Half-year Report

                                                                          1 August 2024

Coats Group plc

2024 Interim Results

Continued growth, 18% EBIT margin, full year upgrades

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 2024.

Strategic Highlights

Financial Highlights

Outlook

The Group continues to make good progress and has delivered a first half out-turn above our expectations. As such the Board now expects a full year performance modestly above current market expectations⁷, as these trends continue. Whilst a level of uncertainty in our markets remains, our outlook is underpinned by ongoing evidence of the recovery in Apparel and Footwear, a slower, but improving recent trend in Performance Materials, and the continued benefits from our strategic projects and margin delivery.

Over the medium term, we remain confident in the Group's ability to deliver strong profit growth and cash generation, owing to our scale, global footprint, innovation, strong digital platform and technical support capabilities, alongside continued investment in sustainability and innovation.

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

"It has been a privilege to lead Coats over the last eight years. I am extremely proud of my team and together we have delivered a material improvement in the quality of the Group and its prospects through transitioning the portfolio, a relentless focus on operational improvement, investing in sustainability and targeting better cash generation. As I handover it will be exciting to watch the new heights the company achieves. For the remainder of 2024, we see generally encouraging trends supporting a year with a more equal weighting than in the prior year."

Conference Call

Coats Management will present its half year results in a webcast at 10.00 BST today (Thursday, 1 August 2024). The webcast can be accessed via https://coats.com/en/investors/investors-overview/ or this link. The webcast will also be made available in archive form 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 2023 was $1.4 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 to constantly stay ahead of changing market needs, Coats has operations across some 50 countries with a permanent workforce of more than 15,000, 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 validated Science Based sustainability targets for 2030 and beyond, with an aspiration 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.

2024 Interim Results Overview

Introduction

Reported revenue was up 7% in the period, as a more broad-based recovery from the destocking cycle is now underway and we continue to see improving trends in each of the three divisions. Group CER revenue increased by 8%, albeit against a weak prior year comparator. This growth was driven by Apparel (CER growth of 14%) as customer inventory and buying patterns returned to more normalised levels, with our strategy of 'Winning with the Winners' aligning us with the key growth brands. As previously indicated, the destocking cycle in Footwear commenced later, creating a slight lag effect in the recovery relative to Apparel. With this destocking now at its end, and the recovery beginning, Footwear returned to growth in the period (CER growth of 7%), as demand from several major brand customers picked up. CER revenues in Performance Materials were 3% lower. While the division continues to be impacted by customer phasing issues in some US end markets and some cyclical destocking, the division is on an improving trend, with revenue increasing sequentially on a quarterly basis and Q2 returning to year-on-year growth. The 2023 customer insourcing of production in Performance Materials is behind us and, as expected, we are seeing signs of revival in certain segments, such as military and fire department tenders. This together with the operational progress made on the US / Mexico footprint transition leaves this part of the business well set for further recovery in volumes and margins.

We have continued to make significant progress against our strategic objectives, and we expect to have again outperformed the industry and estimate we gained market share in both Apparel and Footwear (2023 estimated market share of 25% for Apparel, 27% for Footwear). Within Performance Materials we have also seen share wins, in particular gains at two large automotive OEMs and two large cable manufacturers in the US and Europe. These share gains across the Group are testament to the commercial strategy we have been pursuing and our ability to offer a unique customer proposition. This includes a global presence and leadership positions offering customers a wide range of top-quality products, customer flexibility and responsiveness, technical support and IT systems integrated with our customers. This enables us to align ourselves with many of the fastest-growing global brands and grow our customer portfolio. In addition, our continued focus on innovation and close collaboration with our customers, enables us to quickly align ourselves with key market trends and introduce 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 further gives brands added confidence to work with us.

We have delivered further efficiency savings in the period and this has helped deliver another strong operational performance with adjusted EBIT 26% higher on a CER basis to $133 million. As a result, we are pleased to have achieved an adjusted EBIT margin of 18% in the period, ahead of our 2024 Group adjusted EBIT margin target of 17%. This strong margin performance is supported in part by the market recovery and associated pick-up in volumes, as well as savings from our strategic projects, and acquisition-related synergies. Margins expanded significantly within the Apparel and Footwear divisions, however, within Performance Materials margins were slightly lower year-on-year, owing to the timing of volume recovery and operational set-up challenges in one of our new Mexican plants, which we are working hard to rectify.

Our strategic projects delivered accelerated in-year savings of $7 million, taking the cumulative total to $64 million.  We continue to expect to deliver cumulative strategic project savings of at least $70 million in 2024, in line with our guidance. We now expect to deliver these savings for a cash cost of c.$40 million, considerably less than the previous guidance of $50 million. Consequently, we have identified some further footprint optimisation projects across our portfolio delivering an additional $5 million of savings at a cash cost of around $10 million. These projects will be actioned in the second half of the year with the additional $5 million savings delivered by the end of 2025.

Our acquisition-related synergies delivered $5 million of further efficiencies in the first half, and we now expect to deliver $22 million annualised cost savings by the end of the year, well ahead of pre-acquisition expectations ($11 million by 2024) and a further increase from our most recent update.

Beyond these projects, we have benefited from an effective pricing strategy, and maintained a focus on our operational performance and good cost control, including delivery of procurement savings. Customer loyalty reflects our market differentiation, including the quality of our products, our high levels of customer service and our ability to be highly integrated with customer systems and processes. Reported operating profit was $118 million (H1 2023: $92 million).

With a return to normalised levels of working capital, alongside ongoing market recovery, we have continued to deliver strong cash generation, with increased adjusted free cash flow in the period of $59 million (H1 2023: $51 million). Net debt (excluding lease liabilities) at 30 June 2024 was $381 million (31 December 2023: $384 million), with leverage of 1.4x net debt/EBITDA remaining comfortably within our target range of 1-2x net debt/EBITDA.

Strategic Enablers: Innovation, Sustainability and Digital

Our strategic enablers are Innovation, Sustainability and Digital and these underpin our strategy to accelerate profitable sales growth while delivering sustainable value to our stakeholders. We have continued to progress our enablers during the year, with pleasing results.

Innovation

We innovate to deliver differentiated, highly-engineered products with a focus on driving profitable growth. It is carried out in close collaboration with our customers and, recognising key market trends, our innovation project pipeline is aligned to industry demands and the provision of cutting-edge solutions. The primary focus of our innovation is sustainability, most notably around the adoption of products made from recycled products and biomaterials. However, it also encompasses more efficient production techniques, increasingly lightweight, safety critical products with enhanced protective characteristics, and end-of-life recycling technologies.

Coats has a rich history of new and innovative products, and as the market transitions to products made from biomaterials or recycled and circular materials we are again at the leading edge in our industry. Examples of our innovation, which have been recently launched, include the following:

Our innovation hubs, in close collaboration with customers and, in some cases, university research bodies are working on a range of other innovations that have an overarching sustainability goal, including a focus on hard-to-recycle products, circular solutions, bonding agents and safety critical items. These ongoing innovations enable the use of recycled and biomaterials across this range of hard-to-recycle and safety critical materials for the first time.

Sustainability

Sustainability remains at the very heart of our business. It encompasses the products we create and sell through innovation, as well as how we manage our operations. Our investment in sustainability is a compelling proposition to the increasing number of brands who, often driven by consumer sentiment and preference, demand sustainable products and who want to align with a supply chain having compliant and sustainable operations. Our historic and ongoing investment in sustainability therefore helps us increase our market share over time, as well as reduce our costs, as we become more efficient and use less resources.

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 are pleased that in May 2024, the Science Based Targets initiative (SBTi) validated Coats' near and long-term science-based emissions reduction targets, including verification of the Group's net-zero target for 2050. This latest independent verification is a further key milestone in the Group's sustainability strategy and demonstrates significant progress in the Group's commitment to achieve its 2050 net-zero targets across the value chain.

Reflecting our ongoing commitment to reducing emissions and enhancing sustainability, Coats has also been included in the "Europe's Climate Leaders" list by the Financial Times and Statista. This acknowledges European companies that have demonstrated a significant reduction in their core emissions intensity, and is clear recognition of our considerable progress.

In March 2023, we announced new and challenging interim sustainability targets for 2026. The seven targets reflect the ongoing focus on our people, water, emissions and waste reduction categories, as well as product innovation and materials transition. We have improved our performance against these targets during the period. Notably, we have achieved our scope 1 and 2 CO2e emissions reduction target, reducing emissions by 49% thus far, versus a 2026 target of 22%.

We remain the clear global market leader in the sale of 100% recycled thread products, and we have delivered further strong growth. As customers continue their transition to sustainable materials, we have scaled up our recycled product offering, and we have seen an acceleration in demand for these products. In the period revenue increased by 141% on a CER basis to $159 million, consequently, we are on track for in excess of $300 million of sales in 2024 (2023: $172 million) - a significant milestone. The proportion of sustainable materials within our overall production also increased during the period to 41%, (December 2023: 32%¹F) driven by increased recycled polyester fibres and filaments in our thread products. Our target is to transition to 60% of sustainable primary raw materials by 2026, and 100% by 2030.

We are committed to providing a safe and respectful working environment for our employees and other stakeholders and aim to have an organisational culture which promotes inclusion, diversity, belonging, equal opportunities, personal development, and mutual respect. Through the course of 2024 we have implemented various programmes and initiatives to promote female diversity across our business and have delivered an increase in the female representation in senior leadership roles to 28%, up from 21% in our 2022 baseline, and on track for the 30% target set for the end of 2026. Highlighting our commitment to an inclusive culture, we asked our employees to complete the 'Your Voice Matters Survey' this year and are delighted to have achieved an outstanding Engagement Score of 85%, 11 points above the average external benchmark of 74% and 6 points higher than our 2023 score.  Participation rates for this survey were exceptionally high at 94% of our global workforce. 

^1.Restated from 29% to reflect reclassification of certain materials.

Digital

Our digital offering is another differentiator and enhancing our global digital infrastructure and capability is a key piece of our strategy. We are able to invest in our digital operations by virtue of our scale, and this investment has allowed us to flex our supply chain, react to situations with speed and ensure we are focused on customer, employee, and shareholder value creation.

During the period, we continued to expand our digital offering, with the Coats customer catalogue now digitised. This enables products and colours to be shared in digital format with customers, and incorporated into customers' design systems. With a focus on high-quality customer service, we have also developed Tech Connect - the Coats technical customer support system - enabling customers to now seek real-time online support for issues encountered.

Going forward, we will continue to investigate AI and emerging technologies as a way of connecting with our customers, including building a ShopCoats mobile application which will enable the remainder of e-commerce customers to transition to ShopCoats. From its inception in 2021 to the end of the first half of 2024, the ShopCoats digital system has processed just under $1.7 billion of customer orders, with the value of customer orders through ShopCoats continuing to increase year-on-year.

Our Coats Digital business, part of Apparel, sells software to third party customers, with an overarching theme of making operations more efficient. With the growing importance of productivity, operational and cost efficiency, interest in our software products is also increasing. The business had an excellent first half, onboarding 12 new customers and doubling order bookings compared to the same period last year. The recurring software-as-a-service (SaaS) based revenue also continues to increase.

Board Update

In May 2024 we announced that Rajiv Sharma had decided to step down after eight years as Group Chief Executive. Following a comprehensive selection process, the Board has appointed David Paja as Group Chief Executive designate. David Paja was until recently CEO of GKN Aerospace, part of Melrose Industries PLC, where he played a major role in the successful turnaround of the business and delivery of profitable growth. Prior to this, David held senior leadership positions at Aptiv, Honeywell and Valeo. David will join the Group and become an Executive Director of the Board on 1 September 2024 and assume responsibilities from Rajiv on 1 October 2024 when Rajiv steps down as a Director from the Board.  

Following the May 2024 AGM, Nicholas Bull, Senior Independent Director, stepped down from the Board after nine years. Steve Murray, an existing Non-executive Director, succeeded Nicholas as Senior Independent Director.

Dividend

With ongoing evidence of the expected recovery in Apparel and Footwear, and an improving recent revenue trend in Performance Materials we delivered a strong financial performance, including an increased margin and strong levels of free cash flow. With further progress made on pension de-risking during the year, the Group's Balance Sheet remains strong. We are well-positioned in our markets; we continue to gain market share and see further growth and margin opportunities as the market gradually recovers from destocking and other headwinds.

With these factors in mind, the Board has decided to pay an interim dividend of 0.93 cents per share, a 15% increase on the prior year. The interim dividend will be paid on 14 November 2024 to ordinary shareholders on the register at 18 October 2024, with an ex-dividend date of 17 October 2024.

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, within the context of our capital allocation policy.

Operating Review

H1 2024 Operating Results Overview

Group revenue of $741 million increased 7% on a reported basis and 8% on a CER basis. There has been an improving trend through the year with Jan-Apr CER revenues up 7% vs 2023, as we continue to see improving market conditions for each of the three divisions. The revenue growth reflects the recovery from the widespread industry destocking in Apparel and Footwear against softer prior year comparators, and continued quarter-on-quarter improvements in Performance Materials.

Group adjusted EBIT of $133 million increased by 26% on a CER basis (2023: $106 million CER), largely driven by improved revenue performance and continued benefits from strategic projects and acquisition synergies, as well as certain foreign exchange gains. Inflationary pressures continued to be well managed through pricing and productivity levers, and we have made targeted reinvestments in our cost base as our end markets continue to recover. As a result, adjusted EBIT margins were up 250bps to 18.0% (2023: 15.4% CER), ahead of our stated 2024 Group adjusted EBIT margin target of 17%.  

On a reported basis EBIT was $118 million (2023: $92 million), after $15 million of exceptional and acquisition-related items (2023: $16 million) which predominantly related to the execution of our strategic projects and 2022 footwear acquisitions.

Adjusted earnings per share ('EPS') increased by 27% to 4.5 cents (2023: 3.5 cents) and was driven by our improved operating performance. In addition we continued to tightly manage our interest costs, tax charge and profit attributable to minority interests. Reported EPS of 3.8 cents (2023: 1.5 cents) was significantly higher, also including the impact of discontinued operations (European Zips) in 2023 and exceptional and acquisition-related items, which were significantly reduced year on year.

Our Group cash performance remained strong with adjusted free cash flow of $59 million (2023: $51 million) as we returned to normalised levels of working capital alongside ongoing market recovery. Our Balance Sheet remains in a strong position, with net debt (excluding lease liabilities) of $381 million (December 2023: $384 million), and leverage of 1.4x. 

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 $376 million (2023: $334 million) was up 14% on a CER basis (12% reported). As previously guided we have seen customer inventory and buying patterns return to more normalised levels during the year despite wider macro concerns. This follows a prolonged period of industry destocking that commenced in 2022 and continued throughout the majority of 2023, and as such significantly impacts prior year comparators. 

The Apparel business continues to benefit from market share gains (2023 market share 25%).  We were also able to maintain pricing, and owing to our proactive procurement strategy, leverage 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. With market conditions continuing to improve, our strong market position, agile supply chain, global presence, differentiation and focus on leading brands provide further opportunities for growth and market share gains.

Adjusted EBIT of $72 million (2023: $53 million) increased 37% vs the prior year on a CER basis. The adjusted EBIT margin was 320bps higher at 19.1% on a CER basis (2023: 16.0%), a record level, which is well ahead of our 2024 margin target. This was driven by improving volumes, alongside continued savings from our strategic projects, ongoing procurement benefits, and some positive foreign exchange gains. Excluding these foreign exchange gains, underlying margins were around 18.4%. 

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.

Footwear revenue increased 7% to $198 million (2023: $184 million) on a CER and reported basis.  The revenue growth was driven by the normalisation of customer buying patterns and inventory levels post the significant destocking cycle seen in 2022 and 2023 (which contributes to weaker comparators), albeit the recovery profile is slightly behind that of the Apparel division, as expected.

Our Footwear business has a focus on innovation and sustainability, and this year we have introduced new products and technologies that meet environmental sustainability criteria, as well as the needs of customers. Our combined capability as Coats Footwear has accelerated this process. Not only do we have a comprehensive portfolio, but we also have a strong focus on fast-growth sports and athleisure brands which attract premium pricing. Our brand-specified positions have considerable longevity, typically lasting over the production life of the end-product. This is an enabler of growth ahead of the market. We have also continued to deliver share gains and programme wins (2023 market share 27%), reflecting our position as a trusted partner with our global accounts programme, in which we dedicate resources to key brands and retailers.

Part of the strategic rationale for combining the three footwear businesses (Coats' legacy Footwear business, Texon and Rhenoflex), has been the potential to cross-sell our broad range of products to customers through a single customer-facing commercial team. We have created a number of opportunities for complementary offerings, with our customers seeing the potential to simplify and optimise their supply chains. We are now seeing the benefits of this, and in the period succeeded in cross-selling our products to two large well-known German sports brands, as well as a leading US brand.

Adjusted EBIT was $48 million with adjusted EBIT margins up 340bps to 24.1% on a CER basis, another record, as improved volumes, strong commercial delivery and continued benefits from the acquisition integration synergies impact and mean that we have delivered significantly in excess of our 2024 margin target of >20%. Acquisition integration has so far focused on commercial and general & administrative costs, as well as on procurement, and consequently we will deliver $22 million of annualised efficiency savings (significantly ahead of our initial guidance of $11 million savings). Most recently, we have announced the merger of two of our French operating entities, to create Coats Footwear France. This single business entity will further streamline activities and leverage synergies, as well as bring clear benefits for our customers, suppliers and partners.

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 three PM sub-segments: Personal Protection (39% of H1 2024 divisional revenue), Composites (17% of H1 2024 divisional revenue) and Performance Thread (44% of H1 2024 divisional revenue). Medium-term revenue growth potential for each of the sub-segments is expected to be high single digits for Personal Protection, low double-digits for Composites, and growth in line with global GDP for Performance Threads. The overall medium-term growth target for the division is a 6-9% CAGR.

PM revenue declined 3% to $167 million (2023: $177 million) on a CER basis (5% decline on a reported basis), with Personal Protection decreasing by 1% on a CER basis, Composites decreasing by 19% (CER) against particularly strong comparators, and Performance Threads growing by 3% (CER).  As previously disclosed there have been customer phasing issues in some US markets as well as destocking at some US telecommunication customers in Composites. However, all three sub-segments are on improving trends and the Division as a whole has returned to year-on-year growth in the second quarter. In Personal Protection it has been encouraging to see a steady improvement in military and fire department tender activity in the US and, together with the operational progress made on the US / Mexico footprint transition, this part of the business is well set for further recovery in volumes and margins. 

Adjusted EBIT was 11% lower vs 2023 on a CER basis at $14 million (2023: $16 million). Adjusted EBIT margins were 8.3% (2023: 9.1%), below the 2024 margin target of 13-14%, reflecting the timing of volume recovery in the industries served as well as the ongoing transition of the US / Mexico footprint transition that both continued to impact. This includes operational challenges in one of our new Mexican plants, which we are working hard to rectify. PM margins included c.$4 million of under-recovered costs in relation to the US / Mexico plant transitions as volumes ramp up to expected levels. Excluding these costs, PM margins were 140bps higher at 10.5%. We now anticipate to realise the main benefits of the US / Mexico footprint projects in 2025, one year later than originally planned, largely as a result of the subdued market conditions within the Personal Protection sub-segment.

Financial Review

Revenue

Group revenue from continuing operations increased 7% on a reported basis and 8% on a CER basis. All commentary below is on a CER basis unless otherwise stated.

Operating Profit (EBIT)

At a Group level, adjusted EBIT from continuing operations increased 26% to $133 million and adjusted EBIT margins increased 250bps to 18.0%. The table sets out the movement in adjusted EBIT during the year.

Following the significant volume headwinds during 2023, primarily due to widespread industry destocking in Apparel and Footwear, there has been a return to year-on-year volume growth during H1 against these weaker comparators. The direct and indirect impact of this contributed to a significant improvement in operating profits and margins vs 2023. 

We have benefited from an effective pricing strategy, maintaining price during a period in which we have seen an easing of some key raw material input costs, though other cost categories such as freight and energy have returned to an inflationary trend. Labour inflation has maintained throughout and remains at relatively normal levels. Overall, our ability to hold price and continue to generate productivity benefits has more than offset our overall inflationary pressures. 

Selling, Distribution and Administration (SD&A) costs are above last year as certain costs have returned to the business, in part due to the return to top line growth, but also due to targeted reinvestments into the business after a period of significant cost containment during the destocking cycle. We have also benefited from a further $7 million of efficiency savings (total savings to date are $64 million), in relation to our strategic projects announced in March 2022. Our 2022 acquisitions, Texon and Rhenoflex, will deliver a total of $22 million of annualised synergy benefits with $5 million of incremental benefits vs H1 2023.

The Group's adjusted EBIT margins increased by 250bps to 18.0% on a CER basis (2023: 15.5%), with the impact of the year-on-year volume increases, self-help actions, strategic project savings and acquisition synergies all contributing.

On a reported basis, Group EBIT, including exceptional and acquisition-related items, increased to $118 million (2023: $92 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. For the period, this was a headwind of 1% on revenue and 2% on adjusted EBIT. As previously announced, these adverse translation impacts were primarily due to the previous adoption of hyperinflation accounting in Turkey, and furthermore saw local EBIT headwinds as inflationary pressures continued to accelerate. Aside from the impact of the Turkish Lira, and the resulting volatility of hyperinflation accounting, underlying headwinds were modest and driven primarily by the depreciation of Chinese and Egyptian currencies. At latest exchange rates, we expect a 1-2% headwind impact on revenue and adjusted EBIT for full year 2024 (excluding any future hyperinflation impact in Turkey, which cannot be forecasted with accuracy).

Non-operating Results

Adjusted EPS increased by 27% year-on-year to 4.5 cents (2023: 3.5 cents), supported by a return to growth in Apparel and Footwear. Interest costs were slightly higher than 2023 at $16 million, as we managed our cash position well throughout the period. Our effective tax rate was slightly lower at 28% due to certain timing benefits in H1 (2023: 29%), with a marginal increase in profit attributable to minority interests. Reported EPS of 3.8 cents (2023: 1.5 cents) was significantly higher year-on-year, driven by the improved trading performance, lower exceptional and acquisition related items, and the impact of discontinued operations (European Zips) in 2023.

The adjusted taxation charge for the period was $33 million (2023: $26 million). Excluding the impact of exceptional and acquisition-related items, we expect the effective tax rate on pre-tax profit to remain at 29% for the full year (2023: 29%), in line with our guidance, as the H1 timing benefits referred to in H1 reverse. The reported tax rate for the half was 29% (2023: 29%), 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. Profit attributable to minority interests increased to $13 million (2023: $12 million) reflective of the ongoing market recovery in these territories.

Exceptional and Acquisition-related Items

Net exceptional and acquisition-related items before taxation were $15 million (2023: $16 million). These include strategic project costs of $4 million, footwear integration costs of $1 million and other acquisition-related items of $11 million.

Strategic project costs of $4 million relate to the strategic initiatives commenced during 2022; and primarily consist of severance costs of $1 million and legal / advisor / closure costs of $3 million. These costs have supported the acceleration of project benefits, with $7 million of incremental adjusted EBIT delivered in the half (with $64 million incremental savings on the projects to date).

A further $1 million of costs have been incurred in relation to the delivery of acquisition-related synergies which, as mentioned above, are ahead of expectation, with a total of $22 million of annualised savings to be delivered since acquisition.

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 with previous acquisitions. 

Cash flow

The Group delivered strong $59 million (2023: $51 million) adjusted free cash flow, driven by improved profitability as a result of market recovery and a return to normalised levels of working capital. Adjusted free cash flow is measured before UK pension administrative costs, acquisitions, disposals and dividends, and excludes exceptional items.

We have continued to manage net working capital closely, with a focus on inventory, without compromising service levels. We also continued our disciplined approach to payables and receivables management during the year as an input to working capital efficiency.

Capital expenditure was $11 million (2023: $12 million) as we continued to maintain a selective approach to investing in growth opportunities and in strategic projects which will favourably impact long-term returns. We anticipate 2024 full year capital expenditure to remain in the $30-40 million range as we continue to invest in support of our growth strategy, in productivity and in our environmental performance.

Minority dividends of $9 million (2023: $12 million) were paid, as cash was repatriated from those relevant overseas entities to the Group. Tax paid was $31 million (2023: $23 million). Interest paid was $14 million (2023: $14 million). 

The Group delivered an overall free cash inflow of $7 million (2023: $2 million outflow). This primarily reflects the adjusted free cash inflow of $59 million, offset by:

Net debt (excluding lease liabilities) at 30 June 2024 was $381 million (31 December 2023: $384 million). Including lease liabilities, net debt was $465 million (31 December 2023: $471 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 $72 million at 30 June 2024, which was $9 million higher than 31 December 2023 ($63 million surplus). This increase was primarily due to movements on the UK scheme.

The Coats UK Pension Scheme, which is a key constituent of the Group defined benefit liabilities, had a surplus on an IAS 19 basis at 30 June 2024 of $107 million (31 December 2023: $102 million). The increase in the surplus during the year of $5 million predominantly relates to net actuarial gains of $3 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 potentially removing it from the Group balance sheet and we remained actively engaged with the insurance industry to achieve a full insurance of the benefits of the remaining 80% of the scheme liabilities in a cost effective manner.    

Balance sheet and liquidity

Group net debt (excluding lease liabilities) at 30 June 2024 was $381 million ($465 million including lease liabilities), broadly in line with 31 December 2023 ($384 million). This reflects strong and disciplined cash management as noted above, offset by residual exceptional cash costs in relation to strategic projects, shareholder dividends, and ongoing pensions administrative expenses.  

Our total committed debt facilities remain 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 $320 million at 30 June 2024. 

At 30 June 2023, our leverage ratio (net debt to EBITDA; both excluding lease liabilities) was 1.4x (31 December 2023: 1.5x) 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 2024 which was 9.7x, 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 and the Company has sufficient resources to continue in operation for the period from the date of this report to 31 December 2025, 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 2024 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 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.

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 2024 is not prepared, in all material respects, in accordance with International Accounting Standard 34: Interim Financial Reporting as adopted for use in the United Kingdom, and the requirements of the Disclosure and Transparency Rules (DTR) of the FCA as applicable to interim financial reporting.

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 2024

Condensed consolidated financial statements

Condensed consolidated income statement

For the half year ended 30 June 2024

* Represented to reflect the results of the European Zips business as a discontinued operation (see note 1).

Condensed consolidated statement of comprehensive income

For the half year ended 30 June 2024

Condensed consolidated statement of financial position

At 30 June 2024

* Pension surplus amounts at 30 June 2023 for the Coats US Pension Scheme has 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 six months ended 30 June 2023.

Condensed consolidated statement of changes in equity

For the half year ended 30 June 2024