Coats Group plc (COA) Earnings Call Transcript & Summary

Good afternoon, and welcome to Coats Group plc's presentation relating to the Rhenoflex acquisition. Jackie and I are delighted to talk about the second acquisition in the attractive footwear component space. The combination of Coats footwear, Texon and now Rhenoflex will create a world-class footwear platform. Coats is already the world leader in footwear threads and now with the Texon and Rhenoflex acquisitions, will become the world leader in footwear structural components. Slide 2. Let me start with a few highlights about Rhenoflex. This is a synergistic bolt-on acquisition that strengthens the Coats position as a global leader in the footwear structural component market. This transaction builds on our recent Texon acquisition and further cements our move into the footwear component space adding capability, complementary products, enhanced scale and an opportunity to create value through synergies. A few key points to mention regarding this transaction are: it consolidates our move into the highly attractive and fast-growing athleisure and sports footwear market; it further strengthens the business credentials in sustainability and innovation. We expect annual cost synergies of $6 million that are in addition to the $5 million of synergies already announced with the Texon acquisition. The purchase price is at an enterprise value of EUR 115 million or USD 117 million. On an LTM June 2022 basis, this represents a multiple of 9.3x EBITDA before synergies and a multiple of 6.2x on a post-synergy basis. When you combine both Texon and Rhenoflex, the deal represents 7.8x EBITDA on a post-synergy basis. Consideration is to be funded via a 10% equity placing, and it's our intention to maintain leverage on the balance sheet within 1 to 2x, which is our target range. Page 3. Rhenoflex is a leader in performance-critical reinforcement solutions for the global footwear and lifestyle industries. The core product offering is footwear components that include heel counters, toe puffs, interlining, heel grips and eyelets. The business supplies into the athleisure and sports footwear segment. It also serves the lifestyle accessories segment with sustainable solutions such as recycled leather. Workwear and orthopedics are emerging segments. Rhenoflex is a supplier of choice for premium footwear brands such as Nike. It has manufacturing sites in China, Vietnam and Germany. Lastly, the business is a strong innovation partner with unique and sustainable production methods and has a proprietary zero waste production method called Rhenoprint, which is a true differentiator. Page 4. There is a compelling strategic rationale to acquire Rhenoflex. Coats has a strong and successful existing footwear and accessories business, which has been growing for the last decade. Texon and Rhenoflex each have circa 10% market share in footwear structural components, which jointly provides us with a circa 20% leading market share in a fragmented athleisure and sports footwear market. Acquisition of Texon and now Rhenoflex results in enhanced scale, reach and capability for structural components. Rhenoflex has complementary product offerings across footwear components and fashion accessories. This strengthens our credentials in sustainability as well as enhances innovation capabilities through the addition of Rhenoflex' in-house R&D team. The acquisition is underlined by compelling cost synergies, strong revenue growth rates and an attractive post-synergy transaction multiple, which Jackie and I will cover later. The acquisition of Texon and now Rhenoflex allows Coats to consolidate its position in the attractive premium athleisure and sports footwear market. This combination establishes a global footwear platform with enhanced scale and reach. We have been the leader in footwear threads for many, many decades, and now we can say that Coats will become the world leader in footwear structural components. The combination of Rhenoflex, Texon and Coats Footwear creates a business with sales of $425 million on a last 12-month basis to June 2022. Page 6. Rhenoflex is a highly complementary business to Texon and Coats across products, customers and markets. Both Texon and Rhenoflex offer multiple product categories beyond the core athleisure and sports such as orthopedic and work footwear. The products on the left-hand, right-hand side of the overlap section of the 2 circles serve as exciting additional commercial opportunities in the future. Rhenoflex has approximately 400 customers, which include leading footwear brands, and the customer mix is highly complementary to that of Texon. Rhenoflex' sustainable technologies and innovation -- innovative product lines such as Rhenoprint provide a unique and differentiated offering that will consolidate our position in the market. Page 7. Rhenoflex is an industry leader with a portfolio of innovative and sustainable offerings that enhance our proposition to customers. Some examples are the Rhenoprint Multizone, which is a proprietary zero waste production technology; product digitization through innovative manufacturing where integration of RFID chips happens with their structural components; vegan product lines made from eco-friendly vegan materials; leather waste recycling especially for the luxury brands in Europe. They also have circular production processes and extensively use environment-friendly recycled and renewable materials. Now with that, let me hand over to Jackie.

Thanks, Rajiv. And I'm on Slide 8 now. So the acquisition is highly synergistic and expected to generate annual cost synergies of $6 million, which will come through from the following areas: SG&A savings, efficiencies and procurement, and operational improvements. These synergies are expected to be realized by the first -- by the end of the first full year of ownership with one-off integration costs of $5 million. These are incremental to the stand-alone cost synergies of $5 million that are to be delivered from the acquisition of Texon. The combination of both of these businesses is therefore expected to deliver annual cost synergies of $11 million. We expect there to be further benefits from revenue synergies and other commercial opportunities that have not yet been quantified or factored into our business case. We intend to say more about our plans at our future Capital Markets Day, which we're scheduling in November. If we could move on to Slide 9. We've looked at both our footwear transactions as one strategic move, and this follow-on transaction is highly attractive -- has highly attractive financial terms for Coats and strengthens the commercial opportunity. Combined with Texon, this results in an attractive blended multiple of 7.8x on a post-synergy basis for the combined acquisitions of Texon and Rhenoflex. The combination of both businesses strengthens both our growth and margin outlook. We're expecting a plus 8% revenue CAGR over the next 5 years resulting from strong underlying market fundamentals and positioning with leading footwear brands. There is also a path to a greater than 20% EBITDA margin over the medium term. If we could move to the final slide, which is the key transaction terms. The financial effects of the deal are highly attractive to Coats. The headline enterprise value is EUR 115 million, $117 million, representing a multiple of 9.3x pre-synergies falling to 6.2x on a post-synergy basis. The acquisition will deliver high single-digit revenue growth with opportunities to accelerate growth as part of Coats, expected annual cost synergies of $6 million that are to be realized in the first full year of ownership with a $5 million one-off integration cost. The combination of both Texon and Rhenoflex is EPS accretive to Coats from year 1. And in terms of the overall structure, the acquisition will be funded through an equity placing of up to 10% of the company's issued share capital announced separately today. Our net leverage will remain well within our target range of between 1 and 2x, maintaining a robust balance sheet for strategic flexibility. The transaction is expected to close by the end of August, and we have a dedicated team to oversee the integration. And on that note, I'll hand back to the operator to manage the Q&A.

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

Well done. You've been very busy.

Thanks, Charles.

If I could ask a couple of questions. When you did the Texon acquisition, you described that as a very well-invested business with plenty of spare capacity. Is it a similar situation with this business? And how do you see bringing them together? And what would the combined business look like in terms of operations and management?

Excellent. Thank you very much, Charles. So in terms of Rhenoflex, it is quite well invested. We're very pleased with the current owner of Rhenoflex, the PE company called Findos. They have taken good care of the asset. It's got adequate capacity. Actually, they're just opening up a brand-new factory in China, and they seem to have enough capacity for the next few years in terms of growth expansions. The second part of your question, Charles, was around how do we bring these 2 together. The plans are as following. We will operate the Coats footwear business, Texon and Rhenoflex collectively as one business. All things going well, we will start probably reporting footwear as a separate division effective 1st of January 2023. The plan is to have a Capital Markets Day in November in London focused on the footwear business, where we'll -- you all will have a chance to see the products, listen to the story, meet the management team. It'll be an exciting day. So the plan is to bring the 3 businesses together. I don't have detailed operational plans yet. We will be working that jointly with both the companies over the next 5, 6 days, and we'll clearly have something to say in the Capital Markets Day in November. But it should be a really good story because our philosophy, Charles, is 1 plus 1 equals 3 here, and that's what we'll be trying to create.

And the EBITDA margin that you're targeting for Texon and Rhenoflex is over 20%, presumably that goes for the combined footwear business.

Yes, but it will also be individually for both these businesses. So currently, Texon is at 15% EBITDA margin. Rhenoflex is at 16%. Through growth, pricing and the cost synergies, I think we see a path to get them both individually to above 20%. And then clearly, collectively as probably the new division including Coats footwear, it should all be above 20%. Our current footwear business is at high margins. It's actually higher than both sort of Rhenoflex and Texon, so I think we are reasonably confident, in 3 years or less, all 3 parts should be around 20% EBITDA margin.