing a revised and refocused strategy, and the previously announced integration of the Latin American business with the Industrial operations remains ongoing.

Financial review

Adjusted EPS for the period increased 19% to 3.6 cents (H1 2017: 3.1 cents) due to the higher operating profit, improvements in the underlying tax rate, and a lower pension finance charge. Reported EPS of 2.4 cents compares to 2.9 cents in 2017 with the decrease due to the increase in exceptional and acquisition related items (predominantly the Connecting for Growth exceptional reorganisation cost).

Non-operating results

Net finance costs in the period were $10.5 million, down from $11.2 million in H1 2017. The key drivers of the reduction in net finance costs in the period was a $3 million reduction in the pensions finance charge, which was partially offset by marginally higher interest on borrowings and a small MTM foreign exchange loss (June 2017 $1m MTM foreign exchange gain).

The taxation charge for the period was $26.0 million (H1 2017: $27.2 million) resulting in a reported tax rate of 37% (H1 2017: 36%). Excluding exceptional and acquisition related items, the impact of IAS19 finance charges and the one-off impact of the US tax reform in 2017, the underlying effective rate on pre-tax profits reduced by 200bps to 31% year-on-year (H1 2017: 33%, FY 2017: 32%) which was driven by a reduction in unrelieved losses, together with a favourable change in profit mix for the period.

Profit attributable to minority interests was $10.1 million (2017: $8.2 million) and was predominantly related to Coats' operations in Vietnam and Bangladesh (in which it has controlling interests).

Exceptional and acquisition related items

Net exceptional and acquisition related items before taxation were $19.5 million in the period. These primarily relate to the initial exceptional reorganisation charge arising from the Connecting for Growth programme ($17.4 million in H1 2018 out of a total expected charge of $30 million for the programme). In addition, there are the amortisation of intangible assets acquired in the recent acquisitions ($1.2 million), contingent consideration in relation to these acquisitions ($2.5 million), offset by an exceptional pension gain following the wind up of the 3 UK pension schemes ($1.6 million - see later for details). In H1 2017 net exceptional and acquisition related items before taxation totalled $2.7 million.

Lower Passaic River

In 2010, the US Environmental Protection Agency ('EPA') notified Coats & Clark, Inc. ('CC'), a subsidiary within the Coats Group, that it was a 'potentially responsible party' under the US Superfund law for investigation and remediation costs at the 17 mile Lower Passaic River Study Area ('LPR') in New Jersey in respect of alleged operations of a predecessor's former facilities in that area prior to 1950. CC has concluded that it was not responsible for the contaminants and environmental damage that are the primary focus of the EPA process.

In 2015, a provision of $15.8 million was recorded for remediation costs and associated legal and professional costs based on CC's estimated share of de minimis costs for appropriate remedies, net of insurance reimbursements.

EPA has invited a number of parties, including CC, to participate in an allocation process to determine their respective allocation shares and potential eligibility for future cash out settlements. The allocation process is expected to be completed by the end of 2019, although that date may be extended.

On 30 June 2018, Occidental Chemical Corporation ('OCC'), which has been identified as being responsible for the most significant contamination in the river, filed a lawsuit against approximately 120 defendants, including CC, seeking recovery of past environmental costs and contribution toward future environmental costs. OCC's lawsuit seeks resolution of many of the same issues being addressed in the EPA's allocation process and does not alter our defences or our view that we are a de minimis party. As a result, no additional provision has been recorded in H1 2018.

See note 10 for further details.

Investment

Capital expenditure in the period, in addition to ongoing maintenance requirements, related to new product development (e.g. on-going development of our global innovation hubs), process improvements, capacity expansion, health and safety, and environmental spend. The latter includes projects such as effluent treatment plants (of which one went live in our Honduras facility during the period) which enable a thread plant to recycle more process water, or even to operate with zero discharges. These help to ensure that Coats maintains its strong corporate responsibility credentials and ethical reputation in the industry (as reflected by our recent entry to the FTSE4Good UK equities index) as well as benefiting the local communities that we do business in. Total capital spend for the period amounted to $21 million (1.1x depreciation and amortisation).

In order to continue to support our growth strategy and reinforce our strong environmental compliance credentials we anticipate capital spend to remain in the $50-60 million range for 2018, in line with previous guidance.

Cash flow

There was an adjusted free cash flow of $18 million (reported net cash generated by operating activities $4 million) in the first half of 2018 which reflects the intra-year working capital cycle of the business. This was broadly in line with the same period in 2017 (H1 2017: $21 million), as increased profitability, and the proceeds from the sale of a property (in relation to our lifestyle fabrics business which was exited in the period), was offset by a normalised level of working capital outflow in the first half of the year. The lower levels of adjusted free cash flow generated in the first half reflects Coats' normal cash flow cycle, whereby the second half cash flow significantly exceeds that in the first half.

Adjusted EBITDA (defined as pre-exceptional operating profit before depreciation and amortisation) for the half was $120 million (H1 2017: $109 million). Net working capital as a percentage of sales remained at 13% as working capital continues to be effectively controlled and the benefits seen at 30 June 2017 have largely been sustained. Interest paid was $8 million, $2 million higher than 2017 due to marginally higher interest on floating rate debt. Tax paid was $26 million, a $2 million reduction from H1 2017, where higher profitability in the first half of 2018 was offset by a favourable change in profit mix.

On a non-adjusted basis, there was a free cash outflow of $26 million in the first half, compared to a $345 million outflow in H1 2017. The improvement was primarily related to $353 million of payments into the three UK defined benefit pension schemes in H1 2017 following settlement with their respective trustees (including $340 million of upfront payments out of parent group cash).

For the twelve months to 30 June 2018, Coats generated $85 million of adjusted free cash flow. This was broadly in line with the $87 million generated for the full year 2017, although behind the unusually high $109 million free cash flow for the twelve months to 30 June 2017 (which was prior to the anticipated increase in capital expenditure (largely in H2 2017) and benefitted from certain year-on-year improvements to net working capital, as referred to above). This free cash flow measure is before annual pension recovery payments, acquisitions and dividends, and excludes exceptional items such as the Connecting for Growth exceptional reorganisation cost.

Balance sheet

The Group had a net debt position of $270 million at 30 June 2018 (30 June 2017: net debt $261 million). An important metric for the operating business is the leverage ratio of net debt to adjusted EBITDA. Net debt at 30 June 2018 improved to 1.2x adjusted EBITDA of the last twelve months (1.3x at 30 June 2017).

Pensions and other post-employment benefits

The net obligation for the Group's retirement and other post-employment defined benefit liabilities, on an IAS19 financial reporting basis, was $55 million as at 30 June 2018, down from $163 million at 31 December 2017.

The Group's UK defined benefit schemes, namely the UK Coats Plan, and Brunel and Staveley schemes, show a marginal surplus position of $1 million (£0 million) at 30 June 2018, which is an improvement from the deficit position at 31 December 2017 ($106 million, £79 million). The movement in the period of $107 million primarily consisted of actuarial gains of $100 million (mainly related to changes to the discount rate and mortality assumptions).

UK Pension Scheme Consolidation and Triennial funding valuations

Following agreement with the UK Pension Schemes' Trustees and with effect from the 1 July 2018 the assets and liabilities of the Coats UK, Brunel and Staveley schemes (the Current Schemes) have been transferred to a single new scheme (named the Coats UK Pension Scheme). The consolidation of the three UK schemes into a single scheme is expected to result in savings in administration expenses and efficiencies in investment management. We currently estimate administration expenses and levies to be £5 million per annum and anticipate this reducing to an estimated £4 million per annum once savings are fully realised.

The Current Schemes will be wound-up and as part of this process a number of the Current Schemes' members with small pension entitlements have been given the option to exchange their pension entitlement for a cash lump sum. To date this process has resulted in approximately 1600 members taking this option. We reflect this as an exceptional gain of £1.3 million ($1.6 million) in the IAS19 pension liabilities reported. The deadline for accepting this option closes shortly and a further, non-material, exceptional gain will accrue and be reflected in our 2018 full year reporting.

The next triennial funding valuations for the Current Schemes have an effective date of 31 March 2018. As a consequence of the transfer of assets and liabilities to the Coats UK Pension Scheme and the Current Schemes being wound-up these valuations will not now be required. The Coats UK Pension Scheme will conduct its first valuation with a 30 June 2018 effective date. This valuation will determine the Group's agreed future contribution requirements and the process is still expected to be completed in the first half of 2019. Pending agreement of this valuation the Group will pay deficit recovery contributions to the Coats UK Pension Scheme in the aggregate of the contributions that were being paid to the Current Schemes. The Group will continue to meet the UK pension schemes' administration expenses and levies. Deficit recovery contributions for 2018 are anticipated to be at the previously agreed level of £17.5 million ($23 million), including administration expenses and levies.

As mentioned above, there is a reported marginal surplus for the UK pension schemes as at 30 June 2018 on an IAS19 basis. However, it should be noted that the pension scheme's trustee is required to calculate the liabilities on the more prudent Technical Provisions basis; and that real UK interest rates have reduced since March 2015, which was the date of the last triennial valuation. The Coats UK Pension Scheme hedges c.70% of interest rate and inflation-linked liabilities.

INDEPENDENT REVIEW REPORT TO COATS GROUP PLC

We have been engaged by Coats Group plc (the 'Company') to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 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. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 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.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of Coats Group plc are prepared in accordance with IFRSs as adopted by the European Union. 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 European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 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.

Conclusion

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 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Statutory Auditor

London, United Kingdom

31 July 2018

Condensed consolidated financial statements

Condensed consolidated income statement

For the half year ended 30 June 2018

The results for the periods presented above are wholly derived from continuing operations.

Condensed consolidated statement of comprehensive income

For the half year ended 30 June 2018

Condensed consolidated statement of financial position

At 30 June 2018

* Restated to reflect adjustments to provisional fair value amounts relating to the acquisition of Patrick Yarn Mill Inc. (see note 12).

Condensed consolidated statement of changes in equity

For the half year ended 30 June 2018

Condensed consolidated cash flow statement

For the half year ended 30 June 2018