RNS
Coats Group PLC

Coats Group PLC - Half-year Report

RNS Number : 9818V
Coats Group PLC
13 August 2020
 

13 August 2020

 

Coats Group plc

2020 Half Year Results

Strong cash performance; demand trend improving through Q2

 

Coats Group plc ('Coats,' the 'Company' or the 'Group'), the world's leading industrial thread manufacturer, announces its unaudited results for the six month period ended 30 June 2020 (the 'period'). 

 

 

Continuing operations 3

H1 2020

H1 2019

Change

CER change 1

Organic change 1








Revenue

$536m

$705m

(24)%

(21)%

(26)%

Adjusted 1






Operating profit

$34m

$102m

(67)%

(66)%

(66)%

Basic earnings per share

0.0c

3.4c




Free cash flow (6 months)

$(5)m

$21m




Return on capital employed (ROCE) 5

28%

40%




Leverage 6

1.3x

0.9x




Reported 2,3






Operating profit

$29m

$101m




Basic earnings per share

(0.6)c

3.4c




Net cash generated by operating activities

$15m

$34m




Net debt (incl. IFRS 16 4)

$267m

$269m




 

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

 

'I am proud of the speed, confidence, clarity and empathy with which Coats has responded to the COVID-19 challenges.  As a result of the significant ongoing COVID-19 effects seen in the period, the Group continues to be focused on three key priorities, namely; continuing to ensure the health and safety of our employees; cash, liquidity and working capital management; and supporting our customers and maintaining the critical elements of our supply chain. 

 

'Very early in the crisis, we took decisive underpinning action to protect the financial health of the business. On cash and liquidity, our swift action resulted in maintaining a comfortable headroom position.  Working capital levers were managed well to optimise cash while maximising our ability to serve customers.  Cost actions were taken to underpin profit without compromising our ability to implement our strategy.   

 

'We have seen an improving sales trend in recent, albeit low-season, months with organic sales declines reducing to 25% in June and 18% in July.  As we look to the remainder of the second half we are mindful of the ongoing wider macro-economic uncertainty caused by COVID-19 and the importance of trading in the peak months of September, October and November. 

 

'Our focus has already shifted to winning the recovery.  In a crisis, customers depend on trusted and dependable partners like Coats that offer quality, reliability, innovation, sustainability, digital solutions and technical support.  Our global scale has allowed us to reliably deliver products and services to customers, resulting in incremental customer wins.  We have seen an acceleration of digital adoption and sustainability in our industry and our recent investments in these areas have resulted in commercial gains during the period.  Coats is focused on seizing the short-term and longer-term opportunities that are presented, and I am confident that Coats will emerge even stronger and more valuable to our industry and shareholders in a post-COVID world.'

 

Financial highlights 

·       Group revenues down 21% on a CER basis for the period (down 24% reported);

Organic revenues down 26%, which excludes a 5% contribution from the Pharr High Performance Yarns acquisition; 

Significant impact from the demand and supply disruption caused by COVID-19; Q2 organic revenues down 45% (Q1 down 8%) but with an improving performance through the quarter with June underlying organic revenues down 25%;

Both segments impacted by COVID-19 during the period; Apparel & Footwear down 29% and Performance Materials down 19% on a CER organic basis.

·       Adjusted operating profit of $34 million down 66% year-on-year on a CER basis (down 67% reported); resilient margins despite significant COVID-19 disruption as a result of the ability to significantly flex our cost base during the period. 

·       Adjusted EPS of zero cents driven by lower adjusted operating profits, higher effective tax rate and the impact of mark-to-market foreign exchange losses (primarily due to weakened Sterling in the period).

·       Reported operating profit of $29 million and basic EPS of (0.6) cents; lower than adjusted measures primarily due to certain non-cash impairment costs in relation to COVID-19.  

·       Adjusted free cash outflow of $5 million (2019: $21 million inflow) reflecting prudent cash management (e.g. lower capital expenditure), and working capital unwind in Q2 based on strong collections and lower activity levels. 

·       Closing net debt (incl. IFRS 16) of $267 million; flat year-on-year despite purchase of Pharr HP business in February for $37 million; net debt (excl. IFRS 16) of $207 million (1.3x leverage 6). 

·       Committed facility headroom of $270 million; providing comfortable liquidity and further improved since May Trading Update.     

 

Covid-19 underpinning actions

·      Full year 2020 capital expenditure to be reduced by c.70% to c.$15 million.

·      Flexing of manufacturing footprint to manage impact of lower volumes.

·      Q2 pay reductions for some 4,000 of our non-operational staff, senior management and Board.

·      Agreeing with our UK pension trustees the deferrals of our remaining 2020 deficit recovery contributions.

·      Cancellation of final 2019 dividend; no interim 2020 dividend declared.

·      Significant reductions in other discretionary spend; SG&A down 21% year-on-year in Q2.

·      £300 million of undrawn funding via Bank of England Covid Corporate Financing Facility (CCFF) available, providing additional headroom if required.

 

Strategic highlights

·       Unwavering focus on supporting our customers; already delivering incremental new customer wins and share gains from competitors as we are able to leverage our global footprint, flexibility and digital tools to deliver exceptional customer service.

·       Group remains well placed to navigate through the current challenging environment and emerge even stronger having moved quickly and prudently on underpinning measures.

·       Balance Sheet remains in a strong position providing optionality over most attractive investments during post-COVID recovery phase.

·       13 new product launches during the period; pace of innovation accelerating, with strong pipeline in place.     

·       Launch of Coats Fast Start to help address the global shortage of PPE; aligned to the accelerating shift to industry digitisation. 

·       Acquisition of Pharr High Performance Yarns, completed in February; combination with existing US Personal Protection business delivers scale and market leadership in an attractive growth market.

 

 

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) figures are 2019 results restated at 2020 exchange rates. Organic figures are results on a CER basis and excluding contributions from bolt-on acquisitions (Pharr HP and Threadsol). Revenue figures are an IFRS measure; however CER and Organic growth rates constitute Alternative Performance Measures. 

2

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

3

All figures on a continuing basis, unless otherwise stated.

4

IFRS 16 (leases) applied on a prospective basis from 1 Jan 2019.

5

Return on Capital Employed (ROCE) definition can be seen in note 14, and relates to adjusted operating profits for the last twelve months.

6

Leverage calculated on a frozen GAAP basis, and therefore excludes the impact of IFRS 16 on both adjusted EBITDA and net debt.  

 

Conference call

Coats Management will present its half year results in a webcast / conference call at 0900 BST today (13 August 2020). The webcast can be accessed via www.coats.com/investors/hy2020. The conference call can be accessed by dialling +44 (0)20 3936 2999 and using participant access code '18 08 76'. The webcast will also be made available in archive form on www.coats.com.

 

 

Enquiry details




Investors

Rob Mann

Coats Group plc

+44 (0)20 8210 5175

Media

Richard Mountain / Nick Hasell

FTI Consulting

+44 (0)20 3727 1374

 

 

 

About Coats Group plc

Coats is the world's leading industrial thread company. At home in some 50 countries, Coats has a workforce of 17,000 people across six continents. Revenues in 2019 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 Transportation, Telecommunications and Energy, and Personal Protection. Headquartered in the UK, Coats is a FTSE 250 company, a constituent of the FTSE4Good Index Series and a participant in the UN Global Compact. To find out more about Coats visit www.coats.com.

 

 

Cautionary statement

Certain statements in this half yearly 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.

 

 

 

Operating review 


H1 2020

H1 2019

 

Inc /

(dec)

H1 2019

CER 1

CER 1

inc/(dec)

Organic 1

inc/(dec)

$m

$m

$m

Revenue 2







By segment







Apparel and Footwear

372

539

(31)%

523

(29)%

(29)%

Performance Materials

164

165

(1)%

160

2%

(19)%

Total

536

705

(24)%

683

(21)%

(26)%








By region







Asia

283

395

(28)%

388

(27)%

(27)%

Americas

149

167

(11)%

158

(6)%

(27)%

EMEA

104

142

(27)%

137

(24)%

(24)%

Total

536

705

(24)%

683

(21)%

(26)%








Adjusted operating   profit 2,3







By segment







Apparel and Footwear

27

79

(66)%

78

(65%)

(65)%

Performance Materials

7

23

(70)%

22

(68)%

(69)%

Total adjusted operating profit

34

102

(67)%

100

(66)%

(66)%

Exceptional and acquisition related items

(5)

(1)





Operating profit

29

101












Adjusted operating margin 2,3







By segment







Apparel and Footwear

7.3%

14.7%

(740)bps

14.9%

(760)bps

(750)bps

Performance Materials

4.2%

13.7%

(950)bps

13.6%

(940)bps

(840)bps

Total

6.4%

14.5%

(810)bps

14.6%

(820)bps

(780)bps

 



1

2019 figures at 2020 exchange rates.  Organic on a CER basis excluding contributions from bolt-on acquisitions (Pharr HP and Threadsol).

2

Includes contribution from bolt-on acquisitions made during the period.

3

On an adjusted basis which excludes exceptional and acquisition-related items. 

 

Revenues

 

Group revenues decreased 24% on a reported basis, as all markets were impacted adversely by the COVID-19 pandemic during the period.  On a CER basis, Group revenues reduced 21%, which was 3% above the reported rate of decrease as a result of year-on-year currency translation headwinds (notably Brazilian Real, Indian Rupee and Turkish Lira) during the period.  On an organic CER basis, revenues declined 26% as a result of the 5% contribution from the acquisition of Pharr High Performance Yarns (Pharr HP) which was completed in February.   All commentary below is on a CER basis unless otherwise mentioned

 

As previously reported, our Q1 organic revenues at a Group level were down 8%, which was largely driven by the initial impact of COVID-19 in our China market, alongside a sharp reduction in wider demand in the latter part of March as the global pandemic took hold.  Revenues in Q2 at a Group level were down 45% on an organic basis, as we faced severe demand and supply impacts, particularly in April and May, albeit we saw an improving trend through the quarter as lockdown restrictions begun to ease around the globe and demand rose (June underlying organic sales down 25%).  

 

Apparel and Footwear (A&F)

Revenues in our A&F business were down 29% for the period (down 31% reported) as a result of the impacts of COVID-19 seen firstly in our China business in Q1, and then during Q2 as wider global lockdown measures took hold.  As the pandemic spread around the globe we saw large scale order cancellations / deferrals from brands and retailers which had a significant impact on demand from late March and throughout Q2.   In April and May the business was also significantly impacted by lockdown measures in some of our key markets of India and Bangladesh.  However as global lockdown measures eased we saw an encouraging improvement in demand during June, in part due to some April/May catch up, as production restarted at manufacturers.  

 

Despite the very difficult market conditions we have faced from COVID-19, we have taken a customer focused approach throughout this period in order to support our partners and provide reliable sourcing. In China alone, we have provided enough thread to enable the production of some three million PPE facemasks.  Our long standing and deep customer relationships with retailers and brands and the "peace of mind" we provide as a supplier is even more important at times such as this, as supply decisions increasingly factor in quality, reliability and reputation.   A number of our existing key competitive differentiators have come even more to the forefront, such as our speed of supply, both through geographical proximity of our sites to our customers (Coats has the largest manufacturing footprint globally with some c.40 A&F sites) and our digital tools (e.g. Coats digital sampling tool and online ordering platform) which take human touch points out of the supply process.  

 

In the period we launched Coats Fast Start, a digitally enabled initiative, which supports manufacturers switching parts of their production facilities and supply chains to help address the global shortage of PPE.   We also launched a strategic collaboration with Res. Q and Serai (part of the HSBC group) which aims to re-shape the future of the apparel industry.  This partnership will provide the apparel industry with access to a range of inter-connected digital solutions over a single digital platform and thereby reducing inefficiencies by connecting the multiple standalone systems that companies currently use to manage their processes.  This will drive real-time data and end-to-end transparency across the supply chain, as well as driving efficiencies (leading to cost savings), and reducing the need for face-to-face contact.

 

Our global footprint has also proved advantageous as country-wide lockdowns have meant even more accelerated shifts in country sourcing patterns and this was seen throughout the half, such as during the initial Q1 shutdowns in China, which saw accelerated shifts in volumes to Vietnam. Furthermore, our in-house technical expertise has provided significant support to our customers, and our industry reputation for reliability (including compliance and sustainability) has meant we have become even more of a trusted partner during this difficult period.  Whilst revenues have been significantly impacted in the period, our approach has yielded a number of customer share gains, as well as accelerated shifts to our recycled product range (EcoVerde), which leads us to believe our strategy during this period has been the right one and will lead to accelerated share gains on the way out of this crisis. 

 

By sub-segment, we saw a broadly consistent impact across our portfolio.   A&F thread revenues (c.85% of segment revenue) were down 28% year-on-year, in line with the wider segment sales decline of 29%.  Zips and Trims revenue (c.10% of segment revenues) was marginally worse than the overall A&F decline due to the impact of specific market lockdowns (e.g. Italy), as was Latam Crafts and Coats Digital.  

 

Performance Materials

Performance Materials revenues grew 2% in the period on a CER basis (1% decline reported), consisting of an organic decline of 19% and a 21% contribution from the acquisition of Pharr HP which was acquired in February.  As with A&F, Performance Materials was significantly impacted in Q2 by the demand and supply disruption from COVID-19.

 

Organic sales growth performance in the period was underpinned by relatively robust performance in Personal Protection (16% organic decline) as yarn sales for protective wear remained more resilient throughout the period.   In addition, the Other Industrial Applications end-use sub-segment performed relatively well as demand for products used in a number of these niche areas remained reasonably robust (e.g. medical and filtration products).   Offsetting these more resilient end-uses was Transportation as the automotive industry remained challenged.   Telecoms and Energy revenues were in line with the wider segment declines, albeit with a slightly higher decline in the latter part of the period as the temporarily delayed industry investments previously seen in H2 2019 were exacerbated by COVID-19.  

 

Despite the obvious disruption during the period from COVID-19 we remained focused on delivering high levels of customer service and creating innovative new solutions for our customers in order to deliver incremental market share over time.  We launched a number of new products in the period such as Coats Protect (a family of anti-microbial solutions for yarns and threads), which attracted significant interest and we will continue to accelerate our innovation credentials and solutions in order to deliver tailored customer solutions to meet their design requirements.   We also saw a number of new customer wins in the period, including a significant European automotive manufacturer who we were able to support during the height of the COVID-19 crisis in April / May in order to win this new work.   Overall in the period across both A&F and Performance Materials, we launched 13 new products, and our innovation pipeline to deliver further incremental revenues in H2 and beyond remains strong.  

 

Geographical performance

By geography, we saw broadly similar organic declines across all territories due to the COVID-19 impact.  Alongside the direct demand impact on our end-markets, we also saw significant supply disruption during Q2, with 18 of our c.50 manufacturing facilities being subject to enforced government closure at the peak of the global lockdowns in April.   Since early May the vast majority of sites have been open, and at present only one of our sites are under enforced government closure. 

 

In Asia we saw revenue decline by 27%, driven by key Apparel and Footwear markets, although performance varied quite widely country by country - for example India, which was relatively severely impacted by lockdown activities.  This included a period of around 6 weeks where all six of our manufacturing facilities in India were subject to enforced closure, and demand was still being heavily impacted at the end of Q2.   Our China operations, as previously reported were significantly affected in Q1 as the initial COVID impact occurred and continued to see some impact throughout Q2, with overall revenues down 29% in the period.   Conversely, our Vietnam operation performed relatively well as a result of being less impacted by the pandemic (our sites in this territory have remained open throughout) and being a reliable and attractive alternative sourcing solution to other key Asia A&F markets.  Our Bangladesh business also showed encouraging momentum in June, following severe lockdown restrictions in April which left our manufacturing sites subject to enforced government lockdown. 

 

Our America business showed organic declines of 27% in the period, which was driven by weak A&F sales in Latin America (in particular Mexico and Brazil), with some offset from Performance Materials which was relatively resilient in the period.   The Performance Materials result was underpinned by the Personal Protection decline of 16% (primarily a North America business), as referred to earlier.  

 

In EMEA, revenue declined by 24% for the period, where Performance Materials performed slightly better than A&F.   A number of key markets such as Turkey, Hungary and Tunisia showed encouraging signs of recovery later in the period, whereas other markets such as Italy (largely a zips business) were particularly challenged in Q2 due to the local macro-economic conditions.    

 

Operating profit

 

At a Group level, adjusted operating profit decreased 66% to $34 million on a CER basis (2019: $100 million) and adjusted operating margins were down 820bps to 6.4% (2019: 14.6%). 

 

The negative leverage volume impact of the COVID-19 disruption in Q2 was a significant headwind on margins in the period, as lower utilisation of factories lead to an under recovery of manufacturing overheads which severely impacted gross margins (gross margin down 6.7% year-on-year in the first half to 28.8%), as well as the anticipated initial dilutive impact of the Pharr HP acquisition.  Management took quick and decisive actions over the manufacturing cost base to minimise the impact of these volume headwinds.  This included temporarily flexing its manufacturing footprint to ensure the lower volume levels were most efficiently run through the site network (including flexing opening days and numbers of shifts).  In addition to the management actions around footprint utilisation we have seen continued year-on-year benefits from productivity and procurement initiatives which broadly offset structural inflation (e.g. wages and energy), as well as raw material deflationary benefits from the lower oil price (which were retained through maintaining price) and which should continue into H2, with some offset by adverse mix in the period.   In addition to gross margin actions, we also moved decisively to underpin our SG&A cost base (down 21% organically year-on-year in Q2) by minimising discretionary spend (for example travel and consulting costs) and implemented a 20% pay reduction for all c.4,000 non-operational staff in Q2.  Despite these significant actions, and as a result of the large volume decline in Q2, the Group reported a modest operating loss during Q2. 

 

Group organic adjusted operating profit declined 66% which is in line with the CER basis and is due to the small contribution made by Pharr HP in the period since ownership, as the volume impacts seen at a Group level also impacted Pharr HP.  Excluding the expected dilutive effect on overall Group margins from Pharr HP (4% operating margin business pre-acquisition), Group organic operating margins decreased by 780bps to 6.8% (vs a 820 bps reduction to 6.4% on a CER basis).   

 

On a reported basis, Group operating profit (including exceptional and acquisition-related items) decreased 71% to $29 million (2019: $101 million), which is slightly below the level of adjusted operating profit decline due to slightly higher exceptional and acquisition related items in this period (vs minimal in 2019).  See later for a breakdown of these exceptional items, which primarily relate to non-cash impairment items.  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. 

 

Segmental profit

Segmental organic adjusted operating profit for A&F and Performance Materials moved broadly in line with Group adjusted operating profit (down 66%) with year-on-year reductions of 65% and 69% respectively, as both businesses were significantly impacted by COVID-19.  

 

At an organic adjusted operating margin level, A&F margins (down 750bps) and Performance Materials margins (down 840bps) moved broadly in line.   This was despite higher volume declines in A&F, and due to the relative larger scale of the A&F business and the ability to greater flex the manufacturing footprints of these sites accordingly to limit the downside volume impact.   In addition, both businesses saw some negative mix impact during the period, which impacted the Performance Materials business slightly more than A&F.   Performance materials margins, including Pharr HP were 940bps down year-on-year driven by the expected dilutive effect of the low margin Pharr HP acquisition, which impacted margins by a further 100bps in the period. 

 

Balance Sheet and Liquidity

 

The Group has continued to focus on cash, liquidity and working capital management as one of its primary priorities throughout the COVID-19 crisis, in order to ensure it remains in a strong financial position, and to be well placed to navigate through the current environment safely and emerge even stronger when it passes. 

 

Group net debt (excluding IFRS 16) as at 30 June 2020 was $207 million ($267 million including IFRS 16), which was below the same point in 2019 ($210 million), and reflects strong cash generation in that 12 month period, which has more than offset the purchase price of Pharr HP ($37 million), the payment of our 2019 interim dividend ($8 million), and pension deficit recovery payments for 9 months ($23 million, including administrative expenses).   When compared to Group net debt (excluding IFRS 16) at 31 December 2019 of $150 million, net debt has increased by $58 million in the period mainly due to the purchase price of Pharr HP ($37 million), the well-controlled and marginal adjusted free cash outflow of $5 million (2019: $21 million inflow), and pension deficit recovery payments in Q1 ($8 million).   

 

When the COVID-19 crisis initially hit, the Group moved quickly to take action to underpin liquidity and maintain comfortable levels of headroom.  These actions include reducing our full year 2020 forecast capital expenditure by c.70% to around $15 million, cancelling our final FY19 dividend, and agreeing with our UK pension trustees the deferral of all remaining deficit recovery payments in 2020 (c.$17 million).   We also have access to the Bank of England CCFF scheme which provides a further £300 million of liquidity, should it be required (currently undrawn).    

 

In addition to these specific cash actions we have focused even more closely on working capital management during Q2, reflective of the difficult macro-economic environment.  This heightened focus on managing our Group credit risk, as well as reducing purchases, together with lower operating levels (and the natural working capital unwind this yields) has led to a significant reduction in our net debt (excluding IFRS 16) at 30 April 2020 of $253 million to $207 million at 30 June 2020.  Our net working capital on an organic basis as a % of sales (last twelve months) has remained in line with 2019 at 12.7% (30 June 2019:  12.9%).  In addition, bad debt charges have remained at a low level ($4 million; 2019: $1.4 million) as a proportion of Group revenue (below 1%), albeit higher than recent years, reflective of the current macro-economic conditions.  

 

At 30 June 2020, our leverage ratio (net debt to EBITDA; both excluding IFRS 16) was 1.3x, which included the impact of the significant reduction in profitability in Q2, and remains well within our 3x covenant limit.  Our interest cover covenant also maintained significant headroom at 30 June 2020 at 9.6x vs a covenant of 4x.  These covenants are tested twice annually at June and December, and monitored throughout the year.  Committed headroom on our banking facilities was $270 million at 30 June, a further increase from the comfortable levels at 30 April 2020 that we reported in May (in our Trading Update) of $230 million.

 

We expect some increase to Group net debt in second half as lower levels of collections in Q3 (driven by lower Q2 sales levels) are exceeded by monthly recurring payments, as well as the impact of the deferral of $12 million indirect and direct tax payments (as part of government COVID schemes) from H1 into H2.  Throughout H2, and as the business continues to recover from the Q2 significant sales impact, we expect some increases to net working capital during the period in order to support the sales recovery. 

 

Acquisition of Pharr High Performance Yarns ("Pharr HP")

 

On 10 February 2020, the Group completed the acquisition of the business and assets of Pharr HP, and as such the results for this period include around four months of Pharr results ($34 million revenue).

 

Founded in 1939, Pharr HP is a market-leading manufacturer of high-performance engineered yarns based in McAdenville, North Carolina, US, with around 350 employees.  Pharr HP specialises in providing technical yarn solutions to the growing markets of Industrial Thermal Protection, Defence and Fire Service industries. The acquisition of Pharr HP's manufacturing capabilities and customer base provides further expertise and scale to Coats' existing Personal Protection business (part of the Performance Materials segment), and gives us a leadership position in this attractive growth market. Coats will enhance Pharr HP's performance by leveraging its extensive textile experience, strong industry connections, existing operational footprint in North America, and Coats' strong global brand to deliver high performance solutions for its customers.  

 

Whilst revenues for Pharr HP in the period were impacted by COVID-19 (to a similar extent as the wider Group), we remain confident in the opportunity this acquisition presents us to build a leadership position and scale in the attractive Personal Protection sector. 

 

Dividend

 

As a result of the ongoing uncertainty from the COVID-19 pandemic, and as part of the balanced stakeholder approach to maintaining a comfortable level of headroom throughout this period of uncertainty, the Board is not declaring an interim dividend for 2020.  The Board is mindful of the importance of income to shareholders and as performance progresses and visibility increases, it will keep future dividends, including the final 2020 dividend, under review with any decision to be announced alongside the FY20 results in March 2021.  

 

Outlook

 

We have seen an improving sales trend in recent, albeit low-season, months with organic sales declines reducing to 25% in June and 18% in July.  As we look to the remainder of the second half we are mindful of the ongoing wider macro-economic uncertainty caused by COVID-19 and the importance of trading in the peak months of September, October and November. 

 

The Board remains confident in the Group's ability to continue to successfully manage through the current challenging macro-economic environment.  As a Group we are in robust financial shape and a market leader with an unrivalled global footprint, which alongside our enhanced operational agility leaves us well placed to benefit from the acceleration in demand and emerge as a stronger business once COVID-19 passes.

 

We will continue to underpin our near-term financial performance with the necessary prudent mitigating cost and cash actions, whilst balancing the investment opportunities available to us in order to position ourselves to take full advantage of future growth opportunities.

 

Financial Review

 

Adjusted earnings per share ('EPS') for the period decreased to 0.0 cents (2019: 3.4 cents). This reduction was due to the significant decline in adjusted profit before tax (down 82% year-on-year), and the increase in effective tax rate to 48% (2019: 30%).  The 82% decline in adjusted profit before tax was due to the decline in adjusted operating profit (67% at reported rates), and a higher year-on-year net interest charge (see below for further details).

 

The Income Statement on a reported basis was impacted by the relative strength of the US Dollar compared to the first half of 2019.  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.  This resulted in a decline of 24% in reported revenues year on year, which is a 3% translation headwind when compared to the 21% revenue decline on a CER basis.  At an adjusted operating profit level the translation impact was less where the reported decline of 67% compared to a 66% decline on a CER basis. The main currency impact during the period was the strengthening US Dollar against the Brazilian Real, Indian Rupee and Turkish Lira.  At current exchange rates (30 June 2020) we expect a broadly consistent 3% translation headwind on revenues for the Full Year 2020. 

 

The Group delivered an adjusted free cash outflow of $5 million in the period (2019: $21 million inflow) which was a robust performance in a period of significant operational disruption and reduced operating profits.   Underpinning measures were quickly put in place, including reduced capital expenditure ($13 million in the period; 2019: $22 million), and a heightened focus on controlling working capital.         

 

Return on capital employed (ROCE) was 28% which was lower than 2019 (40%) due to reduced adjusted operating profits (on a last twelve months basis down 34% year-on-year), the impact of Pharr HP (200 bps), with some offset from a well-controlled asset base during the period. 

 

Non-operating results

Net finance costs in the period were $18.8 million (pre-exceptional), a $1.4 million increase year-on-year (2019: $17.4 million).   The key driver of the increase in net finance costs in the year was a $5.7 million mark-to-market foreign exchange loss on forward hedging contracts and primarily in relation to weakening sterling (H1 2019: $2.5 million mark-to-market loss).  This was offset by a $1.5 million reduction in interest on bank borrowings to $6.1 million (2019: $7.6 million) as a result of lower floating rates, and lower corporate facility utilisation compared to the same period in 2019.     

 

The taxation charge for the period was $11.3 million (2019: $25.8 million).  Excluding the impact of exceptional and acquisition-related items and the impact of IAS19 finance charges, the effective tax rate on pre-tax profit was 48% (2019: 30%).  This increase has been driven by the significant impact of COVID-19 on the Group's profit mix in the period, where although income tax and withholding taxes continue to be charged in profitable markets, it is not always possible to recognise the tax credit associated with losses in certain markets.   Excluding the impact of mark-to-mark foreign exchange losses in the period the underlying effective rate was 41% (vs immaterial impact on the effective tax rate in 2019). 

 

As the Group's operations and profit mix normalise following the COVID-19 crisis, the Group's effective tax rate is expected to return to pre-crisis levels over time (2019 full year effective tax rate: 29%). The reported tax rate was 107% (2019: 30%), which includes the impact of exceptional and acquisition related items (including non-cash impairment charges incurred in the period due to COVID-19, which attracts zero tax relief). 

 

Profit attributable to minority interests was $7.9 million, and was predominantly related to Coats' operations in Vietnam and Bangladesh (in which it has controlling interests).   This was 24% below the 2019 level ($10.4 million) which reflects the relative strength of performance of those territories during the first half, compared to the wider Group.  

 

Exceptional and acquisition-related items

Net exceptional and acquisition-related items before taxation were $5.1 million in 2020 ($0.3 million credit in 2019).  This consisted of a $5.0 million charge in relation to the non-cash impairment of assets (including Plant and Machinery) at certain smaller European markets whose short-term financial performance and medium-term outlook has been impacted by COVID-19, and acquisition related items of $1.7 million (2019: $2.6 million).  These were offset by a $1.3 million profit ($2.7 million cash proceeds) in relation to the sale of surplus property in Korea (part of the Connecting for Growth reorganisation programme). 

 

The acquisition-related items of $1.7 million consisted of the amortisation of intangible assets acquired ($1.6 million), and acquisition earnouts ($0.1 million).

 

In the taxation line, exceptional items of $2.9 million predominantly related to tax in Brazil on 2019 exceptional receipts (in relation to a significant legacy tax claim that was successfully closed last year), and $1.9 million of deferred tax asset write offs which are no longer recognised due to the impacts of COVID-19.        

 

Cash flow

The Group delivered $5 million of adjusted free cash outflow in first half of 2020 (2019: $21 million inflow). This free cash flow measure is before annual pension deficit recovery payments, acquisitions and dividends, and excludes exceptional items. 

 

This adjusted free cash flow performance was lower than the same period in 2019 ($21 million inflow) as a result of significantly lower adjusted operating profit, with some offset from well controlled net working capital ($2 million inflow in the period; H1 2019: $41 million outflow), lower capital expenditure of $13 million (2019: $22 million) and lower tax payments (see below).  Minority dividend payments of $11 million were $3 million higher year on year as we accelerated the repatriation of cash to the Group in order to prudently manage corporate headroom and ensure comfortable levels of liquidity around the Group.  

 

Tax paid was $24 million, a decrease of $3 million from 2019 ($27 million).  This reduction is primarily driven by the lower levels of profit in the Group during the period, although this impact is somewhat offset by the timing of certain prior year payments (as previously indicated) and ongoing withholding tax commitments in a number of territories.

 

The Group generated a free cash outflow of $54 million in the period (H1 2019: $12 million inflow), which primarily reflects the adjusted free cash outflow of $5 million referred to above, the consideration paid for the Pharr HP acquisition of $37 million, as well as the first quarter UK pension payments of $8 million.  

 

As a result of the above free cash outflow in the period, net debt (excluding the impact of IFRS 16) as at 30 June 2020 was $207 million (31 December 2019: $150 million).   Including the impact of IFRS 16, net debt as at 30 June 2020 was $267 million (31 December 2019: $215 million).   

 

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 $141 million as at 30 June 2020, which was lower than 31 December 2019 ($181 million).  This reduction is primary due to movements on the UK scheme.  

 

The Coats UK Pension Scheme, which is a key constituent of the Group defined benefit liabilities, shows a $54 million IAS19 deficit at 30 June 2020 (£43 million), which is $38 million lower than at 31 December 2019 ($92 million, £69 million).  This reduction predominantly relates to net actuarial gains of $27 million (lower discount rate assumption due to lower corporate bond yields which was more than offset by asset increases), as well as $6 million employer contributions.  The IAS19 discount rate remains underpinned by AA corporate bond yield spreads, unlike the Technical Provisions basis of valuation (relevant for the triennial valuation process) which is linked to gilt yields which have further reduced in the period. 

 

In agreement with the trustees of the Coats UK Pension Scheme, and as part of the wider COVID-19 underpinning actions, we have agreed to defer the remaining deficit recovery payments for 2020 (April - December inclusive), to provide an additional c.$17 million of headroom cover during this year. The catch up of these payments are currently anticipated to commence in mid-2021 and be evenly spread over a period of around 18 months. We will continue to pay the scheme administrative expenses during this time (c.$5 million p.a.).

 

The effective date for the next UK scheme triennial is 31 March 2021, and this will be required to be finalised by no later than 30 June 2022. 

 

Going Concern

 

On the basis of current financial projections and the facilities available, the Directors are satisfied that the Group has adequate resources to continue for at least the next 12 months and, accordingly, consider it appropriate to adopt the going concern basis in preparing the Half Year financial statements.  Further details of our going concern assessment, financial scenarios and conclusions can be seen in note 1.

 

Principal risks and uncertainties 

 

Coats, like other companies, has since early this year been responding to and mitigating the immediate and ongoing impacts of the COVID-19 pandemic, and preparing for the recovery period, as is detailed in this statement.  As part of these activities we have reviewed our principal risk trends and mitigating actions and the details of these changes can be seen in note 16.

 

 

 

INDEPENDENT REVIEW REPORT TO COATS GROUP PLC

 

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 2020 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 19. 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.

 

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 the group 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 2020 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.

 

Use of our report

 

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.

 

 

 

Deloitte LLP

Statutory Auditor

London, United Kingdom

13 August 2020

 

 

 

 

 

 

Condensed consolidated financial statements

 

 

 

Condensed consolidated income statement

For the half year ended 30 June 2020



Half year 2020

 


Half year 2019

 


Full year  2019


Note

Before

exceptional

and acquisition related items

unaudited

Exceptional

and acquisition related items

(note 3)

unaudited

 

 

 

 

 

Total

unaudited

Before

exceptional

and acquisition related

items

unaudited

 Exceptional

and acquisition related items

(note 3)

unaudited

 

 

 

 

 

Total

unaudited

 

 

 

 

 

Total

audited



US$m

US$m

US$m

US$m

US$m

US$m

US$m

Continuing operations









Revenue


535.8

-

535.8

704.6

-

704.6

1,388.7










Cost of sales


(381.5)

(5.0)

(386.5)

(454.4)

2.6

(451.8)

(897.7)










Gross profit


154.3

(5.0)

149.3

250.2

2.6

252.8

491.0