Coats Regulatory News (COA)

1 August 2019

Coats Group plc

2019 Half Year Results

Coats Group plc ('Coats,' the 'Company' or the 'Group'), the world's leading industrial thread manufacturer, announces its unaudited results for the six months ended 30 June 2019.

Commenting on the Half Year Results Rajiv Sharma, Group Chief Executive, said:

'I am pleased to report a robust performance in the first half despite mixed conditions in underlying retail and industrial markets. Our market-leading Apparel and Footwear thread business benefited from our continued focus on product innovation, digital solutions as well as our leading corporate responsibility and sustainability credentials. In our Performance Materials business, we saw strong growth in some emerging markets and key strategic focus areas, and an acceleration in the performance of recent acquisitions.

'Our improved operating margins, strong cash flow generation and underlying earnings growth reflect continued cost control and the benefits of Connecting for Growth. This programme is now mostly complete and will conclude this year. The savings achieved have funded reinvestments in the areas of innovation, digital and talent, which will benefit us in the future. We will also continue to invest capital in both value-adding organic and inorganic opportunities across our global network. As a reflection of our confidence in the future direction of the business we have announced a 10% increase in the interim dividend.

'In the second half of the year we will continue to drive performance through our focus on customer service and building on our innovation and digital capabilities, supported by our self-help initiatives. Our full year earnings per share will be impacted by the highlighted foreign exchange movements, IFRS16 changes and certain legacy interest charges. However, whilst we remain mindful of current macroeconomic uncertainties, we anticipate delivering 2019 full year adjusted operating profit in line with our expectations.'

Financial highlights

·; Revenue growth of 2% on an organic CER basis in line with May trading update; 3% decline on a reported basis as a result of anticipated H1 weighted foreign exchange translation headwinds.

·; Apparel & Footwear revenue growth of 1% (2% growth excluding portfolio rationalisation actions e.g. tail markets); Performance Materials revenue up 4% driven by strong growth in strategic focus areas of Telecoms and Energy and Personal Protection.

·; Adjusted operating profit up 8% (up 3% on a reported basis) with Connecting for Growth programme delivering a full period of benefits and focus on operational efficiencies, offsetting some gross margin decline; adjusted operating margin up 80bps to 14.5%.

·; Adjusted EPS down 4% to 3.4 cents; excluding temporary mark-to-market foreign exchange impacts, the initial impact of IFRS16 (leases), and legacy interest charges in the period EPS growth was 4%.

·; Adjusted free cash flow for the period of $21 million up 24% supported by a strong Balance Sheet.

·; Strong progression in reported operating profit to $101 million (up 27%) and basic EPS of 3.4 cents (up 47%), reflecting continued strategic progress and minimal net exceptional costs in the period compared to H1 2018.

Strategic highlights

·; Sale of non-core North America Crafts business and acquisition of Threadsol; both completed in February 2019.

·; Connecting for Growth programme continues to progress well and reorganisation activities now mostly complete; remaining incremental savings and reinvestments on track.

·; Significant positive progress in strategic focus areas of digital (e.g. factory automation and commercial launch of Twine Solutions) and innovation; two further Innovation Centres in Turkey and China opened in H1 2019.

·; Launch of our inaugural Sustainability Report, and hosted a dedicated ESG Investor Event in London.

Conference call

Coats Management will discuss this report in a webcast / conference call with analysts and investors at 0900 BST today (1 August 2019). The webcast can be accessed via www.coats.com/investors/hy2019. The conference call can be accessed by dialling +44 (0)20 3936 2999 and using participant access code '74 38 27'. The webcast will also be made available in archive form on www.coats.com.

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About Coats Group plc

Coats is the world's leading industrial thread company. At home in some 50 countries, Coats has a workforce of 18,000 people across six continents. Revenues in 2018 were US$1.4bn. Coats' pioneering history and innovative culture ensure the company continues leading the way around the world. It provides complementary and value added products, services and software solutions to the apparel and footwear industries. It applies innovative techniques to develop high technology Performance Materials threads, yarns and fabrics in areas such as automotive composites, fibre optics and Oil and Gas. Headquartered in the UK, Coats is a FTSE 250 company and is a constituent of the FTSE4Good Index Series. To find out more about Coats visit www.coats.com.

Operating review

Group revenues in the first half of the year increased 2% on an organic and CER basis. On a reported basis, Group revenues reduced 3% as a result of the previously flagged year-on-year currency translation headwinds (notably Indian Rupee, Turkish Lira and Brazilian Real). Based on current FX rates, the H2 2019 translation impact is expected to be broadly neutral.

Apparel and Footwear (A&F)

In A&F, our core thread business continued its resilient growth (up 3%) despite underlying global retail markets remaining mixed. The ongoing robust performance in thread sales was underpinned by our continued focus on product innovation, digital solutions and our strong corporate responsibility and sustainability credentials. The headline A&F growth of 1% was impacted by marginally slower demand for zips due to certain in-year fashion trends (down 1% year-on-year), ongoing difficult trading conditions in Latin America as well as the impact of tail market exits (part of the Connecting for Growth programme) and customer / product portfolio rationalisation actions. Excluding the impact of these tail market exits and portfolio rationalisation actions, A&F growth would have been 2% in the period.

Coats' ability to perform resiliently in mixed retail market conditions 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 and software solutions. This was demonstrated by a 17% organic increase in Coats Global Services' revenues in the period, and the successful launch of the Twine Solutions digital thread printing machine in June 2019. In addition, revenue growth was supported by innovation in areas such as recycled threads and zips, the launch of sustainable thread products (cotton and PFC-free) and lattice footwear composites. Our innovation credentials across A&F and Performance Materials have been further enhanced by the opening of two more global Innovation Hubs in Turkey and China, following the opening of the first hub in North Carolina in H2 last year. These facilities provide opportunities to collaborate with our customers and brands, and work with them to create innovative new product solutions to meet their specific design needs, and drive incremental new product sales.

Performance Materials

Performance Materials revenues grew 4% in the period on an organic CER basis (1% decline reported) which was consistent across the first half of the year as revenues continued to be impacted by the phasing of certain customer programmes. We continued to see strong growth in many emerging markets (in particular within EMEA), and accelerated performance in our acquisitions (Gotex and Patrick Yarns) as we look to drive geographic expansion of existing products across the Coats portfolio, and leverage Coats' global customer base.

Following a review of our Performance Materials strategy during the period we are now reporting our sales activity in five different end-use categories: Telecoms and Energy, Personal Protection, Transportation, Household and Recreation, and Other Industrial Applications.

Growth in our key strategic focus areas remained on track with 27% growth in Telecoms and Energy, and 8% growth in Personal Protection, whilst Transportation revenues were broadly flat in the period largely due to the slowdown in global automotive production. Household and Recreation related products showed a decline of 5% (which included the ongoing low-sew bedding trend in the US), and Other Industrial Application revenues saw a decline in the period, as general demand in North America remained relatively muted.

Geographical performance

By geography, we saw resilient revenue growth in Asia (up 3% on a CER basis) which was underpinned by Apparel and Footwear growth (as key markets continued to perform well), and despite a slowdown in the smaller Performance Materials segment in that territory (partly due to softness in the China automotive market). Revenues in EMEA rose encouragingly by 7%, and was driven by Performance Materials (Telecoms and Energy) as Gotex delivered a strong period of growth, alongside steady and consistent growth in Apparel and Footwear. In the Americas, revenues decreased 6%, where the US consumer durables market remained relatively soft alongside continued decline in Apparel and Footwear revenues in Latam which saw difficult trading conditions (in particular Brazil and Argentina). This was offset to some extent by an encouraging performance in certain Latam Performance Materials markets (e.g. Brazil and Mexico) and Patrick Yarns.

Operating profit

At a Group level, adjusted operating profit increased 8% to $102 million on an organic CER basis (2018: $95 million) and operating margins were up 80 bps to 14.5% (2018: 13.7%). Year-on-year productivity and procurement initiatives continued to broadly offset structural inflation (e.g. wages and energy). The anticipated continued raw material cost inflation incurred during the period (partly linked to oil price) was recovered in full. Despite this inflation pass through, gross margin percentage was impacted by the negative manufacturing variances arising from lower activity levels in certain territories (predominantly Americas). Operating margin progression was driven by continued cost control and the incremental year-on-year benefits from the Connecting for Growth programme.

On a reported basis, Group operating profit (which is after exceptional and acquisition-related items) increased 27% to $101 million (2018: $80 million), primarily due to minimal net exceptional and acquisition related items in the period when compared to the same period in 2018 where the initial Connecting for Growth reorganisation cost was incurred. Exceptional and acquisition-related items are not allocated to segments, and as such the segmental profitability referred to below is on an adjusted basis only.

Revised segmental reporting

As referenced in the FY18 results announcement on 1 March 2019, following the sale of North America Crafts which was completed on 20 February 2019, we have conducted a review of future segmental reporting options. The Group will now report two operating segments, Apparel & Footwear and Performance Materials. This segmentation reflects the distinct difference in strategies between these two segments, the differing customer / end-use market profiles, and as a result the internal management structure of each segment.

A process was subsequently undertaken to allocate profitability between these segments (given many shared operations), which are reported for the first time within these results. Assets and liabilities are not currently allocated between segments but instead managed collectively by each business unit.

Historical analysis for A&F and Performance Materials shows that these operating segments generate broadly similar operating margins, with H1 2018 A&F margins of 13.6% and Performance Materials margins of 14.0% (Group operating margins 13.7%). Full year 2018 operating margins for the two operating segments showed a similar profile to the H1 2018 comparators, with operating margins of 13.7% in A&F and 14.1% in Performance Materials (Group operating margins 13.8%).

In A&F we are the global market leader and deliver a compelling value proposition for our customers (for example speed, quality, innovation, digital solutions and corporate responsibility). There is significant scale to our A&F operations (A&F orders represent over 90% of total Group orders) which drives production efficiencies, and in turn gross margin upside. In Performance Materials we are seeking to build market leading positions and scale in specific strategic focus areas where we excel in designing new product solutions to solve customer needs. As a result, Performance Materials thread / yarn production processes involve more specialisation which drives a higher average sales price and often significantly higher order size to their A&F counterpart (and with that a lower average SG&A cost).

In the first half of 2019, we have seen strong progression in A&F operating margins (100bps) on a CER basis, largely due to the reasons set out above which explain the movement in Group operating margins. Performance Materials margins were flat in the period on a CER basis. This is predominantly due to bad debt and inventory write-downs (in total c.$1 million) and operating costs for our innovation centres which have been opened in the last 12 months.

Connecting for Growth programme

As announced in February 2018, 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.

Good progress continues to be made in the first half of 2019 and the majority of the programme reorganisation actions are now complete (the programme is now scheduled to conclude this year) with the new operating structures being embedded successfully within the organisation. Reinvestment projects, resulting from the programme savings, are progressing well in the areas of digital (e.g. retro fitting data sensors to existing factory machines to stream live data and generate productivity insights), innovation (e.g. two new innovation hubs opened in H1), and appropriate talent acquisition. These will all support the ongoing strategy delivery of the Group and our next phase of growth.

Cumulative net benefits for the programme to date now stand at $14 million; reflecting the increased run-rate of gross savings this year along with the planned increased reinvestments spend to embed the innovation, digitisation and people strategies which are an integral part of the programme. As such, incremental year-on-year net benefits (after reinvestments) of $10 million have been realised in adjusted operating profit in H1 2019 which reflects the incremental run rate of net savings following the launch of the programme in H1 2018 (net benefits at 30 June 2018: $4 million).

Cumulative programme net benefits are expected to be in the region of $25 million by the end of 2019 (2018 full year: $15 million) as we continue to make our planned reinvestments.

$24 million of the anticipated $30 million total exceptional reorganisation charge has now been incurred ($23 million in 2018).

Discontinued operations - sale of North America Crafts

As announced on 22 January 2019, we agreed to sell the non-core North America Crafts business to Spinrite Acquisition Corp, a leading provider of craft products in North America. This transaction was subsequently completed on 20 February 2019. The headline acquisition proceeds were $37 million, which was on a debt and cash free basis, and is subject to an adjustment for the level of net working capital as at the time of completion ($35 million received at completion).

The sale of our standalone North America Crafts business allows the Group to focus completely on the business-to-business global Apparel and Footwear, and Performance Materials businesses. The sale proceeds have initially been used to reduce Group net debt, and will subsequently be used to fund further value accretive bolt-on acquisitions.

In 2018 the North America Crafts business generated full year sales of $128 million (H1: $62 million) and an operating profit (pre an allocation of corporate costs) of $3 million (H1: $1 million). North America Crafts results, which include the results of the smaller lifestyles fabrics business, are reported as discontinued operations in the Group financial results (H1 comparators have been restated accordingly).

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. As underlying earnings and cash flows increase, the Board intends to continue to pursue a progressive dividend policy.

The Board has declared an ordinary interim dividend per share of 0.55c, which reflects 10% year-on-year growth (2018: 0.50c), to be paid on 15 November 2019 (payment date) to shareholders on the register on 25 October 2019 (record date), with an ex-date of 24 October 2019. The proposed full year dividend will be announced in March 2020 alongside the Full Year 2019 results.

Outlook

In the second half of the year we will continue to drive performance through our focus on customer service and building on our innovation and digital capabilities, supported by our self-help initiatives. Our full year earnings per share will be impacted by the highlighted foreign exchange movements, IFRS16 changes and certain legacy interest charges. However, whilst we remain mindful of current macroeconomic uncertainties, we anticipate delivering 2019 full year adjusted operating profit in line with our expectations. 

Financial Review

Adjusted operating profit from continuing operations increased 8% to $102 million on an organic CER basis (2018: $95 million) and operating margins were up 80 bps to 14.5% (2018: 13.7%). On a reported basis, operating profit (which is after exceptional and acquisition related items) increased 27% to $101 million, as a result of the increase in adjusted operating profit, along with the significant reduction in net exceptional and acquisition-related items in the period when compared to the same period in 2018 (where the initial Connecting for Growth reorganisation cost was incurred).

Financials on a reported basis were impacted by the relative strength of the US Dollar compared to the first half of 2018 where we saw FX tailwinds. This has resulted in 3% decline in reported revenues year on year (vs a 2% growth on a CER basis), and 3% growth in adjusted operating profit (vs a 7% growth on a CER basis). As the Company reports in US Dollars and given that its global footprint generates significant revenues and expenses in a number of other currencies, a translational currency impact can arise. The main currency impact during the period was the strengthening US Dollar against the Indian Rupee, Turkish Lira and Brazilian Real. As reported previously, we anticipate this FX headwind to be weighted to H1 2019, and at current exchange rates we expect broadly neutral translation impact in H2.

Adjusted earnings per share ('EPS') for the period decreased 4% to 3.4 cents (2018: 3.5 cents) due to certain foreign exchange impacts, which include the H1 weighted translation headwinds on adjusted operating profit and a MTM foreign exchange loss on future hedging contracts (vs a marginal loss in 2018), along with an increase in interest costs (including the initial impact of IFRS16 leases). These impacts more than offset the impact of higher adjusted operating profits (3% reported growth), and a 100bps reduction in underlying effective tax rate to 30%. Excluding the impact of the MTM losses booked in the period, the initial impact of IFRS16 (leases), and certain legacy items that impacted the interest charge, underlying adjusted EPS growth was 4%.

On a reported basis, the Group generated an attributable profit from continuing operations of $49 million compared to $33 million in the first half of 2018. The increase primarily being due to minimal net exceptional and acquisition related items in the period when compared to H1 2018 where the initial Connecting for Growth reorganisation cost was incurred.

The Group delivered an adjusted free cash flow of $21 million in the first half of 2019 (2018: $17 million) which reflects the adjusted operating profit growth, normal but well controlled levels of working capital outflows in H1 (reflecting the typical seasonality of the business and in line with H1 2018), whilst continuing to invest capital expenditure in line with our full year expectations.

Return on capital employed (ROCE) improved 200bps to 40%, due to higher adjusted operating profits from continuing operations and controlled working capital.

Non-operating results

Net finance costs in the period were $17.4 million (pre-exceptional), a significant increase from $10.5 million in 2018. The key drivers of the increase in net finance costs in the period was a $2.4 million MTM foreign exchange loss (June 2018: $0.4 million loss) which largely relates to the recent depreciation of Sterling and the impact on UK pension deficit recovery payment hedges. In addition, there was a $0.7 million increase in the IAS19 pensions finance charge, a $1.8 million impact following the initial adoption of IFRS 16 (see below), and the impact of certain legacy charges in Brazil/China that were booked in the period ($1.7 million).

The taxation charge for H1 2018 was $25.8 million (H1 2018: $26.0 million) resulting in a reported tax rate of 30% (H1 2018: 38%). Excluding exceptional and acquisition-related items and the impact of IAS19 finance charges, the underlying effective tax rate on pre-tax profits reduced 100 bps to 30% (H1 2018: 31%). This was driven by a reduction in withholding taxes, together with a favourable change in profit mix for the period.

Profit attributable to minority interests was broadly in line with 2018 at $10.4 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 was a credit of $0.3 million in the period and were significantly reduced year-on-year (2018: $19.5 million) due to the weighting of the exceptional reorganisation charge from the Connecting for Growth programme in H1 2018. The exceptional C4G reorganisation charge in this period was $3 million ($1.4 million net of the profit on the sale of a property as part of the C4G programme), and was offset by a $4 million credit in relation to a significant historical legacy tax claim in Brazil (includes the operating profit impact and associated historical interest recovery).

Acquisition-related items in the period were $2.6 million (2018: $3.7 million) which consisted of the amortisation of intangible assets acquired ($1.4 million), and contingent consideration ($1.2 million).

Discontinued operations

In addition to the above exceptional and acquisition-related items, and as referred to earlier, as a result of the disposal of the non-core North American Crafts business (completed on 20 February 2019) an exceptional loss on disposal of $18.4 million was incurred in the 2018 full year results. This relates to a partial write-down of operating assets to the level of sales proceeds, as well as the costs incurred to complete the transaction. The 2019 loss from discontinued operations of $2.9 million relate to trading losses in the North America Crafts business prior to the disposal completion date ($1.2 million) and remaining losses on disposal of $1.7 million (net of pension curtailment gains and a legacy property sale).

Investment

Capital expenditure in the year, in addition to ongoing maintenance requirements, related to new product development (e.g. development of our two further global innovation hubs in Turkey and China), process improvements, digital tools, capacity expansion, health and safety, and environmental spend (e.g. a new effluent treatment plant in Mexico). These help to ensure that Coats maintains its strong corporate responsibility credentials and ethical reputation in the industry as well as benefiting the local communities that we do business in. Total capital spend for the period amounted to $22 million (1.2x depreciation and amortisation).

As previously reported, and in order to continue to support our growth strategy and further reinforce our strong environmental compliance credentials we anticipate capital spend to be in the $45-55 million range for 2019.

Cash flow

The Group generated $21 million of adjusted free cash flow in the first half of 2019. This was a 24% increase on H1 2018 ($17 million) due to the increase in adjusted operating profit and controlled net working capital, alongside continued capital expenditure ($22 million). 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. On a last twelve months basis, the Group generated $100 million of adjusted free cash flow, which represented strong growth on the 2018 LTM comparative period ($73 million).

Adjusted EBITDA (defined as pre-exceptional operating profit before depreciation and amortisation) from continuing operations for the period was $120 million (2018: $118 million). Net working capital outflow in the period was $41 million which was in line with 2018 (H1 2018: $42 million) and reflects the usual seasonality of cash flows in the business as working capital continues to be effectively controlled. Interest paid was $8 million and in line with 2018.

Tax paid was $27 million, a marginal increase ($1 million) from the same period of 2018. A payment of $1.9 million was made in the first half of 2019 which relates to the settlement of a tax liability incurred by our disposed US Crafts business. Excluding the impact of this discontinued payment, there has been a reduction of $0.9 million from the same period of 2018. This reduction is primarily driven by cash tax benefits which arose on 2018 exceptional items crystallising in H1 2019, together with a favourable change in profit mix for the period.

On a non-adjusted basis, there was a free cash inflow of $12 million in the period, as the adjusted free cash inflow of $21 million and the proceeds of the North American Crafts disposal ($30 million; net of pre disposal operating cash outflows and transaction costs), were offset by UK pension payments ($12 million), shareholder dividends ($16 million) and exceptional and acquisition related items ($7 million).

Net debt (excluding the impact of IFRS16) as at 30 June 2019 was $210 million, $13 million below 31 December 2018 ($223 million), which primarily reflects the $12 million free cash inflow in the period.

Balance sheet

An important metric for the operating business is the leverage ratio of net debt to adjusted EBITDA (excluding the impact of IFRS16 - see below), which improved to 0.9x adjusted EBITDA (from continuing operations for the last 12 months) at 30 June 2019 (1.2x at 30 June 2018), and is slightly below the lower end of the 1-2x stated target leverage range. The recent sale of the North America Crafts business further supports our strong balance sheet and will enable us to invest in our business organically, self-finance further bolt-on acquisitions, as well as meet our other key capital demands of funding our pension schemes and making returns to shareholders.

IFRS16 (leases)

Following the release of IFRS 16, which is effective for accounting periods beginning on or after 1 January 2019, the Group has reviewed and updated its accounting treatment for leases. The primary impact of this new standard for Coats is the requirement to use a single model for lessees which recognises a right of use asset and lease liability for all leases, and as such a removal of the distinction between finance and operating leases.

As at 31 December 2018, the Group held a significant number of operating leases which were previously expensed within operating profit on a straight line basis. The Group has chosen to apply the modified retrospective approach from the new accounting standard transitional date of 1 January 2019 and has therefore not restated comparatives. This has involved calculating the right-of-use asset and lease liability based on the present value of remaining lease payments on all applicable operating lease contracts.

The notable P/L impacts on the 2019 half year financial results has been to see a net increase to adjusted operating profits (due to the replacement of operating lease charges offset by depreciation on the newly recognised assets) of $1 million, and an increase to the interest charge of $1.8 million reflecting the newly reflected lease liability. Overall, the impact on profit before tax of this change was therefore an adverse $0.8 million in the period, and we anticipate a similar pro-rata impact to be seen for the full year in 2019.

In relation to the Balance Sheet, the newly recognised assets (previously operating leases) at 30 June 2019 amount to $58 million, with an associated lease liability of $58 million. Net debt, including this lease liability at 30 June 2019 was $269 million. For financial covenant purposes, our leverage remains calculated on the basis without the impact of IFRS16 (0.9x at 30 June 2019).

Pensions and other post-employment benefits

The net obligation for the Group's retirement and other post-employment defined benefit liabilities (UK and other group schemes), on an IAS19 financial reporting basis, was $170 million as at 30 June 2019, which is in line with 31 December 2018 ($168 million).

The Group's UK defined benefit schemes, namely the Coats UK Pension Scheme, shows a $101 million IAS19 deficit at 30 June 2019 (£80 million), which is marginally lower than at 31 December 2018 ($109 million, £85 million). The small movement in the period of $8 million broadly consisted of strong asset outperformance, being offset by the impact of changes in actuarial assumptions (primarily lower discount rate).

Following the disposal of North America Crafts, Coats retains the previously incurred pension obligations from the business. The pension scheme was in a surplus position of $65 million at 30 June 2019 of which a recoverable surplus of $36 million is recognised on the Balance Sheet. This recoverable surplus has reduced from $48 million at 31 December 2018 as a result of fewer serving employees in the US remaining in the Group following disposal.

UK pension triennial valuation

As reported previously, following the merger of its three UK pension schemes in June 2018, the Group and the scheme Trustee successfully concluded the first valuation of the Coats UK Pension Scheme with a 1 July 2018 effective date.

The Group has agreed ongoing annual deficit recovery payments of £20 million ($25 million) per annum increasing annually by the increase in the Retail Price Index (first increase in January 2020) based on a Technical Provisions deficit of £252 million ($320 million). The latest Technical Provisions deficit is significantly lower than the last triennial valuation deficit (31 March 2015) of £582 million ($739 million) due to upfront lump-sum payments into the scheme of £329 million ($418 million), the ongoing deficit recovery payments, with some offset from other valuation factors (primarily as a consequence of a reduction in real UK discount rates since March 2015).

As before, the Group will also meet Scheme administrative expenses and levies estimated at £4 million ($5 million) per annum in the future (i.e. total ongoing payments of £24 million ($30 million) per annum). The new deficit recovery payments will be effective from 1 April 2019 and are payable until 31 December 2028. The Scheme's next triennial valuation will have an effective date of 31 March 2021 to realign with the valuation cycle of the previous three UK schemes.

The previously agreed level of deficit recovery contributions was £17.5 million ($22 million), including estimated administration expenses and levies. As a result of the timing of the start of the new contributions, 2019 deficit recovery contributions, including estimated administration expenses and levies, are anticipated to be £22 million ($28 million). Deficit recovery contributions (including administrative expenses and levies) in the first half of 2019 were $12 million (2018: $11 million).

Following consolidation of the UK schemes and completion of the 2018 actuarial valuation the Trustee of the Coats UK Pension Scheme currently hedges over 80% 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 2019 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 20. 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 2019 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

1 August 2019

Condensed consolidated financial statements

Condensed consolidated income statement

For the half year ended 30 June 2019

* Restated to reflect the results of the North America Crafts business as a discontinued operation and to reflect the impact of the adoption of IFRS 15 'Revenue from contracts with customers' (see note 1).

Condensed consolidated statement of comprehensive income

For the half year ended 30 June 2019

Condensed consolidated statement of financial position

At 30 June 2019

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

Condensed consolidated statement of changes in equity

For the half year ended 30 June 2019

Condensed consolidated cash flow statement

For the half year ended 30 June 2019

Notes to the condensed consolidated financial statements

For the half year ended 30 June 2019

1. Basis of preparation

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed consolidated financial statements included in this half-yearly financial report have been prepared in accordance with International Accounting Standard 34: Interim Financial Reporting, as adopted by the European Union, and the requirements of the Disclosure and Transparency Rules (DTR) of the Financial Conduct Authority (FCA) in the United Kingdom as applicable to interim financial reporting.

The condensed consolidated financial statements for the six months ended 30 June 2019 have been reviewed but have not been audited. The condensed consolidated financial statements for the equivalent period in 2018 were also reviewed but not audited.

The Condensed financial statements represent a 'condensed set of financial statements' as referred to in the DTR issued by the FCA. Accordingly, they do not include all of the information required for a full annual financial report and are to be read in conjunction with the Group's financial statements for the year ended 31 December 2018, which were prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use by the European Union (EU). The information for the year ended 31 December 2018 does not constitute statutory accounts (as defined in section 434 of the Companies Act 2006). The financial information for the year ended 31 December 2018 is derived from the statutory accounts for that year, which have been filed with the Registrar of Companies. The audit report on the statutory accounts for the year ended 31 December 2018 was not qualified, did not draw attention to any matters by way of emphasis and did not contain statements under Sections 498(2) or 498(3) of the Companies Act 2006.

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements, and are expected to be applied in the annual audited financial statements for the current year other than the following new and revised standards and amendments and improvements to existing standards that were effective as of 1 January 2019:

·; IFRS 16 ('Leases');

·; Amendments to IFRS 9 ('Prepayment features with negative compensation and modifications of financial liabilities');

·; Amendments to IAS 19 ('Plan amendments, curtailments or settlements');

·; Amendments to IAS 28 ('Long-term interests in Associates and Joint Ventures');

·; Annual improvements to IFRS's 2015 - 2017 cycle; and

·; IFRIC 23 Uncertainty over Income Tax Treatments

The adoption of these standards has not had a material impact on the financial statements of the Group, except for the adoption of IFRS 16 'Leases' as set out below.

Changes in accounting policies - IFRS 16 Leases

In the current year, the Group, for the first time, has applied IFRS 16 'Leases'. The date of initial application of IFRS 16 for the Group is 1 January 2019.

This standard provides a single model for lessees which recognises a right-of-use asset and lease liability for all leases, exemptions can be applied to low value and short-term leases. The distinction between finance and operating leases for leases is removed.

Details of the Group's accounting policies under IFRS 16 are set out below, followed by details of the impact of adopting IFRS 16. Significant judgements applied in the adoption of IFRS 16 included determining the lease term for those leases with termination or extension options and determining an incremental borrowing rate where the rate implicit in a lease could not be readily determined.

Accounting policies under IFRS 16 Leases

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

·; the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

·; the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).

·; a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.