Coats Group plc (COA) Earnings Call Transcript & Summary

Good morning, and welcome to the Coats Group plc Full Year 2020 Results Presentation. My name is Victoria Huxster, and I'm the Head of Investor Relations at Coats. I'm here with Rajiv Sharma, CEO; and Jackie Callaway, CFO designate. And they're going to talk you through the results and outlook for the business. Without further ado, I will pass you over to Rajiv.

Good morning, and welcome to our 2020 full year results presentation. I will firstly take you through the business highlights and our response to the COVID pandemic. Jackie, our new CFO, will then present the financials. This will be followed by our views on market trends and our outlook statement for 2021. After this, we will open up for Q&A. It goes without saying that 2020 was a very difficult year for the entire world, and Coats has had its share of challenges. I am extremely proud of all our employees who have pivoted with purpose and speed in March to focus on our 4 key priorities of health and safety, cash, customers and suppliers. Our North Star was the company's purpose and values, which guided our decisions and actions. After a very difficult second quarter, we saw sales recovery in Q3 and then recovery continued into Q4. We have seen this trend continue in the first 2 months of this year. Over the past few years, including this year, we have invested in digital, innovation, sustainability, talent and technology. This positions us well to win the recovery. We saw continued share gains in Apparel & Footwear and important new customer wins in Performance Materials last year, we launched 22 new products from our 3 innovation hubs that delivered $13 million of incremental sales last year. We have also pushed forward on our sustainability agenda and raised our ambition for the future. Margins were resilient due to our ability to flex our supply chain and overall cost base. With a robust cash performance, we ended the year with a strong balance sheet and comfortable headroom. This gives us strategic optionality. Finally, I'm pleased to note that the Board has proposed a final dividend of $0.013 per share. This return to paying a dividend at precrisis levels reflects the both confidence in the strategy and outlook for the group. Before I go any further, I would like to set out our refreshed company purpose, which is to connect talent, textiles and technology to make a better and more sustainable world. Thread, our core product, is used to connect various parts of clothes, shoes, bags, et cetera. We also have a reputation of being a connector of ideas and best practices in our industry. In Apparel & Footwear, we will grow our market share by delivering innovative and value-adding product and service solutions to a global customer base. In Performance Materials, we are leading with innovation, developing highly engineered products to create textile-based industry solutions for existing and new markets as well as driving operational efficiencies within the business. We're also strengthening the core of our business by becoming even more customer-centric. This means we relentlessly focus on the industry imperatives, our speed, personalization, innovation, cost, quality, reliability and sustainability. We are investing in our employees, so they can develop to their full potential within a safe, respectful and inclusive workspace. We will maintain our disciplined use of capital to fund inorganic opportunities to build scale or acquire new capabilities. This strategy is underpinned by digital innovation and sustainability. I will provide more details later. Over the next few slides, I will talk about our 2020 priorities and actions. In response to the emergence of COVID, we quickly pivoted to focus on the 4 key priorities listed on the slide. First, on health and safety, we were able to move quickly to safeguard our employees and their families. We moved quickly to procure PPE for all our facilities worldwide. We implemented protocols to ensure social distancing and enhanced hygiene and sanitation. We invested in new touchless technologies to keep our employees safe at work and provided enhanced medical care to the affected individuals. Our actions were designed to keep the employees safe, to protect jobs and to ensure Coats will emerge from this pandemic strong. I am proud of all our employees who faced adversity with humility, determination and never-give-up mindset. The strength and spirit of our global teams was on display during the pandemic. The second of our priorities was cash management. And Jackie will talk about it a bit later. I would like to focus next on the third and fourth of our priorities, which is our customers and our supply chain. We have always put our customers at the heart of our approach. Our long-standing and deep customer relationships with brands and vendors and the peace of mind we deliver as a supplier became even more important in 2020. Speed, flexibility, reliability and quality all remained really important. Because of our global scale, we were able to flex our supply chain, leverage our digital tools and our in-country teams to be very responsive to customers. We kept our labor force in place and used the downtime to up-skill employees. We also ensured optimum inventory in our factory, so we could respond at short notice. In the midst of uncertainty, customers prefer to work with companies that give them optionality. Last year, our approach to support customers in tough times has further strengthened our relationships with these customers. We had 2,700 customer engagements and over 400 technical webinars to help them troubleshoot and optimize their manufacturing lines. We continue to launch new products and to accelerate our shift to recycled products. Our deep customer relationships, global capability, ESG focus and a track record of delivery stand us in good stead as the recovery continues. We could not have delivered product to our customers without close collaboration and support from our suppliers. In Q2, we had to ramp down supply in an orderly fashion and then gradually ramp-up in Q3 as volumes started to come back. We also pushed the development of more local and regional suppliers to improve supply chain resilience. We identified more recycling material suppliers to support our rapid growth in sustainable trends. We did cancel a few orders in very exceptional circumstances and did so in a coordinated manner with the supplier. We have also paid our suppliers in time. And when demand started to recover, we made sure to forward plan alongside them to reduce any supply chain issues. These entrenched relationships are very important to us. We treat our suppliers fairly and our strong supplier relationships placed us well to succeed together as the recovery continues. I will now move on to talk a bit about our operations. Apart from Q2, when 50% of our global capacity was shut down due to government-mandated national lockdowns, we managed to keep our service levels encouragingly high for the year. In March, we took a decision to keep all our labor force and managers in place during the pandemic. This was the right decision. Having a motivated workforce available and inventory at each factory made it possible to respond to customer needs quickly and win incremental business. During H2, we ramped up production in line with demand. We delivered $16 million of savings from our self-help programs in manufacturing, productivity and procurement savings. These self-help programs are critical to offset inflationary pressures. Now I will talk about our 3 strategic pillars of digital, innovation and sustainability and how they are critical to our sales and margin growth. COVID highlighted even more strongly the critical need for digital adoption in our industry. We have benefited from being ahead of the curve in this space as a result of all our previous investments and the fact that we have cloud technology and modern workspace infrastructure in place. Cloud gave us the ability to have 4,000 staff work from home and be very effective. We have several customer-facing tools, such as sampling and online ordering, that allowed us to stay connected with customers. Our globally integrated ERP system allowed us to flex the supply chain in a volatile and uncertain environment. I am so proud of our technology teams that remotely installed SAP at our 2 U.S. acquisitions. As part of our factory of the future road map, we complemented our factory camera network with a software that leverages artificial intelligence and machine learning to keep employees safe and socially distant. In 2020, we continued our investment in factory automation with a state-of-the-art pilot in one of our facilities in China, which we expect to complete by June this year. Our 3 innovation hubs are delivering innovative new solutions for our customers. Last year, we launched 22 new products. Our group Vitality Index was 11%, which means that last year, $128 million of sales came from products that were launched in the past 5 years. These are all exciting new areas for Coats, which are picking up real momentum. Now we are going to show you a short video to give you a bit more insight into what goes on in one of our innovation hubs in the U.S. [Presentation]

A key part of our company purpose is to make a better and more sustainable world. We have previously laid out an ambitious set of sustainability targets. And despite some obvious disruption from COVID, we made good progress on these targets during 2020. Demand for our EcoVerde range of 100% recycled threads continue to increase at pace and revenues were up 600% to $37 million. We have also now demonstrated our sustainability ambitions even further by committing to set science-based targets related to emissions reduction across our supply chain. These are consistent with keeping global warming to 1.5 degrees above pre-industrial levels. We have also committed to developing a long-term target to reach net zero emissions by 2050. And this is the highest level of our ambition on climate under the Science Based Targets initiative. During 2021, we will be developing our targets and plans to achieve this and submitting them for external approval. These will cover Scope 1, 2 and 3 emissions. And it is worth noting that there is a lot of consistency with our existing targets. For example, moving from virgin to recycled polyester reduces the Scope 3 emissions in our raw materials by up to 40%. Making commitments like this to address our emissions builds on a sustainability strategy and demonstrates our resolve to be a role model for change in the area of climate change, alongside the broader sustainability agenda. For example, our continued commitment to upgrading our effluent treatment plants means that 74% of our effluent is now compliant with the zero discharge of hazardous chemicals standards, both for effluent and sludge, which was up from 34% in 2019. We still have a lot to do to achieve our ambitious targets, but we remain committed and focused on delivering our targets to the original deadlines. Lastly, I'd like to mention that today, we have published our third annual sustainability report. It is available on our website. And if you would like to arrange a follow-up meeting about this, then please contact Victoria. Moving on to talk about our markets in 2020 and our performance. Last year, Apparel & Footwear global retail sales were down 20%. There was variation across geographies with U.S. down 23% and the EU down 19%. China controlled the wires relatively quickly. And as a result, it was down 10% for the full year. Industry inventories came down in the second half as brands and retailers were successful in selling existing merchandise while taking a cautious approach to forward orders. The most successful companies were able to pivot quickly to higher online sales and consumer shifts to more casualization. In 2020, industrial online sales rose from 21% to over 28%. 2020 accelerated many existing trends in the industry and also led to a sharper gap between winners and losers. The sharp shift in consumer habits drove relative success in athleisure, comfort wear, tops, sports footwear and mass market value retailers. Segments that were less successful included formal wear, smart workwear, denim wear and accessories like handbags and luggage. High street players and departmental stores were hard hit with multiple bankruptcies during the year. In terms of our performance, Apparel & Footwear sales were down 21% for the full year. From the lows in quarter 2, when we were hit by national lockdowns, we saw an improving trend in quarter 3 and quarter 4. Our global footprint and swift ramp-up of factories in the second half enabled an improving sales trend. Our internal analysis shows that we gained market share in 2020. This was enabled by our strong position in winning segments, like athleisure, sportswear and footwear. We were able to defend our price in a very difficult market due to the overall value and peace of mind we provide for our customers. We have made good progress in the China domestic market, where sales held up relatively well. Our customers engaged greater intensity on the topics of sustainability and innovation. In 2020, the industry has gone past the tipping point, where sustainability is now a must-have for any serious industry player. We work closely with our customers in areas such as chemicals, energy, waste, circularity and recycled products. In a crisis, customers want to know that suppliers are standing by them. The technical services team delivered 2,700 technical customer support engagements to help our customers troubleshoot and optimize their manufacturing lines. They also trained over 24,000 people in key aspects of sewing, seams and product quality. We believe that these investments are paying off in terms of stronger customer relationships and demand creation as we win the recovery. And now let me turn to Performance Materials. And I will first provide a high-level view of the 5 sectors served by our Performance Materials business. Our Personal Protection market was impacted by a reduction in industrial activity in oil and gas and transportation. In addition, military spending on apparel in the U.S. was reduced to fund health care spend. We see the firefighter/PPE segment being relatively more resilient. Energy markets were down due to lower oil demand. Oil rig activity was down 41%, and investment in drilling was down 30%. These are expected to pick up as oil demand and prices go up. Telecoms was hit in the first half as lockdowns stopped the rollout of fiber optic networks and prevented new home connections. We saw this rebound significantly in H2. And the market expectation is for growth to hit high single digits for the next several years. Transportation was hit most by the lockdowns across the Americas and Europe in the second quarter. The opening of economies in the second half saw pent-up demand come through. Full year sales of new cars were down 14% with Western Europe down 24% and China down only 4%. Household and Recreation saw demand rise as most people worked from home and consumed more home products. However, supply was unable to fully match demand due to lockdowns and disruption in trade. In terms of our performance, organic sales were down 14%. Total sales, including the Pharr acquisition, resulted in a 7% growth. Organic PM sales saw an improving trend through the year and were 2% down in the last 2 months of the year. Our Personal Protection sales were impacted by the external market conditions I had mentioned earlier. Recovery in this sector has been relatively slower during the year. This segment is a naturally volatile component of the business due to its end users, but it remains a structural medium-term growth driver, underpinned by attractive industry fundamentals, such as legislation in Western markets and best practice to improve worker safety across the world. Telecom and Energy sales were up 7% in Q4, driven by increasing need for digital connectivity across the world. We expect 5G rollout and more optical fiber to homes to drive medium-term growth in this sector. In Energy, on an encouraging note, testing on our steel replacement composite pipe products continued at a number of our customers. Our Transportation sales grew in H2 with Q4 growing 22%, thanks to restocking in the supply chain and key customer wins in Europe and China. Household and Recreation sales bounced back to growth in the second half, thanks to increased spending on home improvement and outdoor goods. I am shortly going to hand over to Jackie Callaway, our CFO designate, who takes over from Simon Boddie on 31st of March. Firstly though, I'd like to take this opportunity to thank Simon Boddie, our outgoing CFO, who is leaving at the end of the month. He's been with Coats for 5 years and has made an excellent contribution to the company. He has strengthened the finance function, successfully delivered a group refinancing package and improved our outsourcing effectiveness. He's also guided the development of our M&A capability, resulting in a series of quality bolt-on acquisitions, all while maintaining a strong balance sheet. It has been a pleasure and privilege working with Simon. The entire Coats team wishes him well for the future. With that, I request Jackie to talk us through the numbers.

Thank you, Rajiv, and hello to everyone on the call today. I'm delighted to be presenting my first set of results for Coats, and I will start by taking you through the key financial highlights for 2020. Whilst COVID had a profound impact, particularly in the first half of the year, we've seen a strong recovery in the second half with improving sales momentum, particularly in the last 2 months of the year and most recently in the first 2 months of 2021. I've been extremely impressed with the way that the Coats team managed its response to COVID, underpinning the performance of the business and putting us on a strong financial footing going forward. Our adjusted operating profit at $111 million was ahead of expectations. And our cash generation was very solid, resulting in robust free cash flow. We ended the year with a strong balance sheet and leverage of 1.2x, well within our stated policy of between 1 and 2x. This leaves us in a comfortable position on our banking covenants and with significant committed facility headroom. This will allow us to take advantage of the recovery with optionality to make investments in both organic and inorganic growth. Finally, as Rajiv has mentioned earlier, I'm pleased to note that the Board has proposed a final dividend of $0.013 per share. Slide 23 sets out the financial summary and our key financial metrics, which clearly were all impacted quite significantly by COVID. Let's now take a deep dive on these financial metrics, starting with revenues. Overall, the decline in group revenues on a constant currency basis was 14%. This consisted of a reduction in group revenues on an organic basis of 19%, offset by the acquisition of Pharr High Performance Yarns, which was completed in February 2020 and contributed 5%. There was also a small foreign exchange translation headwind of 2%, primarily related to the Brazilian real and the Turkish lira. And this meant that overall reported revenues decreased by 16%. Rajiv has already taken you through the revenue performance of both the Apparel & Footwear and Performance Materials segments. So I don't plan to go into any further detail. But note that we've included some information on the improving sales momentum and exit rates for both of these segments on Slide 38 of the appendix. Group operating profits were down 43% on a constant currency basis to $111 million. And despite the significant COVID impact on volumes, our margins remained healthy at 9.5% due to the rapid cost mitigations we undertook. I will cover the key profit lever movements in more detail shortly. Finally, on this slide, EPS and free cash flow was both also well down year-on-year due to the COVID impact on operations and the impact this had on our tax rate. I will give you more details on this later. Now moving on to operating profits. And on the next slide, we provide an overview of the movement in our group operating profits and margins during the year. As I said, our operating profits were significantly impacted by COVID as negative volume leverage impacted operating margins adversely. However, this impact was partially mitigated by the proactive and strong management actions taken across our cost base, which meant flexing our manufacturing footprint by managing the number of shifts and working hours as well as reducing our SG&A costs. We experienced negative mix in the period, in particular in our Performance Materials segment, alongside broadly neutral pricing despite raw material deflationary benefits from lower oil prices. Other structural inflationary pressures continued, for example, wages and energy, which were again more than offset by productivity benefits across both manufacturing and sourcing. The SG&A cost base was reduced by minimizing discretionary spend, for example, travel, staff bonuses, long-term incentive plans and consulting costs, along with lower variable cost of selling. It should be noted that we expect majority of these savings to reverse in 2021. The above impacts, predominantly the negative volume impact, severely impacted operating margins in the period, which were down 420 basis points on an organic basis to 10.2% and 490 basis points down to 9.5% when including the anticipated dilutive effect of the Pharr HP acquisition. Let's now look at the segmental margins on Slide 25. Both segments were impacted by COVID-19 due to the significant volume decline, particularly in the first half due to global lockdowns and the large-scale cancellations of orders. Apparel & Footwear margins were less impacted in the year despite higher volume declines due to the relative larger scale of the Apparel & Footwear business and the ability to greater flex the manufacturing footprints of these sites to limit the downside volume impacts. This led to significant margin normalization within Apparel & Footwear in the second half to 15.2%, although it should be noted that this includes some benefit from nonrecurring items in relation to the discretionary cost-saving actions I mentioned on the last slide. Performance Materials organic margins were down 700 basis points to 5.8%. And they were impacted by significant volume declines from COVID-19, some negative customer and product mix, labor availability issues in the U.S. that started to impact us later in the second half and the relatively lower scale of the business compared to Apparel & Footwear. While some recovery in 2021 is expected, margins will continue to be impacted by the relatively lower scale compared to Apparel & Footwear, industry labor availability issues in the U.S. and the Pharr HP margin dilution. Improving margins in the medium term will be underpinned by the ongoing attractive growth fundamentals, particularly in the Personal Protection space, despite some recent softness seen in 2020. In addition, we will be looking to drive higher gross margins and our new product launches as well as the creation of a one-yarn business in the U.S., which essentially means operating our various acquired yard entities as one larger-scale single business. As a result of these factors, it is anticipated that 2021 operating margins in Performance Materials will recover to the mid- to high single-digit range. And over the medium term, margins will trend towards group levels. On Slide 26, we show the bottom half of the profit and loss account. And there are 3 items I'd like to highlight to you. Firstly, exceptional and acquisition items relate predominantly to the $5 million noncash impairment charge booked in the first half of the year and related to some of our smaller European markets. This performance outlook has been adversely impacted by the COVID situation. Net finance costs at $24 million were lower than 2019, primarily as a result of reduction in interest on bank borrowings due to lower interest rates and lower corporate facility utilization. And lastly, on tax. The underlying effective tax rate on pretax profit was 39%. This increase has been driven by the significant impact of COVID-19, including withholding taxes that were still incurred at broadly historic levels as the payments of these amounts are not always directly linked to the lower level of operating profits. In addition, it was driven by unrecognized deferred tax assets in certain loss-making jurisdictions. In 2021, at the current rate of anticipated normalization of profit mix, we would anticipate a full year effective tax rate in the range of 32% to 34%. Moving now to Slide 27. As I previously mentioned, I've been extremely impressed with the way the Coats team managed its response to COVID, and in particular the group's relentless focus on cash during 2020. The group focused on very tight control of net working capital. And this included leveraging data science to manage credit risk, reducing stocks and aligning payment terms and closely managing bad debts and collections. Our capital expenditure was managed with discipline. We halted our short-term volume-driven growth CapEx and focused on critical spend, including health and safety, innovation, compliance and sustainability. We also took other cost actions, including deferring our pension payments, reducing discretionary spend and temporarily suspending dividends. As I mentioned earlier, due to the success of our underpinning actions last year, we have today announced our return to paying a dividend. And we have also recommenced our regular pension payments from January with the catch-up of the deferred 2020 pension payments starting in the middle of this year. Our laser focus on cash in 2020 gave rise to many learnings, which we are now embedding into business as usual in 2021. We ended the year with a robust cash performance, as you can see on Slide 28. At an adjusted free cash flow level, we delivered $28 million compared to $107 million last year. This was despite an $88 million reduction in EBITDA for the period. Our net working capital remained well controlled but higher than 2019 as we invested in net working capital to support the COVID-19 recovery. As I previously mentioned, we also underpinned cash flows by focusing capital expenditure on critical spend. Tax paid was $46 million and in line with 2019 due to prior year tax settlements and timing of payments offsetting the benefit of the lower P&L tax charge. Our closing net debt of $181 million, excluding leases, was higher than the same point in 2019 despite COVID and the acquisition proceeds paid for Pharr of $37 million. This level of net debt equates to leverage of 1.2x, which is comfortably within our stated target range of between 1 and 2x. At December 31, 2020, we had committed facility headroom of $330 million. As with previous years, we have provided some modeling guidance for 2021, which is set out on Slide 29. I'm not planning to go through this in detail, but we'll be very happy to arrange follow-up calls if you have any questions. Let me finish by saying that joining Coats during the pandemic was always going to be challenging. But Rajiv, Simon and the Coats team have been extremely welcoming and the onboarding process and handover, very professional and thorough. I'd conclude by reiterating the strong performance of the group in 2020 and the strength of the business and balance sheet as we have entered 2021. And now I'd like to hand back to Rajiv.

Thanks, Jackie. Now before we open up to Q&A, I'm going to talk a bit about how we are seeing 2021 and beyond. COVID has accelerated several trends in the Apparel & Footwear industry. Let me highlight six which we think will make a difference in the future. One, retail transformation with increase in online sales; two, casualization of clothing to accommodate work from home and lifestyle changes; three, sustainability is far more important to consumers and the industry today; four, supply chain resilience is critical, this is resulting in more local and regional capability build-out; five, consolidation in the industry; and six, supply chain digitization. While there is limited impact on the overall thread market, we see these trends playing to our strength in our strategy of investing in innovation, digital and sustainability. In Performance Materials, COVID has accelerated trends we were already seeing in the end markets served by our business. Let me highlight six that are mostly interdependent. One, advanced composites are starting to replace steel and other heavy metals. Two, lightweighting will increase in most aspects of life, such as cars, planes, clothing and shoes. Three, safety at work is now being augmented with comfort at work. Four, lower unit costs and lower cost of ownership are ever more important. Five, safety at work now requires protection from multiple hazards. And six, consumers are demanding that industrial products are sustainable, too. All these trends require products that have more safety, higher performance and more sustainability. Our innovation hubs and expertise in materials, manufacturing and chemistry position us well to deliver growth in a post-COVID world. This slide has our 2021 outlook statement. Throughout 2020, the group moved quickly and prudently to put in place measures to underpin our future success. And through 2021, we will continue to invest in order to win the COVID recovery. We have a strong balance sheet, which provides strategic optionality and positions us well to navigate through the ongoing challenging environment. We remain cautious around the recovery profile of our various global end markets and we'll be vigilant regarding inflationary pressures within the supply chain. Notwithstanding this uncertainty, we are encouraged by our improved trading performance towards the end of last year as well as in the first 2 months of this year. And the Board expects to see continued recovery through 2021. Thank you very much for your time, everybody, and I will now hand back to Victoria.

Thank you, Rajiv. We now have some time for Q&A. And the Q&A session will begin shortly. [Operator Instructions]

[Operator Instructions] Our first question comes from Charles Hall of Peel Hunt.

Can I just ask about pricing? You obviously did a great job in taking price or maximizing price last year despite a very sharp volume shortfall. But going into this year, you've got a few material increases and freight cost increases as well as this abnormal inflation. How do you see pricing going through this year? Because obviously, it takes a bit of time to recover some of that price.

Okay, Charles. Thank you for your question here. So last year, we were very successful in defending prices. So while there was raw material deflation last year, we actually did -- we defended prices very well. This year, when we get into an inflationary environment as far as raw materials are concerned, we have started working on price. We have been discussing with customers. And like most of the years in the past, we hope to recover most of the raw material inflation coming from price. Well, what we are seeing this year, Charles, is a new sort of headwind here, and that's freight. You must be aware that, that's sort of globally, there are sort of big issues as far as freight is concerned, both in terms of cost and also in terms of service. And that's sort of impacting multiple industries across the world here. So we are looking at multiple tactics and strategies on how to recover the freight costs sort of across the world. And then apart from that, we have always had known raw material inflationary pressures across Coats. And that could be labor cost, it could be energy, it could be water, et cetera. Those typically are offset by our internal self-help programs, which are sort of manufacturing productivity, sourcing savings, et cetera. So broadly, I would say, in terms of inflation as a general topic here, we hope to recover pretty much sort of the known raw material inflation and the raw material inflation through our internal price and productivity programs. On the freight side, we're still working through it. And we should be in a better position by the time we get to the May update to be able to inform you how we're offsetting the freight costs.

Understood. Are you seeing this as particularly elevated in the short term? Or is this a new normal?

So the freight issue actually started in quarter 4 last year. And it has continued to be so elevated during the first 2 months of this year. I think this is going to be an issue which will probably last at least for the first half of this year and then gradually start to sort of reduce in the second half. And what's really happening, Charles, is because of COVID last year, 40% of the world's containers are in the wrong place right now. The number of ships that are used to sort of take these containers has actually reduced by 20% because of COVID. And then when you look at the ports across the world, because of COVID, most of the ports are running out on kind of reduced shifts. So when you add these 3 things together, there is less containers, less ships and there are less ships at ports, it is taking a bit longer for a product to get from country A to country B. And clearly, the cost has gone up also in these containers. So I think it's going to be here the first half and then gradually start to wind down in the second half.

Great. And if I can ask one more question, in terms of the pipeline, you talked about it being rich. Could you just sort of expand a bit on what you mean by a rich pipeline?

Are you talking about M&A or something else, Charles?

Sorry, did you hear me?

Charles, yes. Are you referring to the M&A pipeline or some other pipeline?

The pipeline of new products.

New products, okay. So last year, we launched 22 new products. We expect to be doing the same this year. And over time, I see these sort of products increasing our margins going forward and also the scale. So previously, if I look back maybe like 3, 4 years back, we would launch products, but then the impact of the sales line and the margin line would be quite minimum. What we have seen since the arrival of the innovation hubs and us investing some serious money as far as talent is concerned for the innovation activities, we are seeing that the margins are getting bigger. The sales impact is getting bigger. And essentially, the ideas are getting bigger. So I'm quite excited about the whole innovation space here. And this is a big driver as far as I'm concerned to see growth in PM and A&F and also see the margins go up in the medium term.

Our next question comes from Maggie Schooley of Stifel.

I just had a question that piqued my interest in the release on the pilot automation work that you're doing at a factory in China. I was wondering if you could -- I know you said you'll get more results by June of 2021. But I was wondering if you could tell us a little bit more about that and the expectation and what you hope to find. And then the second question was within your CapEx, you're marking, I think, $7 million towards projects in Asia. And I was wondering if you could expand a little bit on what those were as well.

Yes, sure. So let me talk about the automation project. So this is part of our factory of the future program. This is actually an automation that's happening in the final stages of our manufacturing and shipment. So it's sort of involves pick, pack, label and actually shipping the product to the customer. This part of the activity actually involves a lot of labor. So part of the automation is to make sure that we are able to improve the labor productivity, where we are able to increase speeds. And essentially, what we have been seeing over the last few years is that the order profile is getting very, very extremely complex. And so if you're able to automate and apply technology in the last part of the manufacturing process, your ability to serve customers actually improves sort of tremendously. So that's what we are focused on at this stage. It will involve labor productivity. It will all speed and customer service. With respect to the other sort of strategic projects here, we have been working pretty hard over the last few years trying to get bigger in the domestic markets in sort of the big Asian geographies. Now we have a pretty big presence in the India domestic market. But we do have a modest presence in Southeast Asia and Northeast Asia. And this project is geared towards improving our sales sort of impact and to serve customers in the Northeast Asian sort of geography there. So it's basically to rebalance. If you look at our overall profile globally across the world, 80% of what we make gets sort of consumed in U.S. and Europe and the balance, 20%, is kind of domestic markets in India, China, Brazil, Philippines, Indonesia, et cetera. So we are trying to find a way where we can rebalance and maybe start to get a little bit more sales and profits coming from some of these emerging markets.

Our next question comes from Charles Mortimer of Citigroup.

The question, I think Charles almost asked, but on the -- talk about the pipeline of opportunities in the inorganic space. You spoke last year, I think, a bit about one potential A&F, a bigger one in A&F or others in Performance Materials. Where is the focus in the inorganic front? What's the state of the pipeline?

Repeat your question, it's sort of broken at my end here.

Sorry, okay. So just a question, I mean, broad question is on state of the inorganic, the acquisition pipeline. Yes.

Okay. Yes, brilliant. Okay. So I think a couple of things here. One is that the acquisition pipeline is quite active and robust. So we're pretty happy with sort of the ideas that are coming up. As sort of stated in the past, we will move forward on acquisitions when it makes sense, when it's in line with strategy and we're able to sort of deliver shareholder value and customer value from these acquisitions. Just as a reference point, yes, so last year, during the midst of COVID, a lot of the deals that were on the table actually were put on hold because of COVID. We expect some of these deals to resurface again sometime this year. I do expect that 2021 and 2022, we'll see more activity in the M&A space. And just as a reference point, during in the last 2 months of this year, we have walked away from 4 deals. So ideas that sort of came our way, but we've rejected them because they could be not in line with strategy, they could not be much a differentiation in the products or there's not enough of margin uplift. So we sort of keep on looking at ideas. We keep on looking at sort of the proposals from various sort of sources here. Our focus continues to be the same, Charlie. It is focused on the Performance Materials space. It is focused on Coats Digital. And within the core Apparel & Footwear business, if we do find opportunities, we would be -- that will sort of add substantial sort of margin uplift, we'd be happy to look at that.

[Operator Instructions] Our next question comes from James Zaremba of Barclays.

I've got a few questions, re your revenue from new product launches. I guess, I'm just trying to reconcile the $128 million of revenue, I guess, some products launched over the last 5 years over, I suppose, the $13 million and $16 million you disclosed for, I guess, products launched this year and last year. How did new product revenues kind of trend in those kind of years 2, 3, 4 and 5? And then also, I mean, how -- in terms of your comments of now contributing a lot more to the top line and margin, how do we sort of think about that $130 million in terms of growth versus substitution of existing products? And also again, how does it sort of split between the PM and A&F divisions?

Right. Okay. So if you look at the Vitality Index of the group as a whole and kind of Vitality Index is defined as a percentage of sales from new products launched in the past 5 years, so if you look at the Vitality index of Coats Group, we were at about 11% last year. And how that breaks up between Apparel & Footwear and the Performance Material business is PM is about 19%, Apparel & Footwear is about sort of just above 4%. So there's a pretty heavy kind of bias on the PM as far as historical innovation is concerned. But we are starting to see how we can rebalance in the Apparel & Footwear space. And going forward, I would -- if I were to just give you a broad sense of the direction here, a few years from now, we should have a Vitality Index that starts with sort of the number 2. So rather than it being in the teens, it will probably be in the 20s. And it will be more evenly balanced between PM and A&F.

And then I guess just, I suppose, how we get from the, let's say, the low-teens numbers per year to, I guess, $130 million over 5 years, is that, let's say, a product launch 5 years ago with $10 million, are those now contributing kind of $40 million this year? Is that sort of how we think about the progression or...

Well, it sort of kind of varies by segment here. But broadly, I would say that if a product had $1 of sales in the first year, you're looking at, at least the top products delivering something like $10 or $12 in year 5.

Okay, very well, so quite a raise.

Yes, it is. It is quite sharply then.

Yes. And then I guess, just on the Performance Materials, I suppose with that kind of potential acceleration in mind, I suppose you previously talked about targeting mid- to high single digits for this business, I guess, over the medium term. Is that sort of the rough ballpark of what we should be thinking about?

Yes, it is. I mean if you look at the Performance Materials, most of the innovation is going to come in the composite space. We're really focused on composites, so we're looking at Telecom. Personal Protection again is an area where we are looking to innovate to help sort of improve margins in the medium term.

We have no further questions via the phone lines. We've now received a question from Joe Spooner of HSBC.

Obviously, retail was pretty disrupted last year, and you've obviously made some market share gains. I'm just wondering, how do you see the ultimate end market kind of developing from here? Is there some permanent scarring? Do you end up winning market share into an ultimately smaller market? And then just secondly, I think you also noted in the presentation some availability issues on labor in the U.S. Can you just talk about what those were?

Yes, absolutely. So let me take your first question. So kind of going back to March -- March and April last year, the estimate at that time was that the retail sales across the world would be down about 30% this year. What has happened in the second half is that brands and retailers have been very successful in actually selling the merchandise that they had. And there were many, many brands that actually shifted to more online presence. And that really helped in kind of essentially mitigating the damage. So instead of a minus 30% in April, it ended up as minus 20% for the full year, which was -- which was very pleasing. And also, when you go back to March and April, there were questions around stranded inventories that will have an effect this year, et cetera. And the good news is a lot of the inventory has been liquidated last year. So we don't have an overhang coming into this year as far as existing inventory is concerned. With respect to some of the learnings from last year, I think there are 3 things that I would say. The first one is that brand matters. The companies that had a strong brand, whether a company brand or a product brand, did better than the companies that did not have a strong brand. Second thing is an online presence mattered. Companies that had an online presence did better than companies that did not have an online presence. And the third thing is in ESG. ESG has really gone up the important scale in the industry. And companies that had a credible record in terms of ESG did better than companies that did not have a credible record. I think the other 2 things to say about last year is coming out of COVID, I don't see any massive structural impact as far as the industry is concerned or the overall thread market is concerned. So that's sort of the good news here. The second point I'd like to make is that the trends that I spoke about in the presentation, these are all trends that we have started to see a few years back. So COVID has accelerated existing trends, it's not created anything new. So we were already working on most of them in the past few years, and I think it's just increased the speed. So that's as far as the retail side is concerned. When you look at the overall markets here, the worst impacted was actually Latin America. It was down about 38%. And the least impacted market last year was China, which was down only 10%. Then between U.S. and Europe, it was about minus 20%, minus 21%. So it's been sort of widespread in terms of the retail impact, but we are starting to see a recovery happening. Could you maybe just repeat your second question? I missed that one.

The second question was on, in the presentation, you spoke about some issues around labor availability in the United States. I think it was with reference to the Performance Materials business. I just wondered what those issues were and if those are resolved.

Yes. So I think it's sort of 2 things here. One is that finding labor was extremely challenging last year, I think because of all the government subsidies that were being provided by the federal and the state government. So I think for at least a few months, people found it more profitable and better to actually stay at home than come to work. And then once the subsidy started to wind down, it's not fully sort of winded down yet, we have started to see people come back to work. I must also say that there was a lot of genuine fear about the COVID. And there were a lot of employees that just felt safer at home. And we left that choice to the employees. It's a personal decision at the end of the day. And so I think there were 2 things there. One is finding the labor. And when you find the labor, getting them to be productive took time. So I think the combination of these 2 things really meant that a lot of our shifts were running at between 60% and 80% capacity in terms of labor.

We have no further questions registered, so I'll hand back.

Okay. Thank you very much, and look forward to meeting all of you during the next week or 10 days. Thank you. Good day, everyone.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.