Coats Group plc (COA) Earnings Call Transcript & Summary

Good morning and welcome to the Coats Group plc Half Year 2023 Results Presentation. We have here today Rajiv Sharma, Coats' Chief Executive; and Jackie Callaway, Coats' Chief Financial Officer. They will take you through the H1 '23 results and strategic progress as well as the outlook for the business. I will pass you over to Rajiv to start the presentation.

Thank you, Julian. Good morning, everyone, and welcome. Today, I'm going to take you through the first half highlights and then hand over to Jackie to present the first half financial performance. After that, I will take you through the operational performance and a strategic update before closing with a summary and outlook. Following this, we will move to Q&A before concluding the results presentation. As we predicted, it's been a challenging first half with reported revenue down 11% year-on-year, including the 2022 contribution from the Texon and Rhenoflex acquisitions. This was driven by widespread industrial destocking, particularly in apparel and footwear. As stated earlier, the Performance Materials sales have been impacted by a customer decision to in-source production. Comparators for this period are tough due to post-COVID pent-up consumer demand and buffer buying by brands to mitigate supply chain challenges. The apparel and footwear brands have been working hard to address the excess inventory issue that peaked in early quarter 3 last year. We estimate industry orders were down 30% in the first half while our organic sales declined by 19%. We have outperformed the industry and competition by taking market share, pricing discipline and self-help. We increased margins despite significantly lower sales volume and high inflation. This margin result is 90 basis points increase over H2 2022 and 30 basis points above H1 2022 when factoring in the 2 acquisitions on a pro forma basis. Factors contributing to increased margins include our ability to hold on to prices, structural cost savings from strategic projects, synergies from the 2 acquisitions and moderation in raw material costs. As I just stated, strategic projects and acquisition synergies have played a part in margin improvement. Advanced planning and near flawless implementation have resulted in delivering more savings than expected and without customer service disruptions. I'm also delighted to report that the integration of Texon and Rhenoflex into the newly created footwear division is progressing well. Customer feedback has been very positive, and employees are taking great pride in being part of a global footwear component lead. Following the agreement of the off on trigger for our U.K. pension scheme last March, we have seen further improvements in the scheme's funding position. This is another step towards significantly reducing or eliminating existing cash contributions of circa GBP 2 million per month to the scheme in the short to medium term. The Board has increased the interim dividend by 15% to $0.81 per share, reflecting its confidence in the business strategy and its ability to deliver strong cash through the cycle. Slide 5 captures the period of inventory build and correction for a sample of leading apparel and footwear brands. Inventory peaked in the early quarter 3 2022 and has been moderating since then. I emphasize the chart on the left is directional. Each brand is at a different point in its inventory reduction journey. What is clear is that the inventory levels have come down significantly from the peak, and it's likely that inventory will return to normal levels during quarter 4 2023. As this happens, we expect to see a gradual improvement in orders from the apparel and footwear brands around the same time. Slide 6 shows Euromonitor's forecast for apparel and footwear retail sales in value terms. This forecast was updated in June 2023 and illustrates the resilience of consumer spending for garments and footwear. We know the first half retail sales were better than expectation in all regions. With low unemployment and high salaries, it's reasonable to expect that consumer spending in the second half will continue to be resilient. The current destocking challenges are primarily due to the excess inventory within the supply chain. As excess inventory gets flushed out of the system, we can expect novelty in brand orders to their supply chains. Slide 7 shows the key areas that enabled a strong margin and cash performance in H1. Some of these actions are structural that made the company fitter and stronger. The others are tactical actions that form a part of our playbook right through these business cycles. I would like to highlight the strength of the business to take market share and get price through these cycles. Over the past 14 months, we have been busy transforming the portfolio by exiting 14 countries that were nonstrategic and low margin. We have also acquired 2 high-margin businesses. Today, Apparel division and Footwear division are the world leader in the category. We're also #1 and #2 in every country we operate in across the world. As the market recovers, and it will, we should see a further improvement in cash and margins. Today, we can reconfirm our previously announced target of 17% margins in 2024. I will give you more details on some of these after Jackie has presented our financial performance in the half. Jackie, over to you.

Thanks, Rajiv. Let me begin by summarizing the key highlights of our financial performance for this first half of 2023. We are very pleased with our improving margin performance despite the backdrop of a very difficult demand environment due to industry destocking. As Rajiv touched on earlier, on a pro forma basis, which assumes acquisition contribution in the prior year, our margins were up 30 basis points to 15% despite these significant volume headwinds. This margin performance has been supported by rollover pricing gains from our 2022 actions alongside productivity improvements, which have more than offset our inflationary pressures. On inflation, we are now seeing some tailwinds in the areas of raw materials and freight as the 2022 peak costs start to recede in these areas. We are also pleased to say that both our strategic projects and synergy delivery are now further ahead of schedule with more benefits expected to be delivered in 2023 than previously expected. On strategic projects, we now expect to deliver $30 million of savings for 2023, which is $10 million more than our original guidance of $20 million. On acquisition synergies, we expect run rate synergies of $15 million per annum by the end of this year, which is ahead of the $11 million total synergies we originally targeted to deliver in 2024. All of these positive updates show that despite the difficult demand environment, we are able to focus on self-help initiatives to significantly underpin performance and set ourselves up to be fitter and stronger for the future when demand does return. On this note, we've also seen a very good cash performance in the first half. We delivered free cash flows of $52 million, which is significantly ahead of last year. I'd also point out that on last 12-month basis, which smooths out for working capital cycles, free cash flow is an extremely strong $136 million. Lastly, on highlights, we've continued to make further positive progress on the funding position of our U.K. pension scheme, and I'll give some more details on this later. Slide 10 sets out the financial summary and our key financial metrics. Let us now take a deep dive on these financial metrics, starting with revenues. Overall, the year-on-year decrease in group organic revenues was 19%, and this was driven across all 3 of our divisions as a result of destocking in Apparel & Footwear and a customer loss in Performance Materials. There was a 13% contribution from the Texon and Rhenoflex acquisitions, resulting in an overall constant exchange rate declines year-on-year of 6%. Group operating profits were down 9% on a constant currency basis at $107 million and down 21% on an organic basis. As I mentioned earlier, our margin performance was very pleasing despite the volume declines driven by the market environment. On a constant currency basis, margins were down 50 basis points, but remained a healthy 15%. As I said, on a pro forma basis, adjusting for the impact of acquisitions by including them in the prior year, margins were actually up 30 basis points year-on-year, and I'll cover this in a bit more detail later. On a reported basis, both sales and operating profits were lower than the constant currency basis, primarily as a result of the translation FX headwinds due to the U.S. dollar strengthening against some of our key local currencies, for example, the Chinese yuan and the Indian rupee. In addition, the constant currency sales and operating growth was impacted by the adoption of hyperinflation accounting in Turkey, which requires us to translate results back at the period end rates, so as volatile. Adjusted EPS of $0.035 per share was down year-on-year, primarily due to the profit decrease we've seen, but also underpinned by improvements in our effective tax rate and well-controlled interest costs. Finally, on the slide, we performed very well in terms of cash generation with well-controlled capital expenditure and working capital contributing to this. On Slide 11, we've laid out the inflationary pressures we've seen in the period, which are now starting to recede in a number of categories, namely raw materials and freight. Labor inflation continues at relatively elevated levels. However, given the raw material and freight deflation, our overall inflation headwinds in the period were relatively low at $8 million, as shown on the left-hand side of the slide. More than offsetting this were our continued price gains of $20 million, mainly as a result of the proactive actions we took in 2022 when inflationary pressures were at the highest. I would note that our commercial teams have successfully continued to defend these higher price levels despite the deflation that we are starting to see. In addition to price, we saw $17 million of ongoing self-help productivity actions coming through, for example, driving efficiencies in our plants and buying better across our portfolio. This resulted in $37 million of benefits from the actions that we have delivered, significantly in excess of net inflation of $8 million, which was a healthy underpin for margins in the period. Moving on to operating profits, and the next slide provides an overview of the movements in our group operating profits and margins during the period. A number of these bridging items are covered by my commentary on the previous slide. Operating profits in the first half saw a significant headwind on volumes due to the destocking cycle in Apparel & Footwear and also the loss of a customer in Performance Materials. It's worth noting that some of these headwinds are also due to the strong comparatives in the first half of 2022, which saw a significant amount of bounce back post COVID. The volume headwinds are both direct volumes from selling [ lease ], but also in part due to the lower utilization of our factories. As volumes return, we expect to see similar positive utilization impacts across our portfolio. Offsetting these volume headwinds have been a number of factors, including the pricing self-help measures I referred to on the last slide against lower net year-on-year inflation. In addition, we are further ahead on our strategic projects with $21 million of incremental year-on-year benefits delivered in the period, taking total benefits for those projects since they began to $41 million. In addition, we saw a healthy contribution from our 2022 acquisitions of $14 million, which includes $5 million of initial synergy benefit. This is despite the acquisitions being subject to the same industry destocking headwinds seen in our line of Footwear & Apparel businesses. As mentioned earlier, we are ahead of schedule with the synergy actions and now expect to be delivering an annualized run rate of synergies of $15 million by the end of this year, which is well ahead of original guidance. The above impact has led to a very solid operating margin in the period of 15%, marginally down year-on-year on a constant currency basis, but on a pro forma basis, slightly hit year-on-year, as I mentioned earlier, with a good run rate to our 17% margin target. Moving on, let us now look at segmental margins on Slide 13. These are shown for the first time in our 3 new segments: Apparel, Footwear and Performance Materials. To help year-on-year comparability and underlying performance, we have also shown some pro forma numbers for the Footwear and Performance materials divisions. Starting off with our Apparel division. We saw healthy margins of 15% in the first half. This is in line with our 2024 margin guidance of between 15% and 16%, and despite the significant volume headwinds we saw in the period, which is very encouraging. It was a result of these headwinds that margins were slightly down year-on-year from the exceptional demand we saw in the first half of 2022. As mentioned previously, key drivers of the strong margin performance in the first half, our pricing and self-help actions more than offsetting inflationary pressures. This segment also benefited significantly from our accelerated strategic project activity. In Footwear, margins were at 20.8%, again, in line with our 2024 margin guidance of greater than 20% despite the difficult demand environment. Synergies from the acquisitions are coming through faster than anticipated. And on a pro forma basis, which assumes acquisition contribution in the prior period, margins were up a healthy 220 basis points. In Performance Materials, reported margins in the period were 9.1%, a healthy progression year-on-year as we start to see the impacts of our strategic project activity coming through. Excluding the duplicate costs of around $2 million incurred as part of the setup of the new plants in Mexico, underlying margins for the segment were back to double digits at 10.4%. Outside of the Americas, Performance Materials margins remain a healthy double digit. We expect further margin progression and Performance Material margins as the full benefits from our strategic projects are realized. On Slide 14, we show the bottom half of the profit and loss account, and there are 4 areas I would like to cover off on the slide. Firstly, exceptional and acquisition-related items of $35 million, which include $6 million spent in relation to our strategic project initiatives, $11 million of amortization costs in relation to our acquisition of Texon and Rhenoflex, and $17 million write-down and associated cost to sale of our European Zips business. Secondly, you will see that net finance costs were broadly flat from last year. Interest costs on our facilities were up $9 million, reflecting both rising interest rates, but also the new $240 million debt we took out to fund the Texon acquisition last year. This increase was offset by a number of [indiscernible], which include a $6 million mark-to-mark gain in relation to hedging instruments, mainly around sterling strength, a $3 million lower pension finance charge in the period due to the IAS 19 surplus position of the U.K. scheme and a $1 million benefit from hyperinflation indexing in Turkey. The third item is the continued reduction of our underlying tax rate to 29% as profit mix continues to move favorably, and this remains in line with our full year guidance. The final item to flag is the proposed interim dividend of $0.81 per share, which is a 15% increase on the 2022 interim dividend and reflects the Board's ongoing confidence in the medium term. Moving now to Slide 15, where we see the strong cash generation in the period. As an adjusted free cash flow level, we delivered $52 million compared to $30 million last year. This was a strong performance compared to historical delivery and further shows our ability to underpin performance even in difficult market conditions. On a last 12-month basis, which smooths out for working capital cycles and also spans the entirety of the destocking cycle, we have seen so far our free cash flows was an extremely strong $136 million. This performance has been underpinned by tight control of our working capital, in particular, our own inventory levels, but also managing our credit exposure very closely. Capital expenditure was slightly below last year as we manage cash closely. Closing debt of $399 million, excluding leases, was broadly flat compared to the end of 2022. This level of net debt equates to a pro forma leverage of 1.6x, which is well within our target range of between 1 and 2x. On Slide 16, we lay out the latest funding position of our U.K. pension scheme. As a reminder, at our last triennial valuation in 2021, this showed a technical provisions deficit of GBP 193 million, which resulted in a great set of funding contributions up to 2028. We are pleased to be able to say that the deficit has significantly improved since that date, and we are now approaching fully funded on a technical provisions basis with a deficit of GBP 25 million being 99% funded. This improved position has been driven by a number of factors: ongoing employee contributions, favorable market movements and the completion of further derisking actions, most notably the buying completed in December 2022. As a result of this excellent progress, in the first quarter of this year, we agreed with the Scheme Trustees a switch-off, switch-on trigger regarding future contributions. The original threshold of the switch off, switch on trigger was set at 99% to 101%. However, in the period, we have agreed with the trustees to revise this downwards to 98% to 100%, and this is reflective of the latest industry mortality levels, which have recently been updated and have a positive impact. This brings us a further step place at switching our contributions to the scheme, potentially in the very near term, which would yield significant improvements to the group's free cash flows. Aside from the funding position, we continue to work collaboratively with scheme trustees, and we share a continued ambition to derisk the scheme in full by removing it from the group balance sheet in a cost-effective manner. We will update in due course on this progress. On Slide 17, I wanted to take this opportunity to remind you of our approach to capital allocation. In short, we see many attractive opportunities to reinvest our capital to drive growth, both organically and via M&A, where we continue to follow a strict investment criteria. We will also continue to focus on supporting our pension obligations. And while in the short term, this involves supporting the monthly technical deficit payments we will also consider prioritizing a one-off payment, which fully derisk the U.K. pension obligations that this can be achieved in a cost-effective manner. We also remain very mindful of the need to deliver a progressive dividend to our shareholders, and this has again been demonstrated today with the 15% growth year-on-year in the interim dividend payment. We will do all of this whilst maintaining a strong balance sheet of between 1 and 2x leverage. The Board will revisit this capital allocation policy once we have fully de-risked the U.K. pension obligations. Lastly for me, and as with previous half year announcements, we have provided future modeling guidance for the full year, the latest of which is set out on Slide 18. 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 on this. I conclude by reiterating the excellent margin and cash performance during the period despite some significant industry headwinds. They are ahead of scheduled delivery of our strategic projects and delivering of increased acquisition synergies and our continued progress on the U.K. pension scheme funding and derisking strategy. Now I'd like to hand back to Rajiv.

Thank you, Jackie. Let me start with a reminder of our new business structure and how we are reporting the group's performance from this set of results. The new divisional structure provides greater visibility of divisional dynamics to investors and external stakeholders. It also ensures more internal accountability, speed, agility and alignment with customer needs. There are structural growth drivers in our end markets. We also have leading positions in these markets and a clearly differentiated customer proposition that is underpinned by talent, technology, innovation, sustainability and scale. This should help us generate a medium-term sales growth rate of 6% for the group. As previously set out, we also have good potential to further enhance our adjusted operating margin. We remain confident that we will attain our goal of circa 17% group margin by 2024 as a result of the actions we have taken and increasing volumes. Slide 21. As expected, Apparel had a challenging first half with organic revenues down 20% year-on-year, primarily as a result of industrial destocking as brands sought to reduce their inventories. The chart shows that our revenues are normalizing as the vast majority of the destocking is complete. We will know more about the timing and gradient of the recovery in Q4 2023. Notwithstanding the market headwinds, our strategy in the apparel market has been working. During the first half, the industry was down 30%, while Coats was down 20%, reflecting a better than market performance. Our scale and differentiation matters and our focus on the premium end of the market has enabled us to win share. You can see that athleisure, which is a focus for us, has been a particularly strong outperformer in the half relative to the market. We estimate that we have gained around 100 basis points of market share in the half, which is now around 24%. These gains have come from both larger and smaller competitors with new customer wins across a wide range of programs. In a period where we are seeing moderation of certain input material costs, we have successfully held on to our pricing as customers understand the many benefits are working with Coats. These include the quality of the products and local technical support, which is increasingly important as more customers use high-speed, high heat automated manufacturing processes. Customers also appreciate our reliability and flexibility of supply. On Slide 22, reported Footwear revenues increased 60% at constant currency. Excluding the contributions from Texon and Rhenoflex, organic revenue decreased by 23%. Industrial destocking was the primary factor in the first half result. And like Apparel, a majority of the destocking appears to be behind us. We will know more about the timing and gradient of the recovery in Q4 this year. We estimate that Footwear has also gained 100 basis points of market share during the half. This takes the thread share to 28% and the structural components share to 24%. We have continued to win new positions and share gains with top brands due to our scale, innovation, sustainable products and deep customer relationships. We are making really good progress with the integration of Texon and Rhenoflex. This is largely focused around taking the best from each business while combining systems, processes and consolidating the supply chain. We have an integrated commercial team that presents a single face to customers. We have realized $5 million of savings in the half and expect to generate a run rate of $15 million efficiencies by the end of the year, which is an increase from the $11 million originally planned by 2024. Beyond these efficiencies, we have started planning for footprint optimization of the division. We will announce these plans at the full year results. We have already made a start by bringing our existing footwear threads operation and the footwear components operation under 1 consolidated business in Vietnam. This 100% owned and integrated business provides a single point of contact for all footwear customers in the country. Slide 23 shows the Performance Materials business, which had a 14% organic revenue decline in the half. The single biggest adverse impact relates to a major personal protection customers in-sourcing decision at the end of last year. There was also some customer destocking in the composites and performance threads end market. However, as with Apparel & Footwear, we have continued to win new work across each of the 3 subsegments. This includes new contracts with 2 personal protection clothing manufacturers, a large cable manufacturer and 2 large automotive safety manufacturers. Following the announcement in March 2022, we have been prudently moving production from the U.S. to Mexico to overcome labor availability challenges in the U.S. Our new site at Huamantla, Mexico is now fully operational and performing well. We have also completed the installation of new bonding technology at our existing factory in Mexico. The second new site in Mexico is complete and will be commissioned by Q4 this year. We have seen the Performance Materials adjusted operating margin increase by 130 basis points to 9.1% year-on-year despite the top line headwinds in the half. Were it not for the duplicate cost of running factories in the U.S. while building new ones in Mexico, our margin would have been even higher at 10.4%, which is an increase of 230 basis points on the prior period. Our 2024 margin goal for Performance Materials remains 13% to 14%. Moving to sustainability on Slide 25. I cannot emphasize how important sustainability is to our business. At our March 2023 full year results, we announced ambitious new medium-term sustainability targets for 2026. As a reminder, we have a 2030 target to reduce emissions by circa 50% and reach net 0 by 2050. Our focus is on 5 areas, and work is underway to achieve the '26 targets. We are the clear market leader in supply of sustainable threads and also have the largest catalog. Despite industry-wide destocking in the first half, we increased our sales from recycled products by 15% on a CER basis to $17 million. This is a source of share gains and future growth as more brands move to sustainable and more durable apparel and footprint. Sustainability is also very important within our own operations as it's increasingly being seen as a license to operate with big brands. Over time, this will create more opportunities for Coats as the majority of the long tail of competitors struggle to meet brand criteria. We continue to invest in building new capability and capacity. In the first half, we opened a new sustainability focused innovation hub in Madurai, India. Its mission is to accelerate our transition to recycled and renewable materials. It will work alongside our Shenzhen Innovation Hub to make this ambition a reality. On Slide 26, we have specific targets around the transition to sustainable materials with a 2030 target of circa 100% use of sustainable materials. These targets help us in rapidly growing market for sustainable products and also helps to reduce our Scope 3 carbon emissions. We are transitioning towards recycled and renewable materials during this decade. We have unlocked several sources of high-grade recycled polyester and recycled nylon. We are investing in the creation and application of bio-based materials. We are the market leaders with the EcoVerde range of products made from recycled PET bottles. Our eco cycle water dissolvable thread enables low-cost separation of textile and nontextile products in end-of-life garments to facilitate circularity. Ecostrobe is a chemical and water-free process that has enabled us to launch our first fully recycled polyester footwear insole. The majority of our innovation spend for apparel and footwear is targeted to accelerate the introduction of new sustainable products, and processes. We will now play a short video on our new sustainability hub in Madurai. [Presentation]

In Slide 28, you can see the full extent of the portfolio work we have undertaken in the past 18 months. In total, we have exited 14 markets that accounted for circa $140 million of sales. And also, these markets had low single-digit operating margins. We have also acquired Texon and Rhenoflex that are higher growth and higher-margin businesses. In July, we signed an agreement to sell our European Zips business. This transaction is expected to complete in quarter 3. As a group, we are fitter and stronger today. This should result in a medium-term sales CAGR of 6%, stronger group margins of 17% by 2024 and higher operating cash flows. We originally announced our strategic projects in March 2022 with expected total savings of $50 million by 2024. In March this year, we expanded the scope of these projects to include our operations in Asia and increase the expected savings to $70 million from a cash investment of $50 million. These projects are delivering ahead of original announcements, reflecting the robust project planning, tight control and quality of our teams. In the half, we achieved $21 million of savings, adding to the $20 million already delivered last year. As a result of the excellent progress in the half, we are able to increase the full year savings target from $20 million to $30 million. This brings the total to $50 million savings in 2022 and full year 2023. The remaining $20 million will come next year. I am really proud of the Coats team for their consistency in delivering big projects on time, on budget and without disruption to customers. Now turning to recap the highlights and talk about the outlook. As anticipated, the first half has seen widespread industry destocking, particularly in Apparel & Footwear markets. However, it's also been a period when we have demonstrated the strength and character of the teams in Coats, and that we have continued to gain market share, improve margin, deliver more cash and all this while implementing big portfolio projects. This bodes well for the future, and I believe we can come out of the current period of destocking a stronger, nimbler and more efficient business with a leading range of sustainable and innovative products that should help us to deliver a 6% top line growth over the medium term. Slide 32 has the key points of our outlook statement. We are now expecting a more gradual improvement in market demand during the second half. As a result, we continue to expect full year trading to be in line with expectations, although towards the lower end of the analyst forecast range. We remain confident in achieving a 17% margin in 2024. This concludes today's presentation, and we will now commence the Q&A session.

[Operator Instructions] We have our first question comes from Charles Hall from Peel Hunt.

And well done for navigating some pretty tough markets. A couple of questions. Firstly, it's a pretty unusual outcome to be delivering market share increases in a very tough market as well as price increases. Can you just talk about some of the key drivers for those market share increases and generally pricing in the segment. Are you the only ones that are getting price increases? Is that a differential between you and the other players?

Yes, Charles. So I think a couple of dynamics here. I completely agree with you. It is a bit unusual to see pricing being held when volumes are down and inflation is also starting to come down. But I think there's sort of more to the story than just price here. From a brand standpoint, they are really focused on ESG now. So this is our table stakes, and it's a license to operate kind of requirement there. There's also supply chain flexibility. And given our global scale, we are able to provide that. We're also looking for sustainable products. Our sales from our recycled polyester thread line actually grew 15% despite sales being down 19%. So that just shows you that sustainable products, I think, continue to grow. The other thing which is important is the ease of doing business. Over the past few years, we have invested in digital tools. We are able to connect with customers through our proprietary eComm platform, and it becomes easy for customers to engage with us. There's also one more structural differentiation that we have compared to some of the other players. Over the past several years, we have invested in small and medium-sized machines within our factories. And what that does is we started to see early on, I think, middle of last decade, and there's a fragmentation of orders that's happening. So what is it coming in smaller quantities, the frequency of ordering has gone out. And in order to actually address that complexity of orders we were going in for smaller machines and midsized machines. Now what that does is it allows us very fast service. We can respond to last minute request from customers much better than the competition, which still continue to have very large machines, and those machines are not very responsive to quick orders here. So I think these are all the factors that have been playing in. To the best of our knowledge, we don't think any of our competitors has managed to hold on to the pricing. And we tend to be the lone player, at least in the thread space that's at sort of holding on the pricing during the first half.

And so you think it's fair to say that the ability of you to price is different now, you can say, compared to COVID because of these changing themes?

Absolutely. Absolutely. And just to remind the audience here, thread at the end of the day is only 1% of the cost of a garment or a shoe. So hypothetically, even if you double the cost, you will not destroy the economics of the final garment or the shoe. So yes, we do have pricing elasticity. And realistically, from a brand standpoint, they really want to make sure that the thread is not the reason why the production is being held up on the factory shop floor. So the ability to respond quickly and to respond in smaller ports of orders is something which is a big, big differentiator for us.

Got it. One more question, if I may. You obviously set out at the Capital Markets Day is the 17% margin target for full year '24. And since then, we've had a much deeper decline in market volumes than you would have expected. What gives you the confidence still that, that 17% target is achievable?

So I think there's a couple of things. One is that we have been working on the portfolio over the last 18 months. We have exited 14 markets, most of them are nonstrategic, low-margin market. So that's point one. We were also delivering synergies at the higher end of our expectations with the 2 footwear acquisitions. And I guess, Charles, assuming everything continues to be at the same level as we have seen in the first half and the only change that happens next year is the volumes going back to 2019 level, just the volumes alone are going to get us to the 17% operating margin next year.

Our next question comes from Bruno Gjani from BNP Paribas.

I have a question on the volume outlook for Apparel & Footwear. I understand the near-term volume environment is, of course, uncertain. But I was curious to understand how confident you are that volumes have likely troughed today. And further, you noted in the presentation that you have better insight regarding what this market recovery in Apparel & Footwear looks like in Q4 of this year. Could I ask what your current planning assumption is for Q4 and what guidance today bakes in regard to the volume environment in Q4 relative to, say, Q2 or H1 of this year. Do you assume much of a recovery in Q4 today or not so much?

So I think, Bruno, thanks. Thanks for the question here. It's a pretty deep question. So let me take maybe 30 seconds to build the context here. So volumes in the first half were down 23% compared to the same period last year, and they were down about 15% compared to the same period in 2019. So you can see the volume decline has been pretty steep. Clearly, the trough for us happened some time in Q4 last year and we continue to see in Q1 this year. The second quarter, we have seen quite the improved volumes coming through. And what we have said is the second half of this year is going to be slightly better than the first half of this year's result. So that is the base assumption. We are not expecting a dramatic rebound in volumes in the next 3 months. We will know a lot more in the September, October timeframe, actually when the ordering starts for the spring summer season of 2024. So it is a bit premature at this stage. So in the absence of any concrete data, Bruno, I think our base problem is we will see an improvement, but it's hard for us to quantify what's the extent of the improvement here. Having said that, I'd like to give you 2 data points. These data points, I don't want you to extrapolate it and I just sort of think it for what it is. It's 1 data point in a very complex scenario. The first data point is the sampling activity, which is basically the orders that we get from the Tier 1s for next season for production in the month of July is up about 4% compared to July last year, all right? So that's 1 data point. In isolation, it doesn't mean much, but I just want to leave you with that. The second data point is some of the brand customers, the big brands that were taking a very, very cautious approach in the first half, the sentiment seems to be slightly improving during the month of July. Now whether that sentiment translates into more orders in September, October, I think time will tell. But these are the only 2 data points that we have right now, which will tell you what's happening in July.

Understood. That was very useful. And I guess as we look out to 2024, has your view of the world on where volumes ultimately settle actually changed after what you've observed in H1? I guess what I'm trying to get at is how lucky do you think it is that we return to those 2019 volume levels at some point during the year of 2024?

Right. Okay. So this is sort of a challenging question, Bruno. So the first point to make is it's too early to be saying anything about 2024. But I guess to answer your question about '24, let me maybe take you back 3 years. Because there is a story around what's happened in the last 3 years. So in the middle of 2020, in the midst of pandemic, the brands just slammed the brakes on orders and everything came to a grinding halt. As the world started to come out of the pandemic, the COVID lockdowns, the pent-up demand from consumers was very high and came as a pleasant surprise to the brands. So everyone pressed the accelerator and started to order more. As that sort of continues to take off in the middle of '21, suddenly, the brand started to see that the supply chain disruptions are increasing in the middle of '21. And as a result of that, they started to order more. Now that's -- the term that has been used is called buffer buying, which is I might need to buy only 1 piece, but I'm buying 2 pieces because I don't know when that 1 piece will show up at my warehouse. So the buffer buying really started off in the middle of '21, and that's sort of the start of the inventory surge that happens. By the time you got to the middle of '22, the brands noticed that it's sitting on a lot of inventory. As a matter of fact, excess inventory in the middle of last year was approximately 90% more than what they normally carry. And that's when the brand started to slamming the brakes on inventory buildup. So we have been seeing the destocking progress since the middle of last year. It's roughly 12 months. I think the trough was Q4 last year and Q1 this year. It's starting to improve. The destocking cycle has been slightly longer than historical trend. It's slightly deeper than historical trends. But we are clearly seeing that the worst is behind us. The other interesting thing to note, Bruno, is that the end markets, so retail sales for Apparel & Footwear have held up pretty well during the first 6 months of the year. And we have a slide in our pack, which actually gives Euromonitor's forecast for full year '23, sales sort of the growth of retail sales in apparel and footwear. And you can see those numbers are reasonably robust. So with consumer demand holding up, excess inventory starting to come down significantly. It's a matter of trying for the brands start to then press on the accelerator and we start to see the restocking and the normal inventory happens. The actual kind of the restocking and the gradient of the recovery is something which we will know a lot more after the September, October time frame is done by. Just sort of sheer logic says that with consumer demand holding up and inventory coming down within the supply chain, it's a matter of time for the brands go back to normal buying behaviors.

And I guess just finally on profitability, as those volumes do eventually return and it's a significant amount down 15% relative to 2019, down 20% year-over-year. The margin in H1 looks, of course, very impressive. It looks very rich. I guess what I was trying to understand that will get at is the -- once those volumes return and you get the operating leverage from those volumes and of course, you deliver incremental cost savings over and above what you are delivering today, that 17% margin target starts to look quite conservative. Should we instead be thinking about that 17% margin target as a [indiscernible]? Or are there some potential headwinds that we need to make sure we keep an eye on?

All right. I think, firstly, I would tend to agree with the sentiment of your note that you sent out this morning, which is as volumes recover, we should get to the 17% operating margin. My view is, first, let's get to 17%, and then we'll figure out the road beyond that. But I do agree with you with everything else being static, and just the volumes recovering, we go from 15% in the first half this year to 17% when the volumes get back to 2019 levels.

We have our next question comes from Mark Fielding from RBC.

I got a couple of questions, typically. But if I start with just how you see the outlook relatively in Footwear versus Apparel. Obviously, you came into this year thinking that Footwear would see potentially less of a destock impact. I mean, actually, the first half organic performance is slightly worse than Apparel from an organic perspective. So just is there -- how do you think about the outlook there going into the second half and this idea that will come back to normal at some point?

So I think, Mark, just to give you a comparison here. We have been with very close contact with the Tier 1s on the brands, both in Footwear and Apparel over the last 6 months. And on the top 20 footwear brands collectively produced 35% less shoes in H1 this year compared to H1 last year. So just in terms of the number of shoes, the volumes are down 35%. So that's been one of the data points that we have. Visibility to this destocking was very low in the second half of last year. It's fair to say that footwear destocking actually started to happen very late last year and it sort of actually started to take place in Jan, Feb this year here. So that's point #1. Point #2 is our original assumption in footwear was that the excess inventory in footwear was limited to only a few brands. But I think what we have learned in the last 6 months is slightly more broad-based than just a few brands. So it is reasonably broad-based here. On the apparel side, during the same period of H1, roughly 30% less garments were produced in this half compared to the last year H1. So you can see broadly apparel 30% down, footwear 35% down. But I would not make too much of fuss about that extra 5% for a simple reason that footwear as the market is about 1/3 the size of apparel. So any slight movement in the footwear market tends to have a bigger percentage impact here. So what we have said in our earnings -- in our investor call this morning is that broadly, the Apparel and Footwear market is down 30% in the first half.

Great. And just -- so I'm trying to get my head around sort of the moving parts of the -- particularly the previous question. So volumes staying around 15% below when they were in 2019. You're also saying you can get 17% margin, the volumes back at that level, but then equally saying that, I mean, I don't think me or many of my counterparts are putting in 15% year-on-year growth for next year. So I'm just -- I suppose that's the extra efficiencies with the things. But I'm just trying to think about -- I know it's difficult because you're not providing outlook at this point for 2024. But I'm trying to understand what you think is normal demand in your market basically because you've had such a volatile couple of years. And if I can throw one extra bit of that question in that context. If we're having such an aggressive destock, is the potential, not for the level we saw a couple of years ago, but a slightly a bit of excess growth for a short period as we sort of go to back to normal and restock as well. Just how do these parts move?

Yes. Well, I think your first observation is that the last 3 years have been very, very volatile. It's been extreme peaks and extreme troughs, so absolutely spot on there. We do believe the medium to long term, you will get back to those growth rates that we have listed in our investor slide. I think it's -- if I go back, it's probably just tell you the slide number here in a second, and someone help you with that. Slide 20, where Apparel should grow 3% to 4%, Footwear 8% and Performance will be 6% to 9%. So we will get back to those medium growth rates. The reason why we're not making any comments about 2024 is we just don't know what's going to be the shape and the gradient of the recovery here. I've just given you the data points that we are seeing in terms of soft consumer demand. We've also given you some data points around the current inventory levels and how we're seeing things here. If you just look at logic, logic would say that we should start to see a restocking happening at some point in the near future. If you look at history, so this is my fourth destocking cycle that I've been through in the last 13 years month. But this is a very unusual destocking cycle because this has gone on for longer, and the peak and trough have been a bit bigger. And that's the reason why I'm not -- I'm sort of stopping myself from seeing anything about 2024. History suggests that every destocking cycle is followed by a restocking cycle. And usually, it's sort of a reshaped recovery in the past. Will it be a reshaped recovery? Don't know. I just can't say. I think we will be in a better position to give some insights when we do the interim market update in November.

If I could just follow up then so thinking about that 17% margin comment. I mean in the context of obviously now at 15% type level and where you want to go from here into next year, think about what the risks are to it and then the upside is even better. But if say there was no volume growth next year, is the logical starting point, this year's margin plus the cost savings? And then whatever that gap is, which is probably, I think, 70, 80 basis points, is the bit that you need a little bit of volume recovery and leverage on that. Is that a fair thinking?

That's broadly a safe assumption, I would say. Yes, there will be a few minor moving parts, but I think you've got the big picture pretty much sort of correct.

Great. And sorry, one final question. I'm going on a bit here. But just a quick one for Jackie on the pension. So in terms of where we are in the on-off trigger, I'm assuming, therefore, with the ongoing monthly payments before the end of this year, if nothing else changes in the world, you'd be reaching that off trigger. That's correct in particular, the 100% mark now?

Yes. So Mark, at the moment, we are sitting at 99%. And as I mentioned in my presentation, the range has now been changed from 98% to 100%. But it's been updated to reflect the new mortality tables that's positive for us. So we're sitting at 99%. [indiscernible] had a technical deficit of GBP 25 million. So we need a little bit more than the debt payments we're paying in. We're only paying about GBP 2 million a month. So we actually need some market movements to help us, too. So interest rate increases will help us maybe some overdelivery on FX. Now we need to trigger the 100% for 2 months in a row. And if that happens in the second half of this year, we'd issuance and [ RNS ] to market just to update as the triggers switched on.

Great. And just clarifying that you adjusted the range to 98% to 100% because of the change in mortality rates, but you haven't updated the valuation of the scheme on that basis. Is that fair?

Yes, that's correct. So it was actually quite tricky to update the valuation outside of triennial valuation for mortality. So we agreed with the Trustees to change the range to 98% to 100%. When we do the next triennial valuation, which will happen in March next year, it will take us maybe 12 months to do that evaluation. Once it's been updated, mortality will go back in and the range will change again to 99% to 101%.

[Operator Instructions] Our next question comes from Kevin Fogarty from Numis.

Great. Can I just pick up on the point on those customers. The implication there is that the sort of order frequency is greater. I just sort of wondered, is there a risk, I guess, that is sustained as we roll forward, i.e., kind of smaller orders, but a bit more frequency as they seek to sort of minimize their inventories, for example, and sort of in that scenario, could that be different to previous cycles, I guess, is the first point. And would that sort of be a competitive advantage for you guys given what you've said about the first half of the year? And then just secondly, in terms with your kind of 6% CAGR. What's -- what have you seen -- I guess, have you seen other things apart from your market share gain that sort of underpin your confidence in that medium-term objective specifically during the first half of the year?

You're right. So Kevin, what we have been seeing for the last 7, 8 years, it's not just a recent phenomena. It is that customers are ordering in smaller quantities. They are ordering more frequently. And when they order, they wait till the last minute and they expect the orders to be back sooner. So that's been happening since 2015, 2016. So it's not just the pandemic phenomenon. What has happened in the last 3 years that, that trend that had started before the pandemic is much further accelerated. And your prognosis is absolutely right. As that trend continues, it is a source of competitive advantage for us because of the way our factories are designed and the kind of machines that we have in the factories and the fact that we are pretty much technologically connected between all the factories and vertical interfaces within all the factories. So our speed and agility is much better than the competition. So that clearly is -- it's something which is going to help us. And this will continue into the medium to long term. So that's just a trend that we have been seeing and long way this trend continue. So we are actually -- if you look at some of our investor presentations in the past, we are investing in sort of digital thread printing. So we are working with some start-ups we're looking at. So how do we take advantage of this trend and really come up with something which is game changing that will help Coats over the next 2 or 3 decades. So these are things that we're working pretty closely in those. But in the meantime, we continue to take market share. What's really clinking in the last 3 years. So ever since the pandemic happened and the whole ebb and flow that we have seen in terms of demand and supply in the last 3 years, it has really, really, really helped us. That we're saying in the Formula One car racing, it's hard to overtake cars on a bright sunny afternoon. A rainy day, one can actually overtake 4 or 5 cars. And that's what we've been doing during the last 3 years. So the market share that we have gained in the last 3 years has been more than normal, and half of the market share has come from our primary global competitors.

Okay. Fine. Okay. No, that's helpful. So that's effectively kind of winning a bigger share of their wallet effectively. Is that understood?

Correct.

We have our next question comes from David Farrell from Jefferies.

I think I can eke out 2 more. Firstly, just on the market share gains. I'd be Interested to know whether or not of the people you're taking market share gains from not the, call them, the global competitors, but the regional ones. Are they permanently going out of business or are they just kind of lingering around there to kind of maybe come back at a later stage? That's my first question. And then I wondered if I could get a bit of an update in terms of where we stand on ProWeave. That's sounded like a really interesting opportunity when you bought Texon in terms of getting into the [ athleisure ] market. What progress has been made there?

All right, David. So on the first question around market share from smaller competitors. It's actually a combination of both. So some of them are lingering around, and some of them have just closed shop. The good thing, which has been happening over the past 5, 6 years, is that local governments have been enforcing their own loss in a much more strict manners of environmental laws, labor compliance laws, et cetera. And a lot of these small players have not been able to meet the local legislation or local legal requirements and hence, they go out of business sooner rather than later. There are some which are still working and lingering around. But we would tend to see this sort of trend continue where the long tail of competitors continues to collapse because of their inability to meet compliance requirements either of local countries or of the global brands. So that's on the market share point. Can you just remind me of your second question? It's probably brilliant.

Yes.

Yes, got it, David. Yes. So we have had 5 customer wins in the first half, ProWeave. Footwear is more of a longer cycle process compared to Apparel. So these wins will start translating into actual sales probably in 2024. In the first 6 months of this year, we have had $0.5 million of sales of ProWeave. So that is an exciting program that will continue to ramp up over the next few years. But this year, it's not going to be material.

Our next question comes from Mark Fielding from RBC.

Sorry, me again. Can we actually just talk a little bit more about Performance Materials. I mean, around half of the revenue decline relates to the customer in-sourcing issue. But you've also talked about some destocking there. You indicated that Q1, you thought that destocking would be relatively short lived. Just can you give us an update about how you're thinking in the outlook there and that sort of particularly that destock elements of things?

Yes. So there's been a little bit of destocking that's happened in the household sector of our Performance Materials and a little bit of the telecom. It's -- so these are the two end markets within Performance Materials business that have seen some degree of destocking, I would say. The household to a large extent, follows the same dynamics as we see in Apparel because it's broadly a thread that goes into various products that are consumed in a household. So there's been some degree of restocking there. The telecom thing is very interesting in the sense that it's less of destocking. It's more of delays by customers, I would say. So while some of the big American telecom operators are trying to get permits for their 5G tower rollouts, et cetera, there's been some delay. And so that is less of destocking you want to really understand. Beyond that, it's pretty much there's been no destocking in the PM section.

So how does the outlook then look for those 2 factors where you feel that bit of destock and you said the customer delays and how does it look for the second half of this year?

So there won't be any dramatic change in the second half in terms of those 2 end market dynamics. There would be a gradual improvement going into 2024.

And actually, while on the [indiscernible], can you just remind us how much is the impact going to be in the second half of the customer in-source? I think a little bit of it was in Q4 last year already.

And so it's $20 million in the first half, and that's $10 million in the second half, Mark.

Right. And one minor follow-up question to my earlier pension questions, if that's all right, which is actually just remind us the on-off agreement, that doesn't cover the admin cost, does it? Can you just remind us what the number is on the admin cost...

The admin costs, no, it doesn't come -- the admin costs will still continue that until we actually fully derisk the pension scheme.

And what is the number on those admin costs at the minute?

That sits around sort of $4 million to $5 million a year.

We have no further questions at the line. I will now transfer back to the management team for closing remarks.

Well, I guess, thank you, and thank you, everyone, for your time, for your questions. Very good, very deep questions. We have tried to be as transparent as we can even though in some cases, we don't have all the answers. But we've given you a directional view of what we are seeing just to help you in your analysis. Within the company, we are focused on controlling the controllables. We're really excited about the internal improvements that we have made. And we are confident that as volumes come back, that's going to translate into more sales, better margins and more cash delivery all times. So with that, let's conclude this call. Thank you very much for your time and look forward to meeting some of you during the road show. Thank you, everyone.