Coats : 2022 Half Year Results

2 August 2022

Coats Group plc

2022 Half Year Results

Accelerating and Transforming

19% Sales growth and 180bps increase in EBIT margin

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

	H1 2022	H1 2021 4
			Reported	CER
Revenue	$801m	$703m	14%	19%
Adjusted 1
Operating profit	$125m	$97m	28%	35%
Basic earnings per share	4.3c	3.3c
Free cash flow	$30m	$49m
Net debt (excl. lease liabilities)	$195m	$168m
Reported 2
Operating profit	$111m	$93m	19%	26%
Basic earnings per share 5	3.4c	3.0c
Net cash generated by operating activities	$20m	$61m
Interim dividend per share	0.70c	0.61c

Financial Highlights

• Group sales growth of 19% on a CER basis (14% on a reported basis); favourable underlying market conditions in H1 alongside early pricing actions, continued supply chain agility and self-help programmes, delivered a strong performance despite high inflation;
• • 
    o Apparel & Footwear: 21% sales growth (CER); all key regions performed strongly despite some ongoing Covid impacts as we leverage our global footprint effectively
    o Performance Materials: 16% sales growth (CER); double digit growth in Personal Protection and Composites; encouraging improvement in US Yarns business
  • Pricing actions across both Apparel & Footwear and Performance Materials coupled with self-help programmes to offset inflationary pressures
  • Adjusted operating profit $125 million; adjusted margins up 180bps to 15.6% and well above 2019 levels: o A&F adjusted operating margins 18.2% reflecting strong volumes and excellent customer service
    o PM adjusted operating margins 8.2% showing continual improvement driven by US strategic projects and operational improvements
  • Adjusted EPS of 4.3c per share (reported 3.4c per share), up 30% vs 2021
  • Net debt (excl. lease liabilities) of $195 million; 0.8x leverage3 supported by robust free cash flow generation
  • Interim dividend of 0.70 cents per share, up 15% vs 2021; reflecting our confidence to deliver progress for the benefit of all our stakeholders in 2022 and beyond

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Strategic Highlights

• Acquisition of Texon International for $237 million completed on 20 July, a leading footwear solutions provider strengthening the Group's existing presence in the highly attractive athleisure footwear market
• Sale of our Brazil and Argentina business completed in May; allowing further focus on accelerating profitable sales growth and delivering strategic projects in the wider Group
• Substantial momentum on strategic projects to improve margins by optimising the portfolio, footprint, and cost base efficiency; savings delivery ahead of original expectations with $5 million delivered in H1 and $15 million expected for the full year 2022 (original expectations $5 - 10 million in 2022)
• Recycled product revenues up c.40% to $65 million; 2022 Sustainability targets largely on track

Outlook

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

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

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

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

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

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

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

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Conference Call

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

1. Adjusted measures are non-statutory measures (Alternative Performance Measures). These are reconciled to the nearest corresponding statutory measure in note 14. Constant Exchange Rate (CER) are 2021 results restated at 2022 exchange rates.
2. Reported refers to values contained in the IFRS column of the primary financial statements in either the current or comparative period.
3. Leverage calculated on a frozen GAAP basis, and therefore excludes the impact of IFRS 16 on both adjusted EBITDA and net debt.
4. Represented to reflect the results of the Brazil and Argentina business as a discontinued operation.
5. From continuing operations

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Enquiry details

Investors	Nick Kidd	Coats Group plc	[phone]
Media	Richard Mountain / Nick Hasell	FTI Consulting	[phone]

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

Cautionary statement

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

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Group Chief Executive's review

Accelerating and Transforming

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

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

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

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

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

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

• Acquisition of Texon
• Sale of our Brazil and Argentina business
• Exit from Russia
• Exit of direct operations in South Africa
• Significant momentum on strategic projects.

Acquisition of Texon

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

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

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

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

Sale of Brazil and Argentina business

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

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

Strategic projects

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

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

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

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

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

Improving the overall cost base efficiency

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

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

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

Strategic enablers: Sustainability, Digital and Innovation

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

Sustainability

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