O2 Partners, LLC (VRT) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to today's Completion of OrthoLite Acquisition and Announcement of New Group Structure Call. My name is Seb, and I'll be the operator for your call today. [Operator Instructions] I will now hand over to David Paja, CEO, to begin the call. Please go ahead.

Thank you. Good morning, all. We are delighted to be here today to cover two important topics: first, the completion of OrthoLite and a reminder of the acquisition rationale; and second, our new division structure. We have also provided a brief confirmatory trading update, and we'll provide a fuller update when we have October's numbers on the 7th of November, which is consistent with prior years. We are delighted to announce that we have completed the acquisition of OrthoLite after receiving regulatory approval from the U.S. and Vietnam. The timing is consistent with our expectations. This was an exceptional opportunity. There wasn't an alternative asset of this scale, quality and strategic fit available in the footwear universe. This creates a market-leading Tier 2 supplier of critical footwear components. And we won't rush with the integration, we will focus on preserving OrthoLite's growth, which is very exciting. We're expecting to achieve annualized joint cost synergies of $20 million by 2028. Through this acquisition, we are combining the Global #1 in footwear threads and Global #1 in structural components, with the Global #1 in open-cell foam insoles. We serve the same customers, the same segments, and we have similar business models. So there is significant opportunity to improve customer penetration. OrthoLite has very high brand intimacy, whereas Coats historically has stronger relationships with Tier 1 customers. This makes us stronger. The co-branding relationships that OrthoLite has shows how deeply entrenched they are with customers. They have 310 co-branding agreements. OrthoLite has 36% market share. And as we've explained before, open-cell technology is growing faster as part of the insole market in general, and we expect penetration to increase further through the end of the decade. The market is very fragmented, and customers value scale and agility to meet their requirements, especially in such uncertain macroeconomic conditions. As with Coats, OrthoLite has the global manufacturing base to adapt to tariffs. 92% of their products are manufactured between China, Indonesia and Vietnam, which is very similar to Coats' footwear footprint in those localities. Consolidation of those -- of these footprints will be the biggest source of synergy. We're also changing the group's divisional structure, streamlining it into two divisions: Apparel and Footwear. This reflects the transformation of the group's profile following the exit from the North America Yarns business earlier this year and the acquisition of OrthoLite now. This change reduces internal complexity and aligns the divisions more closely with the underlying technologies. The Apparel division led by Adrian Elliott, expands to include the Performance Threads and Personal Protection businesses, which accounted for roughly 80% of the old Performance Materials division. And it is worth remembering that performance threads are produced in the same sites as apparel threads. The enhanced Footwear division will be led by Pasquale Abruzzese, which includes the old Footwear division, OrthoLite and our Telecom & Energy business, the other part of the old Performance Materials division. This change is possible now because of the significant operational improvements made in Performance Materials over the last 12 months. The division has returned to growth in H2 and has delivered a step-up in profit margin with more to come and a clear plan to execute. Before we turn to Q&A, a short but reassuring update on trading. We can confirm that trading through the third quarter for both Coats and OrthoLite was in line with the expectations that we set out in July. We will release our usual trading update for the 4 months of H2 on Friday, 7th of November. We will now turn to Q&A. Please be mindful that we are limited in what we can say on trading at this stage. We will provide more detail, as we said, next week.

[Operator Instructions] So far, we have this question from Kevin Fogarty. Since the announcement of the OrthoLite deal in July, how have your thoughts on the potential -- value creation potential of the deal been influenced by what you know now rather than what you knew in July?

Thanks, Kevin. Great question. I would say that in general, we've reaffirmed our views on the potential of the combination, both in terms of cost and sales synergies. We've gained access to additional information to the management teams. We started the detailed planning process in terms of execution of cost synergies. And we also, I would say, worked much more closely on sales synergies opportunities that we have pre-identified, but now we're kind of moving ahead. So I would say on both fronts, more reassured.

And we have a couple of follow-ups also from Kevin. Can you comment on how OrthoLite has performed relative to Coats footwear during the period since July this year? And secondly, are there synergies that we should be thinking about that should result from the reorganization announced today? And will this reset the medium-term EBIT margin and growth targets for Footwear and Apparel?

Thanks, Kevin, for the question. So in terms of the OrthoLite trading, as we said in the statement, the trading in the last quarter has been in line with what we were expecting, bearing in mind that OrthoLite's growth rates are sort of above our core footwear divisional growth rates. And then in terms of the question around the divisional change and the financial targets, the real crisp around the divisional change is around sort of simplification of the business, but also alignment of technologies. And that in itself is not going to sort of prompt a change in the financial framework. But with the acquisition of OrthoLite, as we said in the statement, in terms of the growth rate of OrthoLite, the higher margins of OrthoLite and the cash generation there, that will lead to an update of our financial framework, and we'll tell you more about that in March.

[Operator Instructions] Thank you for your participation. We currently have no further questions on the call, and I will hand back for any closing comments.

Okay. So closing comments, thank you for joining today. This is a very exciting day for Coats. So we're really looking forward to what's next and to execute on our plan and our medium-term targets. Thank you.

Thank you. This concludes today's conference call, and you may now disconnect your lines.