Coats Group plc (COA) Earnings Call Transcript & Summary

Thank you very much. It's really exciting to be here and it's so good to see a really large turnout, so thank you very much for that. Today is a special day. My name is Rajiv Sharma. I have the privilege of leading this extraordinary company. Today, we are excited to share with you the story of our new growth engine called Coats Footwear. Last year -- just as a data point, last year, the world produced about 16 billion pairs of shoes. And for us, the relevant number is 6 billion, because that's the premium and the performance end of the market. So when you hear the team later on in the presentations, we are referring to the 6 billion pairs of shoes here. I myself am wearing an OnRunning shoe, which is designed by Roger Federer. He's been wearing the shoes at Wimbledon. It's made from Coats' threads, and it also has Texon and Rhenoflex structural components. So this is a good example of how our 3 parts are coming in to make one. Let's talk about the agenda. In total, we have 7 sections taking just under 3 hours. The agenda includes presentations, product displays and question and answers. Section 1 is an overview of Coats and an introduction of the new footwear business unit. Sections 2, 3 and 4 cover why footwear is an attractive market for Coats, and what are we doing to create a new Footwear business. And more importantly, how are we going to create customer and shareholder value. Section 5 covers the financial aspects of the 2 acquisitions and a directional view of the divisional growth rates. These presentations should take about 60 minutes. This will be followed by a 30-minute Q&A. And the last part involves smaller groups going through specialist presentations with our experts at the 4 booths at the 4 corners of this room. Speakers today are Jackie Callaway, CFO; Adrian Elliott, President of Apparel & Footwear; and Frank Boettcher, Managing Director of Texon and Rhenoflex. We're also joined by the entire Footwear leadership team, and you'll have a chance to meet them as we go through the program. Before we get into the Footwear markets, I thought it's useful to talk about Coats Group. Coats is the world's largest producer of apparel thread, and now has become the world's largest producer of footwear components. We are proud to be world leaders in 2 areas. Sustainability is core to our strategy, and we are proud of our leading position in this area. Reputable external agencies regularly assess and score our performance in this area. On behalf of the entire Coats team, I'm thrilled to inform you that FTSE4Good places Coats in the 96th percentile of FTSE companies. Sustainalytics has Coats in the top 1% for textile companies, and MSCI has given us the A grade for the last 4 years. Coats has a decade-long track record of more than offsetting inflation through pricing and self-help actions. Our products are critical in manufacturing of garments and shoes, and usually cause the fraction of the total cost. We serve 34,000 customers in 100 countries and have a big presence in Asia, where most of the world's garments and shoes are manufactured. Our supply chains are underpinned by technology and have proven to be agile and resilient during the past 3 years. We are accelerating profitable sales growth and transforming the business to improve margins. So far this year, we have done the following. We have announced strategic projects that will deliver an incremental $50 million of EBIT in 2024. We have exited our loss-making businesses in Brazil and Argentina. We have successfully closed 2 footwear acquisitions and delivered a strong H1 result, which includes 19% sales growth and 35% EBIT growth. Sometimes, it's good to look back at the group and see where we've come from. This gives context to better understanding where we're going. In the last 10 years, we have transformed the group. It started with exiting our Consumer Crafts business, which had sales of roughly $500 million and low profits. This allowed us to focus on being a 100% industrial B2B business. Sales grew from $1.1 billion to $1.6 billion. We have diversified the portfolio beyond core apparel thread. Through a combination of organic growth and acquisitions, Performance Materials and Footwear each have now grown to account for 25% of the group. Apparel has grown too, but it now accounts for 50% of the group sales. By leveraging our core competency in manufacturing and materials, we have diversified into new end markets like telecom, oil and gas, automotive and personal protection. Diversification, specialization, scale, sustainability and innovation are key parts of our strategy. We are leaner, more efficient and more effective today. In short, we are doing more with less. All this gets reflected in the 500 basis points increase in EBIT margin. Coats already has a very successful threads -- footwear threads business. The acquisition of Texon and Rhenoflex are good strategic fits, adding further diversity by strengthening our position in the faster-growing footwear market. I am confident the post-synergy EBIT margin of the Footwear business will be more than 20%. On that note, let's start focusing on footwear. Since World Cup soccer is starting next month, let me start with an interesting data point here. In the last World Cup soccer, 88% of the players were wearing football shoes made with Coats' threads. Footwear retail sales are around $488 billion and growing between 7% and 8% in value and 4% in volume terms. We expect to grow around 8% by focusing on the higher growth categories of Sports and Athleisure. Following the 2 acquisitions, our addressable market goes up from $600 million to $1.8 billion, and this creates new opportunities for growth. The footwear component market is fragmented. Threads, structural components and insoles are all complementary products, and combined, we have a 23% market share. If you look at the Apparel Threads business, we also have about 23% market share in that sector. This is a good foundation to grow organically in the future. We have 3x more the addressable market and we are 3x bigger than the closest direct competitor. Texon, Rhenoflex and Coats all focus on the premium and performance end of the market. The growth strategy is underpinned by world-class service, innovation and sustainability. The product and customer portfolios are mostly complementary and give opportunities for cross-sell and upsell. Our team is confident of taking Footwear margins above 20% over the medium term through a combination of sales growth, synergies and better operational efficiency. I am delighted to announce that effective January 2023, we are creating a new business unit called Coats Footwear. This will sit alongside the Apparel business unit and the Performance Materials business unit. On this slide, I think it's important to just pencil down 4 numbers. 8% sales growth, $1.8 billion of addressable market, 23% market share and greater than 20% EBIT margin. So a very, very strong business to start with, and playing in a fundamentally growing market. Macro trends and market dynamics make Footwear an attractive market for Coats. Did you know that 88% of the world's shoes are made in Asia, and roughly 70% are made in 3 countries, which is China, Vietnam and Indonesia. Manufacturing shoes at scale is a very complex and very technical undertaking. Footwear components, including threads, are engineered products that need to meet very high performance and quality standards of the brands. Roughly 90% of all components are specified by the brands. Coats does well when products are specified based on quality, technical specifications, performance and on-the-ground technical help. Favorable macro trends are driving increasing demand for Athleisure and Performance footwear. If you notice in 2020 and 2021, during the COVID period, athleisure and sporting goods really held up very well during those difficult years. We do see that athleisure and sporting goods, over the medium term will continue to grow faster than the average footwear market growth here. Brands are looking to reduce number of suppliers to bring down cost and complexity. We have been in discussions with many brands over the past year, and clearly, the focus from their boards is how do you bring down the cost of managing the suppliers? It's not just a cost issue, it's also a compliance issue. And we are really thrilled with the acquisitions of Texon and Rhenoflex. When the announcements went out, the feedback from our customers was very, very positive, and they are really rooting for us to make it a grand success. Footwear is a large and growing market. As mentioned earlier, it's about $488 billion at retail prices and growing at 7% to 8% in value terms, at 4% in volume terms. Coats Footwear has focused on the performance and premium end of the market like Sports, Athleisure and Luxury. These segments have proven to be more resilient in the past 3 years and are expected to outperform the broader footwear market. As mentioned earlier, the total addressable market for threads is $0.6 billion. With the acquisition of Texon and Rhenoflex, we're adding $0.6 billion to structural components and another $0.6 billion for insoles, taking the total addressable market to $1.8 billion. All these components play a critical part in shoe performance, durability, comfort and feel. The Coats Footwear business is expected to grow at 8% CAGR over the medium term. There is no change to the apparel growth rates of 3% to 4% and the Performance Materials' growth rates of 6% to 9%. From a historical CAGR of 4% to 5% growth for the group, we now anticipate the sales CAGR to be higher at 6% over the medium term. We are combining 3 successful businesses to become the world's leading footwear component supplier, and in doing so, are creating a platform for growth and value creation. These 3 businesses share common attributes such as a focus on Premium and Performance brands, sustainability and innovation at the core, and manufacturing excellence and technical expertise. Each of these 3 businesses brings complementary products and capability, each adding to the other. Coats is an established global thread leader with decades experience, with the 300 footwear brands and roughly 2,600 footwear factories across the world. Texon is a market leader in structural components and has roughly 33% of its revenues coming from insoles. They also have an exciting innovation pipeline and a European distribution network that Coats can leverage. Rhenoflex is a structural component specialist with a proprietary Rhenoprint manufacturing process that delivers complex designs with 0 waste. Rhenoflex opens up access to new customers and luxury brands through the fast-growing lifestyle and accessories market. Apart from the terrific products, strong market positioning, deep industry expertise and world-class manufacturing, I am most excited about the talent that's coming along with the 2 acquisitions. You will have an opportunity to meet all of them in the next couple of hours. I am sanguine that Coats Footwear will grow faster than market, and I'm confident that we will take Footwear margins to above 20% in the medium term. Now with that, let me hand over to Adrian and Frank to present details on the market, product and value creation.

My name is Adrian Elliott. I have been the President of what we call our Apparel and Footwear segment since 2014, and I am very proud and delighted actually to be able to talk to you today about the new Footwear division that Rajiv has mentioned. So I'm with here with Frank. Frank will introduce himself a little bit later, but Frank is the Managing Director of Texon and Rhenoflex, the 2 businesses that we have acquired. Frank and I, over the next 35 minutes, we're going to take you through the market opportunity, the footwear opportunity, how we are creating that global champion that Rajiv just spoke about, and how we then deliver the value. Value for our customers, value for our investors, value for all of us. I guess in strategy terms, that's kind of where you play, how you play and how do you deliver value. That's what we're going to take you through. So let us start with footwear. Footwear is a dynamic -- it's large, dynamic and it's a financially attractive market. We characterize footwear with 3 things. It has very passionate consumers, has very strong brands and manufacturers, and it has some very healthy margin pools, and that's what we want to demonstrate to you today. So remember those 3 things: passionate consumers, strong brands and manufacturers, and the margin pools. Why are consumers so passionate? A few weeks ago, I had the opportunity to sit with an industry veteran who comes from one of the world's largest footwear brands, and he gave me some insights. I haven't really thought about it before. Footwear is an affordable item that allows us as individuals to express personality and to express who we are, or as he said, more likely who we think we are or who we'd like to be. This consumer psychology transcends cultures and nations and demographics. Adidas talks about clothing of the person or the consumer from the feet up. Nike, as you well know, started as a footwear company. Vans, $4.2 billion footwear company. There are other -- in case we think this is a bit of a crowded market, such as the attraction of the market, you'll now see people entering to down here on the bottom left. That is Lululemon going the other way. They're going from the body down. Why? Because of the attraction of the footwear market. You also see here another entrant in 2010, Rajiv is wearing some, OnRunning. Launched in 2010, sales last year of $700 million. Roger Federer took a shareholding in 2019. Again, it shows the attraction of the market and the ability of brands -- strong brands and manufacturers to exploit that consumer passion. It's also a market of iconic brands. The one in the middle is the Air Force 1. Hugely, hugely powerful brand. Tens of million pairs a year, again been around for a long time. You can also see on this slide, I hope you get the feel that goes -- footwear takes you from the field of sport to the street, to your place of work, hugely dynamic and attractive market. Not only is it footwear though, we also have in our Footwear division portfolio products that go into -- products with a very similar psychology and a very similar dynamics. So whether it be handbags or outdoor backpacks, or the return of travel and everybody buying suitcases, again very strong consumer passion. You'll see later on products that consumers pay over EUR 8,000 for. Hugely passionate consumers, and again, very strong brands, tremendous supply chains and those margin pools that are so important. Why is this important? Why is this important for us? Why is this important for us here? The more passionate your consumers, the powerful the brands and the manufacturers, the better volume, the more engineered product that you will get, more business for us. I think the key takeaway for me on this slide is this is an attractive market that plays to our strengths. Again, strategy talk, where do we play and how do we play, but getting the wear is really important. And this is a market that not only is attractive but plays to our strengths. Rajiv's already talked and have spoken about the growth, let's look at that one on the right-hand side. Countless surveys have shown that over 65% of consumers prefer to buy from purpose-driven brands who give great importance to sustainability. And I could assure you, we work with 300-plus brands in the footwear space. And I can assure you the vast majority are extremely serious about sustainability. They have their sustainability goals, their ESG, their SRI, their Higg's index, and they demand from their suppliers and their partners that we support them on their journeys. And as a partner and a supplier, that is extremely important. It plays to our strength, Rajiv's already spoken about the sustainability ratings of Coats, and you'll see later on with Frank. And this was one of the great attractions for us. Texon and Rhenoflex, absolutely the same. So you're playing in a fantastic market that plays to our strengths. On a similar theme, I think here, I'll just take a minute out to kind of give an idea how this industry works for a global champion component supplier. You'll hear a little bit more about this, and probably better than I will explain, on the booth afterwards. But essentially, this is a specification game at brand level and a conversion of that into sales, invoicing, collections, cash at manufacturing level. There are some brands that have their own manufacturing, and I was delighted to go into Ecco's new factory in Vietnam recently with tremendous [indiscernible] products, by the way. Beautiful factory, beautiful product factory they've built in Vietnam, but that's the exception. Nearly all of the brands outsource the manufacturing to very strong manufacturing groups. Maybe a little less known, I'm sure everybody has heard of Nike and Adidas and New Balance. But if you're looking at Pou Chen or Stella, Evervan, [indiscernible]. These guys, you see huge and impressive manufacturing partners. That's how it works. You take a specification, you get your component into the product and you deliver at the manufacturing. Again, that's why this market is so favorable to us. It plays to the global footprint, it plays to the specification game. And as I said before, the more engineered the product, the better for us. And you will see and you will feel out later how this market works to that, both in footwear and in other products. And it is clearly -- in Coats, we talk about win with the winners, okay, and this is clearly a winning category. We've got a few winning brands on the slide here. The slide is not big enough to get them all on, but this is a really, really attractive market. And again, why is that important? It means that we, with our market share and our position with these brands using our strengths, we are able to expand our market, expand our sales and our revenue and our margin opportunities. Rajiv spoke about this. You're taking a $600 million thread market, and we've basically tripled that addressable market opportunity through the acquisition of Texon and Rhenoflex. But even better than that or on top of that, the 2 acquisitions have opened up new avenues of growth. They've opened up new avenues of growth in terms of adjacencies. And you will see that, I think, over here when you go around the booth, some tremendous stuff. And you will see over here things like what you'll see the -- you'll see the luxury handbag market, but you also see things like our products, Vogue and Verde. Over here, you will see a product called Vertex. It also opens up the uppers market for us. Okay? Now over here, you're going to see with [ Paul ] a bit later on, on the booth #3, something called ProWeave, which was developed by Texon. ProWeave is very exciting. It's a -- it's a unique jacquard-weaving technology that allows -- it's almost reimagining fabrics for the uppers of footwear. It's really cool. One piece, delayering, multi-zone, multi-direction. [ Paul ] will tell you better than I. And the proof of the pudding isn't over there, you'll see that Umbro has just launched its Velocita Alchemist, I don't know who the branding manager is, but that's what it's called. You'll see it over there, it's called the Velocita Alchemist, and have a look. They've just launched that for the World Cup. It's the yellow boot over there. And when you're on the booth, please have a look at the back of it because you'll see that they've branded it ProWeave. They branded it ProWeave, in other words, taking our brands to consumers. So not only have we tripled the core market from $600 million to $1.8 million, but the acquisitions have opened up these new avenues of growth. Tremendously exciting. Right here, Rajiv is wearing his OnRunning shoes. Again, launched in 2010, 10% of the German running market, $700 million last year, millions of pairs a year. Other classic iconic brands here. I'm wearing my Dr. Martens, you can see here. 1461s, named such because they were launched in April 1960 with the high one. Again, classic models, Dr. Martens has gone from GBP 200 million, I think that was GBP 300 million in 2017, GBP 200 million before that, to nearly GBP 1 billion. And how they've done that, they've been really smart. They've taken the Dr. Martens, which you probably remember had a certain kind of history, and they've taken it to the female market, and they've absolutely driven passion through this brand. GBP 180, my shoes cost, by the way. The margin pools in footwear, pretty cool. Right. We also have Air Force 1s modeled by Frank here. Air Force 1's tremendous, tremendous iconic brand from Nike. And I bet you, nearly everybody in their house at one point or another has had some white Air Force 1s. Either you wear them, I don't know, or your children or somebody, everybody. And finally, we have the Adidas Samba. Adidas got 2 great iconic brands: Stan Smith, Adidas Samba. Adidas Samba was launched in 1949. Not launched as a football boot, it went from the field to the street to the film. I made a joke yesterday. I won't make it today. But it's gone from a soccer boot to a street fashion and it's gone into cultural icon. Again, millions of pairs a year. And the thing that all 4 of these pieces of footwear have got in common is that they all have product from Coats, from Texon and from Rhenoflex. So again, you win with the winners, and we are pretty good at this. And later on, as you go around the booth, you'll see how that process works and what that means in terms of stickiness and pricing power and all those good things. Right? So let's talk about that global footwear component champion, the thing that Rajiv talked about. Bringing together the 3 tremendous businesses, the Coats, Texon and the Rhenoflex. I'm going to start with the thread part, because I know an awful lot about thread. Not a usual boast you might hear, but that's true. Thread. I think the key thing here is last 12 months, June 2022, sales of over $205 million. That's 9,200 tonnes of thread, which apparently is 80% of the weight of the Eiffel Tower. That is a lot of thread. The important thing here is that makes us #1. It gives us the scale of market leadership, and what it means is Coats knows this industry. We know the brands, we know the people, we know the manufacturers, we know how to manage the networks. And it is upon that rock that we wish to build the global footwear champion, and we are doing that by adding Texon and Rhenoflex. And with that, let me hand over to you, Frank.

Thank you very much, Adrian. So because I'm new to the Coats family, I'd like to introduce myself a little more in detail. So my name is Frank Boettcher. I am more than 30 years in the business, 25 years of this in C-level functions. I started as a trainee for Marketing and Sales for a major chemical company and left the company as the CEO. After that, I was with the Green Dot system in Germany, and I was responsible for the implementation of plastics recycling, so I have a lot of experience about sustainability and the implementation of plastics recycling plants. And I was asked to join Rhenoflex in 2017, and I took over the transformation of this company from a local player to really a champion in this specific field. All -- during all my career, I have a lot of experience with transformation cases, restructuring cases, especially in the chemicals industry. I was responsible for all the M&A projects at the chemical company, and I have good experience for PMI projects. So we learned from Adrian about Coats, that they are the leading -- or we are the global leader for threads, and this is already for decades. We are combining now 2 leading players, Texon and Rhenoflex, and both companies have experience in the market for more than 70 years. So Texon is really an expert for insoles, reinforcements. Rhenoflex is an innovation pioneer for reinforcement solutions. The common strategy pillars for us are sustainability, innovation and global footprint for all the 3 companies, and that's not new for us. We take advantage from each other. So especially from Coats, they are already strong in the Vietnamese and Indonesian market. This is very important for this mid-cap companies, Rhenoflex and Texon, to grow in these regions in the future as well. So we are building the world's leading footwear component supplier, and we have 23% market share. The next follower is 6% to 7%. So the key message at this point is 3 leading companies, the footwear champions, size of the segment and economies of scale, and I come to this a little bit later. And I'd like to give you a feedback about my talks 2 months ago with Nike at the campus in Portland about the intention idea to create a footwear champion, and they want this. They want the consolidation in the market. The major brands want to have this fragmented supplier base consolidated. They really appreciate, they see us in a position to partner with them especially within the supply chain, but also in innovation and sustainability. So this footwear champion is more than the sum of its parts. Our combined product portfolio provides now highly attractive footwear components, which are complementary to each other. So we have products with a strong quality profile. The product portfolio from Texon and Rhenoflex overlaps only by 50%, so the major part of the combined business is really complementary to each other. It's a high attractiveness for our customer, and for customer context, we have a much better efficiency for each meeting. We are able to cover a lot of products within the shoe in one meeting. So the enhanced customer base, the overlapping part is, to a certain extent given and we have a chance to increase our share of wallet, and we can offer package yields. It's also very important. Yes. On the other hand, we can provide the products from Texon and Rhenoflex at Coats' customers, and we can do the same, Coats' products at Rhenoflex and Texon customers. So the key message here is cross-sell and upsell. This is a tremendous opportunity for us, and I show this on the next page. Adrian talked about the winners, here are some more, major brands. The key message here is we have 300 leading brands and 2,600 vendors. This has been available for Rhenoflex and for Texon for many, many years. But being a mid-cap company, we have limited capabilities to develop the market. Under the roof of Coats, we have now a very professional marketing and sales organization in all relevant regions, and this gives us a big opportunity, great opportunity to work with our customers, and this is an advantage for both, for the brands and our vendors. And in addition, with all the contacts, we have much better market intelligence. We understand much better where the trends are, which gives us the opportunity to develop better products in the future. What are the key benefits for our customers? And at the end of the day, of course, for our investors? An enhanced product portfolio, better products, faster design and the development process. A typical process at Nike or Adidas, for example, takes 18 months. Speed to market is an issue, and they want to reduce this to 9 months. With this approach, providing this attractive product portfolio, we have less contacts necessary, one face to the customer, and it really supports this speed to the market. Second, acceleration of sustainability and innovation, the key differentiation pillars. We mentioned this earlier. So faster delivery of ESG goals, stronger innovation and customer satisfaction. So we have the critical size to really provide impact and accelerate the processes. Third, a global footprint. Speed to market, higher vendor satisfaction, so this capability to have really sites at all the relevant markets in Asia. We learned 88% is Asia. Key markets, China, Indonesia, Vietnam and India. So as a mid-cap company, we have limited capabilities to provide this footprint. Together with all the 3, this is a great asset. And remember, our followers are 6% to 7%, so this is really a big advantage. Four, improved technical service. So products are specified by the brands. Vendors are forced to take the component. They need to support that the product works properly. Our product drives also production speed. One key KPI is, PPH, [ payers ] per person per hour. With our products, we are able to reduce seconds in the production process, which is very important for the total performance of the production side. Higher productivity, lower cost will help us to create a better position. Deep customer relationships, trust and reliability is the outcome. This drives the top line growth, better margin and at the end of the day, for us, better profitability. Let's talk about our premium products. On this page, you see all the different product categories, groups, what we are offering to our customers. So we have a high number of key components, the Threads, the Reinforcements, Heel Counters, Toe Puffs, Eyelets, the insoles, and you will learn about this at our booth in more details, and this is very excited to learn what quality level is able to provide by the Coats, Rhenoflex and Texon team. These products are the same -- has the same relevance in the addressable market for us like wheels on a car. You need this to create the performance, and I'd like to give you some examples. One is this construction means if you, at the retailer, at the shop, if you buy shoes, it is set. And shoe doc from Nike told me once, a customer needs 3 seconds to decide whether they like the shoe or not. Three seconds, so you need to have a good shape. And with our products, we provide this good shape. Then you have the wear test and trial, the slip in the shoe, and they have a good feeling or we do not have a good feeling. And this comes from the design of the product, of course, but also from our material. We have to get a good fit. At the end of the day, you need a shoe which is properly built when it is worn. So this good shape, the good performance that keeps the shape is driven also by our materials. So our components define the performance of a shoe. Price is very important. We selected 2 segments. One is Casual, one is Performance. The Casual part is definitely the winner during the pandemic. The casual trend itself and then home office situation has them to show a very strong growth rate. Working in this field, you have a certain attitude of a certain period of time, you look everywhere which shoes are worn. And you find out, sneaker. The prices for this Casual segment is for Heel Counters, $0.10, the Thread, $0.09 and the Toe Puffs, $0.06 per pair. This shoe, the Air Force 1, it's about $120 million plus a year. We do the calculation, what it means to have this little component with this price level, several $10 million revenue with a single model. And the key message here is once you are in and specified in the shoe, you are almost unto the life cycle in, and will not be substituted by competitive material. The performance part, running shoes, soccer, golf, basketball as some examples. We provide there -- we get higher prices because we deliver performance. There are different requirements for purpose, and at the end, better margin prices. $0.18, Heel Counters, Threads, $0.20, and Toe Puffs, $0.09. Accelerated sustainability and innovation. Again, 2 major pillars for us in our strategy, key differentiators. So all companies define clear targets for sustainability. From my perspective, of course, can profit from a more advanced profile from Texon and Rhenoflex. The definition 0 waste is available everywhere. For Rhenoflex, Texon, 25%. 2/3 of our input materials are already recyclables or renewables. You will learn about products which are much higher recycled content today, but average is 25%, it's 2/3. There's another example from Coats. The Coats EcoVerde, 100% recycled polyester. I'm really impressed about this achievement. So I was many, many years in the plastics recycling business, being able to provide a product with 100% content, this is really -- this means something. And if you take Adidas, they ask the supplier to get 100% recycled polyester by '24, Coats is ahead, so this really impresses me. Innovation, you'll see much more at the booth presentation later. We have a very highly attractive innovation pipeline everywhere at Coats, Texon and Rhenoflex. Many of the new developments are driven by increased recycled or renewable contract. For example, the nylon thread, recycled nylon thread, fiber reinforcement composites, the ProWeave, the Reform 2.0 from Texon. At Rhenoflex, there are 15 new innovations. Most of them are already ready for the market with go-to-market concepts. And we have a very solid technology available called Rhenoprint, 100% waste-free. Already in the market for quite a long time, and we developed a second generation of this product group, which is [ covenant ] by Nike and other key brands. This is a game changer. An engineer said to me, I get goose skin if I see the opportunity we get. And this is done by Coats, Texon and Rhenoflex. They all spend a lot of work for new innovation, has a very attractive pipeline. You will be excited to learn what the teams have achieved. I was. And remark at the end of my part of the presentation, Texon and Rhenoflex have been competitors for decades. The fight against each other, very professional. I'm excited about the collaboration between the teams, which are very constructive, and I did not expect this when I jumped in this new family. You could have expected that there's more reserve, reluctancy, but it's not. It's definitely not. Why? The answer is respect. They respect each other, what they have achieved in the past. And the second part is they are really excited to make it happen under roof of Coats in a bigger size with all the go-to-market concepts now. So this really impresses me. And how we want to make it happen will be shown by Adrian with the global footprint. Thank you.

Well, thank you very much. That's very nice. Global footprint. Three things I'd like to just pull out on this one, I think. If you remember how I tried to explain how this industry works, it means that the global footprint is critical because you have to talk to the brands, you have to talk to the sourcing houses, and you must deliver an invoice and collect the cash with the manufacturers. So the footprint becomes critical in terms of delivering that service that Frank was just talking about. Three things to pull out from here, the acquisition of Texon and Rhenoflex has actually given us a bigger European business than we had before, which is good. Believe it or not, there is still a really attractive market in Europe for footwear and bags, and all of the things you're looking at. So that's great. The second thing is that strength of -- well, you talked about it. The strength of Coats across the big sourcing markets is incredibly important. Today, the brands are asking their strategic vendors to double the production of footwear in Indonesia over the next 3 years. That's taking it from 330 million pairs to around about 650. So as you can imagine, when asked, the strategic vendors that do that. So they are investing today in new factories, new facilities in Central Java and Western Java. The strength of Coats and the power and the footprint of Coats will allow Texon and Rhenoflex in this combined business to support the customers when they do that. The brands are also asking the vendors to develop in India, something that hasn't happened really before, but it's happening now, mainly around the Chennai area of India. Again, same message. Coats has been in India for decades or century, perhaps. Tremendous operations there. It allows us to exploit that for the Texon and Rhenoflex businesses so that we can keep up and make sure we satisfy the manufacturers and the brands. So the global footprint part is extremely critical, and that's where -- when we talked and you talked about market share, that is almost impossible. Better not say impossible, it's very difficult for competitors to do that. The other thing here around the footprint is not only factories and service, but also technical support. Frank talked about PPH, the pairs by person per hour. If you talk to any footwear customer, that's really important for them. How do they get more and more volume from a sourcing supply base where labor is in shorter supply, and it's all through productivity. And what we bring, and we've done it for years as Coats and as have you guys, we bring the technical support where it matters, whether that be South Vietnam or [ Donguan ] or Chennai or Central Java. Again, it is extremely difficult for competitors to replicate that, and that is what drives the trust and reliability of the brands and the manufacturers to us. So there we are. That's around the market share. Again, it's really important. The capabilities that we've just talked about and Frank talked about, this is a highly fragmented market. Highly fragmented market. In Coats, I'd like to talk about [ NI/NF ]. I'd like to talk about premium, differentiation at scale. Premium, we're very proud of our price levels, okay? Differentiation, if people are going to pay those prices, there's got to be a reason. We have to be differentiated from our competitors. And everything we've talked about in terms of sustainability and innovation and engineering and product and all the things that Frank talked about give us the differentiation. But you need scale. Scale is the thing that drives the profitability behind it, so it's premium differentiation at scale. And by bringing these 3 businesses together, that is what we are creating. But do not just listen to me and Frank. Let us hear what customers have to say about things. [Presentation]

Well, what a move, expertise. What a great partnership. Look forward to this, very excited about working with you guys. That is what customers are telling us. I can tell you, Frank and I and the rest of Coats and Rhenoflex and Texon people are extremely proud, but that is what customers think of us. And we're extremely proud to be able to enjoy the ongoing business that we have with them. So a last, a last slide from me, you'll be glad to hear. On the left-hand side, left-hand side, this is about customer value, superior customer value that they have already told us that they expect and want to get from us. It is about that product portfolio. It is about sustainability and innovation. It is about that global footprint and support, and deep customer relationships. Why do customers enjoy working with us so much? Because we live in a volatile and certain complex and ambiguous world. Trust and reliability are key, and that is why the scale of the combined business gives us that opportunity. Through superior customer value, I would argue you get superior investor value. And it's not only on the customer side that we will take actions, we will connect and combine our sales teams, integrate our G&A activities, leveraging procurement between Texon and Rhenoflex and the operational excellence side. So we will deliver value for customers, and we will deliver value for investors. So this is a market with passionate consumers, with strong brands, strong manufacturers and very healthy margin pools, and that is why we are able to leverage and deliver outstanding financial results. And with that, I'll pass over to Jackie, who is wearing her Adidas Sambas. Thank you very much.

Thank you, Frank, and Adrian. Now before focusing on the exciting new Footwear division, I'd really like to take this opportunity to remind you of the very strong performance and key financial highlights of the business in the first half of 2022. We saw accelerated sales growth with 19% constant currency sales growth versus last year, and approximately 2/3 of this growth was due to our pricing actions and better mix and the other 1/3 was volume-related. Now as you know, Coats is a company that operates very well in an inflationary market and has a well-defined and tested playbook. And during 2022, we continue to see heightened inflationary pressures in the area of raw materials, labor, energy and freight. And as with previous years, we moved quickly to mitigate these inflationary challenges by successfully implementing pricing actions and self-help programs, and our early actions leave us well placed to continue to mitigate these cost pressures as we have successfully done in the past. Our adjusted operating profit of $125 million and margins of 15.6% were both well up on last year and well ahead of pre-COVID levels, largely driven by the volumes we saw in the first half as well as ongoing type cost management and the initial delivery of our strategic projects. Now, we've always guided that 2022 will be a year of 2 halves. The first half benefiting from higher-than-normal volumes with volumes normalizing in the second half of the year, but against very strong 2021 comparators. We remain on track to deliver operating profits in line with 2022 expectations. On cash, we delivered a robust free cash flow of $30 million in the first half which maintained a strong balance sheet position, with leverage at the end of June of 0.8x. This strong balance sheet allowed us to fully debt fund the acquisition of Texon, and we took the decision to equity fund the acquisition of Rhenoflex. Post both acquisitions, we remain confidently within our 1 to 2 target leverage range on a pro forma basis. We've seen strong momentum on our strategic projects during the period, and we are ahead of schedule in terms of delivering the benefits. We now expect to deliver $15 million incremental EBIT benefits during 2022 versus the initial expectation of between $5 and $10 million. Let's now recap on the acquisition metrics for both the Texon and Rhenoflex acquisitions. For both businesses, we paid a combined purchase price of $354 million. As I mentioned, the acquisition of Texon was financed by debt, and the acquisition of Rhenoflex was financed by equity. On a post-synergy basis, this results in an EV/EBITDA multiple of 8x, a 5-year estimated ROIC of 16%, a payback period of circa 7 years, and an IRR of circa 19%. The acquisitions are highly synergistic, and expected to generate annual cost synergies of at least $11 million through the following areas: SG&A savings through headcount optimization, efficiencies and procurement and operational improvements. And these synergies are expected to be realized on a run rate basis by the end of 2023. In addition, we are working through additional synergies in the areas -- in areas such as commercial opportunities and footprint optimization, and we will share these opportunities with you as these plans are formally signed off in 2023. Now on the next slide, we set out our pro forma financial statements for the Footwear division in 2021. And as we've already noted today, we expect the footwear division to grow by at least 8% and the EBIT margins post synergies to be greater than 20%. Both Texon and Rhenoflex businesses are trading in line with the acquisition business cases and integration work is well advanced, with the single management team now reporting to Frank. I would now like to focus on our medium-term revenue and margin ambitions which we are increasing, so let me walk you through that detail. So in the past, we've always guided group growth of between 4% and 5%, with the Apparel and Footwear division growing at 3% to 4% and the Performance Materials division growing at between 6% and 9%. Going forward, we raised our group ambition to 6% revenue growth, with the Apparel division growing at 3% to 4%, Performance Materials growing at 6% to 9% and our new Footwear division growing at, at least 8%. In terms of group EBIT margins, we've always guided that as a first step, we want to get back to pre-COVID levels of 14.3%. Our ambition is to make a step change in our EBIT margins of at least 300 basis points by 2024, so this equates to an EBIT margin of circa 17%. And we'll deliver this margin by successfully implementing our $50 million of strategic projects which are already well advanced, and delivering on the $11 million synergies from the Texon and Rhenoflex business case. Now on my final slide, I would like to reiterate our capital allocation policy, which remains unchanged. We are focused on maintaining a strong balance sheet with leverage of between 1x and 2x, and we prioritize 4 key areas: Reinvesting in organic growth, supporting pensions, paying a progressive dividend and acquisitions in line with disciplined strategy. Now, I'd like to make a couple of further comments on both pensions and acquisitions. Firstly, on pensions. In recent weeks, there has been a lot of discussion around the strength of pension schemes and the use of LDIs. Earlier this year, we set up a joint working group with the trustees of the Coats Pension Scheme to consider the longer-term derisking of the scheme. And I can confirm that our pension collateral position was very strong as a result of that derisking strategy. So there's been no need to unwind any hedging positions, and the long-term funding position of the scheme has not been materially impacted. So overall, the pension scheme remains in a very, very good position. On acquisitions, I'd highlight that our focus over the next 12 months will be continuing to deliver on our strategic projects and the integration of Texon and Rhenoflex, so we don't expect any further material acquisition activity in the next 12 months. So now, I'd like to conclude by reiterating the excellent performance of the group in the first 6 months of this year. The raising of our group revenue growth ambitions to 6% as a result of the exciting creation of the new Footwear business, and the step change in group margins to circa 17% by 2024. And now, I'd like to hand back to Rajiv.

All right. Thank you very much, Jackie.

I guess we get into Q&A at this stage here. You're asking me to do something incredibly difficult, which is to forecast what's going to happen in '23, all right? If you talk to 10 people, you'll get sort of 10 different views here. Before I answer your question, I think it's important to say that in Coats, we have diversified and resilient end markets. Price and productivity more than offset inflation in most -- in sort of every year. The focus on sustainability and innovation to drive new growth opportunities has been well established. We have a playbook in Coats which focuses on share gains, so it's not dependent on what's happening in the market. And we have very deep customer relationships. So if you put all that together, there is reason to be confident about 2023, irrespective of what's happening. I personally believe, this is my personal view, that 2023 is not going to be as bad as what you hear on television or in the [ FT ] or Bloomberg, et cetera. I think there was a survey done 2 months back or 6 weeks back where there were a bunch of CEOs and they were asked, what do you think about 2023. And most of them -- 80% of them said, it's not going to be as bad as what the papers are making it to believe. So that's my view. Coming back to Coats. If there's no recession in the U.S. next year, I expect sort of the Performance Materials would be doing well. They should be growing in line with the numbers that we have suggested. Footwear, very confident that they'll be doing at least 8%. Apparel should also have a strong year, but it's going to be a year of 2 halves to them. They will be intra-year sort of volatility next year. But I think if you look at it over a full year, if there is no U.S. recession, we should be delivering the numbers that we just showed here.

Okay. And just on the footwear segment itself. Can you just talk a little bit more about the sales and the margins? Because I think there was a slide that said you Footwear business and the existing Threads business have grown at 3% to 4%, and you're expecting it to now grow at 8%. Is that just the advantage of scale you've got, and you're expecting to take more market share that...

Absolutely. Absolutely. When I joined Coats a few years back, our market share was less than 16%. And today, it's about 23%. So when you look at the track record over the last decade, in kind of normal years, we have taken between 50 and 70 basis points of market share, and that should continue going forward. The Footwear, I think, driven by innovation, sustainability and the synergies between the 3 divisions, they should be delivering 8-plus percent sales growth. And that's -- that business has got very healthy margins.

And the second point was on the margins. You put up a slide saying it was 16% pro forma. You've got over 250 basis points coming through from the initial synergies, so that gets you a long way to your 20%. How much beyond 20% is it possible to go? You talked about further optimization of footprint, there's operating leverage, you presume you got some sourcing savings to come. Is that a staging post, or is that just a target?

I think at this stage, I'm just comfortable saying it's going to be more than 20%, all right? The reason why I'm not giving you a definitive answer is we still need to work on the footprint optimization, and that's going to take some time. But we are reasonably confident to say that it will be 20-plus percent in the medium term.

When we think about the footprint optimization, not to put words in your mouth, but one of the things that you mentioned was that the footwear brands are asking you or their customers to have the lead time from 18 months to 9 months. Most of the structural components are manufactured in a few locations. Could you envisage a proportion of the rest of your footprint having dedicated lines for structural components? First of all. And then the other aspect and maybe an unfair question, the Rhenoprint, one of the benefits of it is speed. Can we see that overlaid on the composites side? And what benefit do you think that technology could bring to the rest of the group?

Okay. Excellent question. I'm going to ask Frank to answer the Rhenoprint one here. Just on your first question, yes, there will be separate dedicated production lines. As a matter of fact, the factories for the structural components are independent, stand-alone factories. We have about 11 of them through the 2 acquisitions. They will continue remaining stand-alone factories. The Footwear threads, which is about 50% of the new footwear division, the production will continue to happen in the existing Coats' factories as it's been done for the last 2 decades. So we need to make sure that we are leveraging economies of scale in that place. Rhenoprint is all about 0 waste and manufacturing complex designs, and I'll let Frank answer the rest of the question.

Okay. I do not know whether I get the question right. Would you mind to repeat it again for me?

Yes. One of the clear things about Rhenoprint was that the speed with which it can actually operate, which is very advantageous, perhaps, to overlay into composites within the Performance Materials division or in other areas of the group. If you could just go into a little bit more about the benefits of that technology being used across the wider group?

Yes. So it is a proven technology. It's in the market for more than 20 years, and we produce today with about 70 production lines in Asia, more than 250, 300 million pairs. So it's a proven technology, and we have developed a new technology where we have this multizone concept, you will learn this during the presentation in the booth. So this is an option to work with different products, and this brings you to the question of composites. We can add other material on different layers as a kind of 3D, 2D printing. And the question, how to bring it to other technologies and products at Coats is something we do currently with our technical teams. So we expect that there is an overlapping part.

If I can just build on that. Rhenoprint and the composites are 2 different technologies, 2 very different manufacturing processes. In Rhenoprint, the input material is actually a powder. And in the case of composites, it's a yarn, right? So it's completely different.

One last odd question. This -- the structural components, when they're put into the shoe, are they held in place with a tight fit or with glue?

Frank?

It's both. It's both here.

I was just -- the reason why I asked the question was for recyclability. Just for that.

Well, I had the opportunity of visiting Adidas footwear factory in Indonesia a couple of months back. It's a very technical in engineering and manufacturing process. The way they insert the structural components into the shoe is a lot of science and some art there. And that's the reason why they need technical and engineering capability in this area.

I think there might have been another question down here for you.

Yes. All right. If you can get the mic here, please?

A couple of questions. Just looking at the testimonials, a couple of them called out access to new factories. I see the Rhenoflex and Texon have actually got facilities in China and Vietnam. So is that talking more about Indonesia and the trend that's happening there? And my second question is, clearly, this is a very exciting market for you. Just wondering whether it's caused you to reassess some of the other markets you're operating in maybe kind of legacy Coats' businesses in terms of kind of strategic reviews, or anything that might be out there?

Okay. So I guess as far as the first part of your question is the new factories is essentially referring to Indonesia and India. That's where the derisking is happening. Brands are looking at derisking from China, and a lot of the volume is moving into Indonesia and then in the future, into India. Billions of dollars are being invested right now to build these new large-scale factories, so that's the reference to the new factories here. Your second part of the question?

Yes. Just in terms of actual potential disposals out of the business, now that you've got footwear in?

Yes. So we have said in the past that we sort of continuously look at the portfolio. We keep on looking at the performance of the portfolio. We have exited Brazil and Argentina. We have closed our Russian operations. We closed our South African business in the first half of the year, and we continue to look at that. [ Zips ] is one area where we have a strategic review going on. And if there's anything to announce at some point in the future, we'll be sort of happy to announce that.

And just on the Performance Materials margin, is the 13% to 14% representative of a longer-term level? Or are there things still holding back in 2024?

So the answer is no. That's not the end-state margins, that's sort of a staging gate, so the next sort of -- 3 years. The margins for Performance Materials should be in the 16% to 18% long term, and that's driven through innovation and using a lot of the new, exotic materials.

So that's -- so it's not efficiency getting you there. It's -- it's innovation.