Coats Regulatory News (COA)

1 August 2023

Coats Group plc

Interim Results 2023

This statement contains inside information

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

Coats Group plc ('Coats,' the 'Company' or the 'Group'), the world's leading industrial thread and footwear components manufacturer, announces its unaudited results for the six months ended 30 June 2023.

Strategic Highlights

Financial Highlights

Outlook

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

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

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

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

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

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

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

1.Adjusted measures are non-statutory measures (Alternative Performance Measures). These are reconciled to the nearest corresponding statutory measure in note 15. Constant Exchange Rate (CER) metrics are H1 2022 results restated at H1 2023 exchange rates. Organic figures are on a CER basis and exclude contributions from Texon and Rhenoflex acquisitions.

2. Reported metrics refer to values contained in the IFRS column of the primary financial statements in either the current or comparative period.

3. Leverage calculated on a proforma and frozen GAAP basis and therefore excludes the impact of IFRS 16 on both adjusted EBITDA and net debt and includes a full 12 months of EBITDA for Texon and Rhenoflex.

4. From continuing operations.

5 Current company compiled analyst forecast range for Group adjusted operating profit in the year to 31 December 2023 is $240 million to $261 million.

Conference Call

Coats Management will present its interim results in a webcast at 09.45 BST today (Tuesday, 1 August 2023). The webcast can be accessed at www.coats.com/en/investors/investors-overview. The webcast will also be made available for replay 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 2022 was $1.6 billion. Trusted by the world's leading companies to deliver crucial, innovative, and sustainable solutions, Coats provides value-adding products including apparel, accessory and footwear threads, structural footwear components, fabrics, yarns and software applications. Customer partners include companies from the apparel, footwear, automotive, telecoms, personal protection, and outdoor goods industries. With a proud heritage dating back more than 250 years and spirit of evolution enabling it to constantly stay ahead of changing market needs, Coats has operations across some 50 countries with a workforce of 17,000, serving its customers worldwide. Coats connects talent, textiles, and technology, to make a better and more sustainable world. Worldwide, there are four dedicated Coats Innovation Hubs, where experts collaborate with partners to create the materials and products of tomorrow. It participates in the UN Global Compact and is committed to Science Based sustainability targets for 2030 and beyond, with a target of achieving 'net zero' by 2050. Coats is also committed to achieving its goals in Diversity, Equity & Inclusion, workplace health & safety, employee & community wellbeing, and supplier social performance. To find out more about Coats visit www.coats.com.

Cautionary statement

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

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

Group Chief Executive's review

Purpose and Strategy

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

2023 Interim Results Overview

Introduction

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

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

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

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

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

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

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

UK Pensions

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

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

Strategic Projects

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

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

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

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

Improving the overall cost base efficiency

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

Transformation of Asian Operations, focusing on China and India

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

Texon and Rhenoflex

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

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

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

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

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

Focusing on Attractive Markets

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

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

Strategic Enablers: Innovation, Sustainability and Digital

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

Innovation

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

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

Sustainability

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

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

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

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

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

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

Digital

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

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

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

Dividend

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

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

Operating Review

2023 Interim Operating Results Overview

Group revenue of $715 million decreased 11% on a reported basis, 6% on a CER basis (including the initial impact of the Texon and Rhenoflex acquisitions), and decreased 19% on an organic basis. The organic revenue decline, against a very strong prior year comparator, reflects the continuation of the widespread industry destocking in Apparel and Footwear, together with previously disclosed customer contract in-sourcing in Performance Materials.

Group adjusted operating profit of $107 million decreased 9% on a CER basis (H1 2022: $125 million reported), with operating margins down 50bps to 15.0% (2022: 15.6%). On a proforma basis, including acquisitions for the first half of year, margins were up 30bps year on year. The year-on-year reductions in operating profit primarily reflect the impact of lower volumes due to market conditions. This was partially offset by largely maintained pricing, with some input cost deflation and the ongoing benefits from strategic projects and integration synergies. On a reported basis operating profit was $72 million (H1 2022: $111 million), after $35 million of strategic project costs, asset write downs as a result of the announced disposal of EMEA Zips and acquisition-related items.

Adjusted earnings per share ('EPS') decreased by 18% to 3.5 cents (2022: 4.3 cents) largely as a result of the reduction in operating profits, with some offset from a continued reduction in our effective tax rate. Reported EPS of 1.5 cents (H1 2022: 3.4 cents) was 55% lower, including the impact of exceptional and acquisition related items.

Revised Divisional Reporting from 1 January 2023

As a result of the acquisitions of Texon and Rhenoflex, our new organisational and reporting structure, effective 1 January 2023, is comprised of three divisions: Apparel, Footwear and Performance Materials. The new Footwear division consists of the existing Coats footwear thread business (formerly part of A&F), 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 goal for the Group 2024 adjusted operating margin is c.17%, comprising 15-16% for Apparel, >20% for Footwear, and 13-14% for Performance Materials. 

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 $354 million (H1 2022: $444 million) was down 20% on a CER basis (25% reported). As anticipated, revenue was lower year-on-year, against a very strong prior year comparator, and reflected the continuation of the widespread industry destocking, after a surge of post-COVID-19 inventory restocking in H1 2022, as well as buffer buying in the face of supply chain disruption.

Despite challenging market conditions, our Apparel business benefited from market share gains, with an increase in our estimated market share by around 100bps to c24%. We were also able to largely maintain pricing and leverage the 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 the cost premium 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 despite price moderation in certain areas.

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

Apparel thread revenue decreased by 17%, Zips and Trims decreased by 44%, with Coats Digital 20% lower as a result of reduced customer investment.

Adjusted operating profit of $53 million (H1 2022: $70 million) decreased 24% vs the prior year on a CER basis. Adjusted operating margin was 70bps lower at 15.0% on a CER basis (H1 2022: 15.7%). Savings from self-help actions, including the strategic projects, partially 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 around 100bps to a blended c.26% (with footwear threads at an estimated c.28% and structural components at an estimated c.24%). There was solid pricing, even as some input costs began to moderate. We are realising the benefits of the acquisitions of Texon and Rhenoflex with commercial opportunities being pursued. In challenging market conditions, our leading position globally has allowed us to leverage the strength of our customer relationships and market leading product ranges.

Footwear revenue increased 64% to $184 million (H1 2022: $113 million) on a CER basis (60% reported), including the Texon and Rhenoflex acquisitions, which were acquired in July and August 2022 respectively. 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 contribution from Texon and Rhenoflex, organic revenue decreased by 23%. There was a similar year-on-year percentage decrease in structural components revenue.

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 de-risking from China, are becoming prominent trends, with brands placing increasing emphasis on sustainability and innovation. With market conditions expected to gradually improve in the second half, these important, longer-term trends provide Footwear with further opportunities for growth and share gain.

Adjusted operating profit was $38 million with reported margins down 770bps to 20.8% with significantly lower sales volumes and the dilutive impact of the acquisitions. These acquisitions remain on track to be accretive for the Group, post synergies. On a proforma basis, including the July and August 2022 acquisitions in H1 2022, margins were up 220bps year on year. This is as a result of strong commercial delivery in a difficult market environment, pricing benefits largely being maintained in the context of some lower input costs, the delivery of acquisition synergies and general cost discipline. Acquisition integration has so far focused on commercial and general & administrative costs, as well as on procurement. These activities are proceeding well and we now expect full year synergies and efficiencies to be ahead of previous expectations.

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 PM in three sub-segments: Personal Protection (39% of H1 2023 divisional revenue), Composites (20% of H1 2023 divisional revenue) and Performance Thread (41% of H1 2023 divisional revenue). The medium-term growth rates expected for each sub-segment are high single digits for Personal Protection, low double-digits for Composites, and global GDP growth for Performance Threads. The overall medium-term growth target for the division is a mid-high single digit growth CAGR (6-9%).

PM revenue declined 14% to $177 million in H1 2023 (H1 2022: $205 million) on an organic and CER basis (18% on a reported basis), with Personal Protection decreasing by 22%, Composites decreasing by 9% and Performance Threads lower by 7% (all on an organic basis). The largest factor driving the decrease was the in-sourcing of production by a large US customer in personal protection, which resulted in $20 million lower revenue from the customer compared to H1 2022. There was also destocking at some US telecommunication customers in Composites, and from customers in a number of Household and Recreation markets. Underlying PM sales remained strong underpinned by share gains in European telecommunications, strong automotive sales and strong reflective trims sales.

Within this, there were significant new customer share wins across all PM 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 gains at two large automotive safety component customers and at a global feminine hygiene product manufacturer.

Adjusted operating profit was unchanged on an organic and CER basis at $16 million (H1 2022: $16 million) despite the lower sales volumes. Adjusted operating margins were up on an organic and CER basis by 130 bps to 9.1% (H1 2022: 7.8%) 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 in the half also included c.$2 million of duplicate running costs in relation to the US / Mexico plant transitions. Excluding these costs, PM margins would have been a further 130bps higher at 10.4%.

Geographical Performance

In line with divisional performance, there was a significant revenue decline on a CER organic basis in all geographic regions, due to the market headwinds previously mentioned.

Our Asia revenue, 56% (H1 2022: 59%) of Group, decreased 13% CER to $398 million (2022: $459 million), which included an 8% 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. 

Our Americas revenue, 19% (H1 2022: 21%) of Group, decreased 22% CER to $133 million (2022: $170 million). All key markets were impacted by the challenging market conditions in H1 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.

In EMEA, 26% (2022: 19%) of Group, revenue increased 39% CER to $185 million (2022: $133 million), which included a 45% contribution from the Texon and Rhenoflex acquisitions, and as a result organic revenues declined 6%. Excluding acquisitions, performance was driven by positive momentum in PM in telecommunication composites and transportation, as fibre optic sales remained robust in EMEA. Organic revenue growth also benefited from the weakening Turkish Lira, as we continued to price largely in US Dollars. 

Financial Review

Revenue

Group revenue decreased 11% on a reported basis and 6% on a CER basis. On an organic basis revenue decreased 19%, which excludes the Texon and Rhenoflex acquisitions. All commentary below is on an organic basis unless otherwise stated.

Operating Profit

At a Group level, adjusted operating profit decreased from $125 million in 2022 to $107 million (including acquisitions) and adjusted operating margins decreased 50bps to 15.0%. The table sets out the movement in adjusted operating profit during the period.

In the first half, there were significant volume headwinds as a result of industry destocking in the Apparel and Footwear businesses, as well as the adverse impact of the customer contract in-sourcing in Performance Materials, and very strong prior year comparators. From the second half of 2022, as anticipated, we saw a slow-down in demand due to widespread industry destocking in both Apparel and Footwear. The direct and indirect volume impact of this, together with the very strong H1 2022 comparators, resulted in significant direct and indirect volume headwinds.

Our proactive approach to pricing during 2021 and 2022 when inflationary pressures accelerated at unprecedented levels, has meant that we have continued to see pricing gains in the half. We have started to see an easing of key raw material input and freight costs during the latter part of 2022, and this has continued into the first half. The favourable impact from this has acted as a significant partial offset to some of the volume impacts seen in the period.

Selling, Distribution and Administration (SD&A) costs are below last year, despite the ongoing inflationary impacts in some areas, as we controlled our costs in challenging market conditions. We have also benefited from a further $21 million of efficiency savings (total savings to date are $41 million, including $20 million delivered in 2022), in relation to our strategic projects announced in early 2022, with the savings accelerated. Since these projects began, we have increased the total efficiencies 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 in India and China. 

Our 2022 acquisitions, Texon and Rhenoflex, delivered an $14 million post-acquisition contribution to adjusted operating profit in the half, including $5 million of synergy benefits. These acquisitions have experienced similar destocking headwinds as the wider Apparel and Footwear businesses. However, we have delivered integration synergies to further underpin performance and now expect total run-rate synergies of $15 million to be delivered by the end of the year (original expectations of $11 million in 2024).

The Group's adjusted operating margins decreased by 50bps to 15.0% on a CER basis (H1 2022: 15.5%), reflecting the impact of the year-on-year volume declines with significant offset from other, controllable factors. On a proforma basis, including acquisitions for the first half of 2022, operating margins were up 30bps year-on-year.

On a reported basis, Group operating profit, including exceptional and acquisition-related items, decreased to $72 million (H1 2022: $111 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. In the half, this was a headwind of 5% on revenue and adjusted operating profit. 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. In addition year-on-year depreciation in Indian and Chinese currencies contributed to the headwind, primarily relating to depreciation during H1 2022. At latest exchange rates, we expect a c.1-2% translation headwind for revenue and adjusted operating profit for the full year (excluding any future hyperinflation impact in Turkey, which cannot be forecasted with accuracy).

Non-operating Results

Adjusted earnings per share ('EPS') decreased by 18% to 3.5 cents (H1 2022: 4.3 cents) driven by lower adjusted operating profit, which reduced from $125 million to $107 million. Interest costs remain well controlled, despite rising interest rates and increased debt, due to the funding of the acquisitions in H2 2022. Reported EPS of 1.5 cents (H1 2022: 3.4 cents) was 55% lower, after exceptional and acquisition related items.

The decrease in adjusted profit before tax was primarily due to the $17 million decrease in adjusted operating profit. This was partially offset by the net finance charge, which was $1 million lower year-on-year. 

Net finance costs decreased to $14 million (pre-exceptional) (H1 2022: $15 million). The key drivers of this were:

Offsetting these increases, there was:

The adjusted taxation charge for the period was $26 million (H1 2022: $33 million). Excluding the impact of exceptional and acquisition-related items, the effective tax rate on pre-tax profit was 29% (H1 2022: 30%). The reported tax rate was 39% (H1 2022: 34%), 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 operate in primarily Apparel and Footwear markets exposed to the wider industry destocking cycles in the half. As a result, profit attributable to minority interests decreased to $12 million (H1 2022: $15 million).

Exceptional and Acquisition-related Items

Net exceptional and acquisition-related items before taxation were $35 million (H1 2022: $13 million). These include strategic project costs of $6 million (net of a $6 million property profit), $17 million of asset write downs and costs from the EMEA Zips disposal, and other acquisition-related items of $11 million.

Strategic project costs of $6 million relate to the strategic initiatives commenced during 2022; and primarily consist of severance costs of $7 million, legal / advisor / closure costs of $3 million, non-cash impairments of $2 million, offset by a profit of $6 million from the sale of property. These costs have supported the acceleration of project benefits, with $21 million of incremental adjusted operating profit delivered in the period (with $41 million incremental savings on the projects in total to date).

$1 million of costs have been incurred in relation to the delivery of acquisition synergies which, as mentioned above, are now delivering ahead of expectations, with $5 million of savings in the half.

The agreement to dispose of the EMEA Zips business, announced in July 2023, has resulted in the reclassification of this business as Held for Sale as at 30 June. As a result of this, and related to the expected proceeds of the transaction, asset write downs of $13 million have been incurred, in addition to $4 million of transaction related costs. We expect this transaction to complete during Q3 of this year. 

Other acquisition-related items of $11 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 in previous acquisitions. 

Cash flow

The Group delivered $52 million (H1 2022: $30 million) of adjusted free cash flow in the half. Free cash flow is measured before annual pension deficit recovery payments, acquisitions, disposals and dividends, and excludes exceptional items.

On a last twelve months (LTM) basis, which smooths in year working capital cycles, adjusted free cash flow was $136 million, reflecting our focus on cash generation through the destocking cycle. 

Adjusted free cash flow performance was strong, particularly when our normal cash flow cycle results in the majority of cash being generated in the second half of the year. We have managed net working capital closely during the industry destocking cycle, with a focus on our inventory levels while not compromising on service levels. We continued our disciplined approach to payables and receivables management through the half. 

Capital expenditure was $12 million (H1 2022: $16 million), as we continued to maintain a selective approach to investing in growth opportunities, as well as in strategic projects. We anticipate 2023 full year capital expenditure to be in the $30-40 million range, as we continue to invest in support of our growth strategy, in productivity and in our environmental performance, although this level of investment is dependent on the demand recovery profile in H2.

Minority dividends of $12 million (H1 2022: $8 million) were paid, as cash was repatriated from those relevant overseas entities to the Group. Tax paid was $23 million (H1 2022: $28 million), reflective of lower profitability year on year. Interest paid was $17 million (H1 2022: $11 million) reflective or higher interest rates and the Texon acquisition debt taken out in H2 2022.

The Group delivered an overall free cash outflow of $2 million (H1 2022: $49 million outflow). This primarily reflects the adjusted free cash inflow of $52 million, offset by:

· UK deficit repair payments (including administrative expenses) of $17 million;

· Dividend payments of $28 million;

· Exceptional and acquisition related payments, mainly relating to strategic projects of $8 million.

Net debt (excluding lease liabilities) at 30 June 2023 was $399 million (31 December 2022: $394 million). Including lease liabilities, net debt was $492 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 $79 million at 30 June 2023, which was $37 million higher than 31 December 2022 ($42 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 pre-tax surplus on an IAS 19 basis at 30 June 2023 of $152 million (31 December 2022: $117 million). The increase in the surplus during the period of $34 million predominantly relates to actuarial gains net of tax of $9 million. This is from an increased discount rate due to significantly higher corporate bond yields reducing liabilities, but was partially offset by asset losses due to the high degree of hedging in place in the portfolio. There were also employer contributions (excluding administrative expenses) of $14 million. 

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, which was expected to result in the pay-down of the deficit slightly earlier than originally planned. The Group agreed to continue to pay the Scheme administrative expenses and levies of around $5 million per annum.

Updates since then indicate that the funding deficit has fallen significantly and is now approaching fully funded on a technical provisions basis with an estimated deficit of £25 million (being 99% of the technical deficit valuation). This significant improvement has been due to 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 in early 2023, and reflective of the collaborative working relationship with the Trustees, we have agreed a mechanism to switch off / switch on the regular cash contributions to the scheme based on monthly estimates of the latest funding position. As such, if the scheme remains in surplus for two consecutive months cash contributions will cease entirely until any trigger on the downside (i.e. a return to deficit) has been hit. At this point, contributions on a pre-agreed basis would resume. 

Since the initial agreement of this mechanism earlier this year, which set a range of 99-101% funded for the on/off triggers, we have worked with the trustees to reflect the latest views on mortality assumptions. This has reduced the funding range for the on/off triggers to 98-100%, further increasing the chances of the off trigger being reached in the near future. This has the potential to significantly reduce or eliminate the existing levels of contributions made into the Scheme, and thereby increase free cash flows generated by the Group, within the short to medium term.

Balance sheet and liquidity

Group net debt (excluding lease liabilities) at 30 June 2023 was $399 million ($492 million including lease liabilities), in line with 31 December 2022 ($394 million). This reflects disciplined cash management as noted above, offset by the acquisition-related items, ongoing pension deficit repair payments, shareholder dividends and exceptional cash costs in relation to strategic projects.

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 $305 million at 30 June 2023. 

At 30 June 2023, our proforma leverage ratio (net debt to EBITDA; both excluding lease liabilities) was 1.6x 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 30 June 2023 which was 9.5x, 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 has sufficient resources to continue in operation for a period of 12 months from the date of this report to 31 July 2024, 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.

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 2023 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 the related notes 1 to 22. 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.

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 2023 is not prepared, in all material respects, in accordance with UK 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 2410 (UK) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" (ISRE) issued by the Financial Reporting Council. A review of interim financial information consists of making enquiries, 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 statements of the Group are prepared in accordance with UK adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusions 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 management have inappropriately adopted the going concern basis of accounting or that management 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, 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 Company'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 report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statements 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 guidance contained in International Standard on Review Engagements 2410 (UK) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Ernst & Young LLP

Luton

31 July 2023

Condensed consolidated financial statements

Condensed consolidated income statement

For the half year ended 30 June 2023

Condensed consolidated statement of comprehensive income

For the half year ended 30 June 2023

* Pension surplus amounts at 31 December 2022 and 30 June 2022 for the Coats UK Pension Scheme have been restated to reflect a change in measurement as further described in note 1. There is no impact on either profits or cash flows for the respective periods.

Condensed consolidated statement of financial position

At 30 June 2023

* Pension surplus amounts at 31 December 2022 and 30 June 2022 for the Coats UK Pension Scheme have been restated to reflect a change in measurement as further described in note 1. There is no impact on either profits or cash flows for the respective periods.

Condensed consolidated statement of changes in equity

For the half year ended 30 June 2023