Coats : Discover our year in review and download the full 2023 annual report

AGREAT

PLACE TO WORK

World's 25

Best Workplaces

Coats Group plc Annual Report 2023

OUR PURPOSE IS TO CONNECT TALENT, TEXTILES AND TECHNOLOGY TO MAKE

A BETTER AND MORE

SUSTAINABLE WORLD.

Big, bold, game-changing ideas are crucial to delivering this.

We are accelerating profitable sales growth through our ground- breaking sustainable products and solutions, transforming Coats for the future and creating value for our customers, their industries, our shareholders, our people and the communities in which we operate.

Coats Group plc Annual Report and Accounts 2023

2023 full year results and highlights

There is much to be confident about in Coats' trading performance in the year. Against the backdrop of widespread industry destocking, we gained market share, grew our margin and our adjusted free cash flow."

Rajiv Sharma,

Group CEO

14%

ORGANIC REVENUE

DECLINE

44%

RECYCLED SALES

GROWTH

160bps

EBIT MARGIN GROWTH

$131m

ADJUSTED FREE CASH FLOW

16.7%

ADJUSTED EBIT MARGIN

8.0c

ADJUSTED EPS

2.80c

TOTAL DIVIDEND UP 15%

1.5x

BALANCE SHEET LEVERAGE

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Coats Group plc Annual Report and Accounts 2023

At a glance and highlights

We are the global market leader in apparel threads, structural components and threads for footwear, and innovative pioneers in performance materials.

We are manufacturers of sustainability-led innovative products, and trusted partner to leading brands across all three segments and multiple industries.

A FTSE250 company and a FTSE4Good Index constituent, Coats takes part in the UN Global Compact and is committed to science-based sustainability targets for 2030 and beyond.

Financial highlights

• Reported revenue down 9%
• Organic revenue 14% lower, on improving trend (H1: 19% lower; H2 10% lower) with:
• • Continued outperformance vs industry -
    Apparel and Footwear markets c.20% lower
• Achieved 2024 Group adjusted EBIT margin target
  17% in the second half, one year ahead of plan
• Strong adjusted free cash flow of $131 million, despite lower sales volumes
• Net debt (excluding lease liabilities) lower at $384 million with 1.5x leverage3
• Proposed final dividend of 1.99 cents, +15%, reflecting the Board's confidence in growth strategy and future performance

Transforming the business

• Global market leader in 100% recycled thread products - revenue grew 44% to $172 million at constant currency, despite lower industry volumes
• Strategic projects delivered further $37 million accelerated savings, with overall savings on track for $70 million by 2024
• Integration synergies from Texon and Rhenoflex has delivered a total of $16 million savings to date ($19 million annualised), well ahead of pre-acquisition expectations ($11 million by 2024)
• Received Great Place To Work® accolade - and recognised as one of the world's top 25 workplaces
• "Off trigger" activated for UK pension scheme, resulting in £2 million per month cash savings in 2024; working towards full pension scheme de-risking in the medium term

Financial performance

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) metrics are 2022 results restated at 2023 exchange rates. Organic figures are results on a CER basis, and only includes like-for-like contributions from Texon and Rhenoflex post their respective acquisition dates.
2. Reported metrics refer to values contained in the IFRS column of the primary financial statements in either the current or comparative period.
3. Leverage calculated on a frozen GAAP basis and therefore excludes the impact of IFRS 16 on both adjusted EBITDA and net debt. See note 37b for details.
4. Restated to reflect the results of the EMEA Zips business, divested in 2023, as a discontinued operation. This has resulted in a reduction in previously reported
   2022 revenues of $46 million and $2 million adjusted EBIT.
5. From continuing operations.
6. EBIT (Earnings before interest and tax) relates to Operating Profit as shown on the face of the P/L.
7. Total dividend per share 2.80 cents.

Some of our customers

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Coats Group plc Annual Report and Accounts 2023

Chair's statement

DAVID GOSNELL

CHAIR

Resilient Coats/performance

This year has been no less challenging for the world than we have seen in recent years. The conflict in Ukraine, followed by the escalated situation in the Middle East have served to remind us of these various global challenges.

During the pandemic Coats utilised its global footprint to maintain service to all our customers, and were prepared and ready to capture

the return in demand. 2023 saw a year of unprecedented destocking, along with cost of inventory, continued inflation and elevated interest rates. Coats once again responded and focussed on controlling the controllable to deliver cash and margin. Our resilience in the face of such challenges underlines the importance

and effectiveness of our business model.

Coats has always thrived on the foundations of its culture and the people who make it special, and I am proud that we have been externally recognised as one of the top 25 workplaces globally.

Destocking has been a theme across the industry and whilst in 2023 Coats was no different in this regard, it is a great credit to our customer focus and agility that we continued to grow market share alongside margin enhancement.

Transformation

Last year saw the double acquisition of Texon and Rhenoflex, which has been pivotal in Coats' most recent evolution. I am delighted with the way both companies have seamlessly integrated to create another world-class business in our new Footwear division. This is testament to the closely aligned cultures and goals of all three businesses and has resulted in the delivery of synergies in excess of those announced on acquisition.

Our programme of Strategic Projects, announced in 2022, is on course to deliver as Coats continued to demonstrate its ability to execute on large-scale projects. Importantly, we have completed the majority of our US and Mexican manufacturing footprint projects, and we are currently in the process of ramping up utilisation.

2023 also saw the sale of tail markets in Mauritius and Madagascar as well as the disposal of

our EMEA Zips business, further streamlining our operations and allowing management to focus on delivering value to the Group. I wish those businesses all the best for the future.

Capital allocation

Our capital allocation policy remains unchanged and focusses on four key pillars (i) reinvesting in organic growth (ii) acquisitions in line with disciplined strategy (iii) supporting pensions and

1. paying a progressive dividend. We implement these pillars whilst maintaining a strong Balance Sheet with a target leverage ratio of 1-2x.

Following on from the £350 million buy-in in 2022, we have made significant progress on UK Pensions by agreeing with the UK Pension Trustees to switch off our deficit repair payments. These payments will remain off so long as the pension scheme assets remain above 99% of its technical provisions. We remain focussed on removing the risk from our Balance Sheets and optimising our Capital Allocation to enable additional growth opportunities.

The Board is mindful of the importance of returns to shareholders. To underline the strong progress we have made in 2023, we are pleased to propose a final dividend for the year of 1.99 cents per share, bringing the total dividend for the year to 2.80 cents per a share, a 15% increase on the 2022

total dividend. Subject to approval at the AGM, the final dividend will be paid on 30 May 2024 to ordinary shareholders on the register at 3 May 2024, with an ex-dividend date of 2 May 2024.

Sustainability

Sadly, the human impact on the world is not confined to conflict. The recurrence of natural disasters correlated to climate change has only reinforced the importance of our longstanding industry-leading commitment to the environment. We continue to deliver on our stretching sustainability goals, adding further momentum in the last year with the opening of the Madurai, India Innovation hub, established to accelerate the development of sustainable materials, and the addition of solar panels to a key site in Bangladesh are among many examples of our investment.

I was also delighted to see Coats receive the Cradle to Cradle Certified Material Health Certificate, and to be recognised with such positive feedback at the Shenzhen Fashion week, where we showcased garments made with 100% EcoVerde, which is a part of our sustainable thread range. As consumers become ever more aware of the impact on the environment, and ever more inclined to change their behaviours, Coats stands well positioned to deliver, having been a pioneer and consistently invested in Sustainability for many years.

Innovation

Sustainability also leads our Innovation strategy, the four Global Innovation hubs being prime examples of this. Coats has a rich history of new and innovative products, and as we witness the transition to recycled, circular materials we are again at the leading edge in our industry.

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Coats Group plc Annual Report and Accounts 2023

CEO's statement

RAJIV SHARMA

GROUP CEO

Despite unprecedented industry-wide destocking, by focussing on our customers, flexing our operating model and the delivery of strategic projects, productivity and procurement savings, Coats has increased market share, strengthened margins, and delivered another year of strong cash flow."

2023 HIGHLIGHTS

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Coats Group plc Annual Report and Accounts 2023

CEO's statement cont.

The business strategy and business model has allowed us to deliver strong financials through the cycle. The business is well positioned as volumes recover."

Rajiv Sharma,

Group CEO

2024 Group adjusted EBIT margin of 17% achieved in H2

World's Top 25 best workplace

It gives me great pride and satisfaction that Coats is included as one of the Top 25 workplaces in the world. It is a testament to the culture we have built in the company, that has been the glue for Coats during significant volatility and external shocks in the past few years. All 15,000 permanent employees in Coats have played a crucial role in the success of the business and are worthy recipients of this prestigious award. A truly remarkable achievement.

Global leader

Coats is the world's largest supplier of industrial sewing thread to the apparel industry with a c.25% global market share. We are also the world's largest supplier of industrial thread and structural components to the footwear industry with a c.27% global market share. Apparel and Footwear are both global leaders in their respective markets, while Performance Materials gives us diversification into industrial end-markets and is a technology incubator.

Delivering despite destocking

We anticipated that destocking would be an industry-wide issue, leading to low demand visibility and reduced volumes, and that we would need to navigate through this period.

Whilst consumer demand for apparel and footwear was resilient, destocking and buffer buying continued through H1. Overall, we anticipated the apparel and footwear industry was down around 20% in terms of manufacturing volumes. Recovery will be gradual improvements every quarter.

We anticipated destocking and had prepared the business to ride through this period of low demand visibility and lower volumes. We have focussed on self-help initiatives, portfolio optimisation and fiscal discipline to deliver robust performance. It is

especially pleasing to note that we held pricing, highlighting the critical part we play in the supply chain. Market share has grown across our Apparel threads, Footwear threads and Footwear structural components as sales outpaced the market reflecting not only the strength of our business, our customer focus and flexible operating model, but also our ability to balance sound financial management with investments in sustainability and innovation. This has resulted in improved margins and continued strong cash flow generation.

The business strategy and model has allowed us to deliver strong financials through the cycle, and the business is well positioned as volumes recover.

Innovation

We saw more notable developments of sustainability-led innovation, helping drive progress towards our 2030 committed goal of generating 25% of sales from products created in the previous five years. Examples include:

Hi-P going into soft durable seams essential in athleisure, swimwear and other high-performance apparel where softness, stretch and bulk are critical.

FlamePro Arc Lightweight protective fabric sets new standards for safeguarding against electrical arc incidents, flash fires, and related hazards.

Our 100% Recycled EcoVerde Neophil product received validation from key customers across the Automotive sector, solidifying its position as an environmentally conscious industry leader.

Sustainability

In 2022, we announced new sustainability targets for 2026 that will keep us firmly on a path to meet our 2030 goal of reducing emissions by 50% and reach our carbon Net-Zero goal by 2050. We made

significant progress on both a strategic and tactical level this year with the opening of a state-of-the- art sustainability hub in Madurai, India and the addition of solar panels to our site in Bangladesh.

The Madurai hub will work alongside our Innovation Centre in Shenzhen, China to accelerate transition to recycled and renewable materials and is part of our $10 million investment to scale up the development of green technologies.

In Bangladesh, solar panels installed across 50,000 square feet of rooftop is expected to reduce fuel- based energy on the site by 12%. During the day, 40% of factory power is from renewable sources.

Our sustainability success is demonstrated in the sales of premium recycled thread which, despite industry destocking, have grown in excess of 44% in the last year. Sustainability is a source of competitive advantage for Coats and helps us grow market share.

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Coats Group plc Annual Report and Accounts 2023

CEO's statement cont.

Our people

Talent is coming together with technology in Coats culture to redefine the limits of excellence in every aspect of our business. Our people have formed winning teams and deliver extraordinary results in a very challenging environment. Grit, energy, tenacity and resilience of our employees is coupled with modern tools, processes and programmes to deliver value to customers, shareholders and other stakeholders.

I have already highlighted the accolade of being one of the Top 25 companies in the World to work for, and in 2023 Coats added a further three countries to our list of Great Place To Work® (GPTW®) certified markets, bringing the total to 17.

Employee recognition is fundamental to ensuring that the grassroots programmes we have rolled out are realised, and this is manifest in our comprehensive awards programme acknowledging the work done and goals achieved around the Group.

This aligns with our support and development initiatives that encourage the level of engagement required to be one of the

very best workplaces, enabling Coats to connect talent, textiles and technology.

Strategic Projects

Our programme of Strategic Projects continues to deliver with $70 million of cost savings by 2024, with $57 million delivered to date.

Apparel

In the Apparel division, we consolidated our India Distribution Centres into state-of-the-art facilities designed to incorporate future automation in order to capture the near-term growth forecast.

We opened our European Logistics Centre in Romania, rationalising three centres into one whilst still serving 5,000 direct customers. All of this was done seamlessly and without disruption to

the business.

In addition to strategic projects, we also divested our EMEA Zips and the Madagascar / Mauritius businesses. This will enable management to focus on areas of the Group that will maximise shareholder value and help shape the future of Coats. I wish both businesses and the employees all the very best for the future under their new ownership.

Footwear

Separately from strategic projects, we have integrated the structural components acquisitions into our existing footwear threads business to create a new footwear division. Again, we are ahead of schedule and I am delighted that we have already delivered $19 million of annualised savings, well ahead of the $11 million savings expected

by 2024. Our customers are already seeing the benefits of having a single customer-facing team dedicated to servicing this growing segment.

Performance Materials

Our two new factories in Mexico, designed with best-in-class technologies, are now operational and will complement the ongoing optimisation of the North America footprint. Our Innovation hub in North Carolina continues to be an important part of our customer engagement and source of new products. In 2023, the Division launched 6 new products with promising sales potential and achieved 20% on our Vitality Index.

Financial performance through the cycle

In a year when the world battled the impact of inflation and cost of living challenges, it was important that Coats continued to deliver value. Our ongoing programmes on both a strategic and operational level have seen the Group grow margins and cash through the macro-economic cycle.

Pensions

We continue to make good progress on addressing the UK Pension legacy. 2022 saw a £350 million buy-in and in 2023 we were able to switch off the monthly deficit contribution payments by agreeing a £10 million one-off lump sum payment to take the

scheme into a fully funded position. This results in a free cash flow benefit of £2 million per month and will continue as long as the scheme's assets remain above 99% of its technical provisions, optimising our capital allocation and enabling additional growth opportunities. Our medium- term aspiration remains to de-risk the scheme fully and remove it from our Balance Sheet.

Looking ahead

The Group expects to make good progress in

2024 underpinned by modest revenue growth, with a weighting to the second half, as Apparel and Footwear gradually recover, and with increasing tender activity in Performance Materials.

Our continued focus on controlling our costs, including the benefits of strategic projects, increases our confidence in achieving our 17% Group EBIT margin target in 2024.

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