Coats Group PLC

LSE:COA

Earnings Call Analysis

Earnings Call Transcript 2021-Q4

[Operator]

Hello, everyone, and welcome to the Coats Group Plc Full-Year Results Call. My name is Bethany and I will be your operator today. There will be an opportunity to ask questions by dialing in after the presentation using the details provided.

I will now turn the call over to Victoria Huxster. Victoria, over to you.

[Victoria Frances Huxster, Head-Investor Relations, Coats Group Plc]

Good morning and welcome to the Coats Group full-year 2021 results presentation. My name is Victoria Huxster, and I am a Head of Investor Relations at Coats. I'm here with Rajiv Sharma, CEO; and Jackie Callaway, CFO, and they are going to talk you through the results and outlook for the business.

Without further ado, I will pass you over to Rajiv.

[Rajiv Sharma]

Good morning and welcome to our 2021 full-year results presentation. I will start with the highlights and division performance. This will be followed by a presentation on our financials by Jackie. The presentation concludes with our outlook statement. After which, we open up for Q&A.

In this presentation, I refer to Apparel & Footwear division as A&F and Performance Materials division as PM. Last year's strong performance can be traced back to decisions and actions taken in 2020 during the height of COVID to support customers, suppliers and employees. These strong relationships are fueling our progress last year and this year.

In 2021, we have seen robust demand recovery and accelerating growth. Sales grew by 29% versus 2020, and 6% versus 2019, supporting our expectations of a V-shaped sales recovery for Coats. We also took 2 percentage points of market share, the highest gain in a decade. We accelerated our progress in sustainability and signed up for ambitious climate change and circularity goals. Sales of a premium recycled polyester thread have grown 159% to $96 million establishing a clear link between sustainability and commercial events. In 2021, we launched 21 new products that delivered $37 million of sales, and most of it had good margins.

Despite COVID-induced disruptions, supply chain challenges and inflationary headwinds, the global Coats team delivered a strong 12.8% operating margin and over $100 million of free cash flow. Our leverage now stands at 0.7 times, providing a strong platform to take advantage of attractive organic and inorganic investment opportunities to further accelerate growth in the future. The board is pleased to propose the final dividend of $1.5 per share, which is a 15% growth against the final dividend in 2020. We see continued growth this year and now expect performance to be modestly ahead of our previous expectations for the year.

Lastly, and very importantly, we have commenced a number of strategic projects in the group that should collectively deliver a $50 million of uplift and incremental profit in 2024, more of this topic on the next slide. Improving customer service, supply chain resilience, and overall cost base productivity is a key enabler to grow sales and profits faster than market. We have flagged labor availability challenges in the US for some time and have now concluded that these are structural challenges.

During the past two years of COVID, we have learned new ways to connect, collaborate and be more productive as individuals and as a company. With that in mind, we have commenced a number of strategic projects. This includes footprint and portfolio optimization in a few countries and associated SG&A costs. By investing $35 million of exceptional cash over two years, we expect to deliver $50 million of incremental adjusted operating profit in 2024. These strategic projects will allow us to mitigate the labor availability issues in the US and return PM margins back to 2019 levels in the next two years.

Our focus internally is to accelerate profitable sales growth and to transform the company to be even more successful in a post-pandemic world. Let me hasten to add that we will not provide more details on these strategic projects and there are – as there are several sensitivities and protocols that we need to follow. However, there will be regular updates with more details to the market over the next 24 months. The next update will be during our H1 results announcement.

During the next few slides, I will talk about the market for both A&F and PM and how we perform during 2021 and each of these divisions. So, I'd like to start with a market backdrop in A&F. As you can see from the top left-hand chart, we have seen a strong market recovery in global A&F retail sales, but it's still below 2019 levels. The US and China were particularly strong with Europe slower to recover. We expect global A&F retail sales to get back to 2019 levels this year. The demand recovery was robust across all categories and resulted from a combination of pent-up demand, buffer buying due to supply chain challenges and some normal restocking. The slide on the lower left-hand corner shows US inventories improving, but still below 2019 levels.

We expect normal inventory buildup in 2023. Last year, we saw unprecedented supply chain volatility, with customers switching sourcing between geographies at short notice, competing for raw materials and increasingly using expensive airfreight. Companies that did well last year had strong brands, global supply chains, online channels, and strong balance sheets. Brands focused on online, sports, athleisure, denim, and mass market have done well last year.

First, I'd like to start with the market backdrop in A&F. As you can see from the top left-hand chart, we have seen a strong market recovery in the global A&F retail sales, but it's still below 2019 levels. The US and China were particularly strong with Europe slower to recover. We expect global A&F retail sales to get back to 2019 levels this year. The demand recovery was robust across all categories and resulted from a combination of pent-up demand, buffer buying due to supply chain challenges, and some normal restocking.

The slide on the lower left-hand corner shows the US inventories improving, but still below 2019 levels. We expect normal inventory buildup in 2023. Last year, we saw unprecedented supply chain volatility, with customers switching sourcing between geographies at short notice, competing for raw materials, and increasing – increasingly using expensive airfreight. Companies that did well last year had strong brands, global supply chains, online channels, and a strong balance sheet. Brands that focused on online, sports, athleisure, denim, and mass market did well last year.

While the market has not yet recovered to 2019 levels, our A&F division has delivered 33% growth over last year and 5% growth over 2019. Growth ahead of market was enabled by 2 percentage points of market share gains from 21% to 23%. How did we do this? It's a strong customer relationships, supply chain resilience, operational delivery, and talented teams. Winning with the winners and sustainability are a key part of our playbook, 43 of our top 50 brands now have sustainability targets. We offer our customers market-leading premium products, excellent support and technical services, reliability of supply and digital tools. Our global footprint and proximity to customers has remained a critical differentiator.

Now, let me turn to PM and start with an explanation of the new subsegments on the slide. In order to provide more clarity and better align to the growth opportunities for the PM business, we have changed the way we operate and report the PM subsegments. We are happy to help investors map the previous segmentation to the new segmentation. We have Personal Protection, which is about 40% of the divisional revenues, Composites, which is about 25%, and Performance Thread, which is roughly 35%. The medium-term growth rates expected for each segment are high-single digit for Personal Protection, double-digit for Composites and global GDP growth rates for Performance Thread.

It is really important to stress that there is no change to the medium-term growth expectations of 6% to 9% for the entire PM division. Let me now talk a little bit about the subsegments. The Personal Protection market has seen a healthy recovery as industrial activity and worker safety standards have risen. We have seen growth in thermal, cut abrasion and electrical protective wear. Leading customers expect workwear to provide safety against multiple hazards and also be lighter and more comfortable to wear.

In Composites, we are seeing a rapid expansion of the fiberoptic network, with 65% of homes around the world still to be connected by fiber to home. Fiber demand is expected to grow 7% or more between 2021 and 2026. The energy market is expected to increase CapEx for exploration and production. We're also seeing an accelerated shift towards electric vehicles. These end market dynamics will be favorable to a Composites segment. Within Performance Thread, car production is expected to be up 9% in 2022 versus 2021, although it is still not back to 2019 levels. The mature markets of teabag and feminine hygiene remain robust, with 5% growth during 2021. Lastly, sustainability is starting to be a factor in several industry end markets.

In terms of our performance in PM, revenues recovered well in all the segments with organic growth of 19% versus 2020, including a recovery in Personal Protection, which grew by 14% in November and December to end the year up 12% on an organic basis. The order book for Personal Protection remained strong. In Composites, we saw good commercial wins in the US, and you can also see here on the slide a picture of a new Composites factory in Spain, which has 50% more capacity.

In Performance Thread, we saw market share wins in automotive, as well as a strong performance across all product ranges. Jackie will talk in more detail later about the margins, but excluding the US business, PM margins were a healthy 14.4%. As already discussed, some of the strategic projects will enable global PM margins to return to at least 2019 levels next year.

Let me talk about operational delivery and supply chain resilience. Our previous investment in technology and highly engaged teams allowed us to flex global supply chains to better serve customers. I am most proud of our operations teams who excelled in a tough environment. The backdrop has been difficult with COVID shutdowns in India and Vietnam, labor shortages in the US, as well as very difficult supply chain environment for everybody in our industry. We took swift action to mitigate inflationary pressures early with price and productivity. We were able to flex our global factory and distribution network to serve customers from multiple locations. Our strong supplier relationships allowed us to source the required input materials on time. Health and safety is our number one priority, and as you can see we have had the strongest performance to-date in health and safety.

Now, let me cover innovation and sustainability and how these are critical to our future sales and margin growth. A key part of a company purpose is to make a better and more sustainable world. When we launched our sustainability strategy pioneering a sustainable future in 2019, we laid out ambitious targets for 2022 and 2024. Despite the past two years of COVID disruption, we remained committed to those targets and have made good progress on all five pillars. Let me pick out a couple of highlights here.

In the social pillar, one of our 2019 targets was to have certification from externally reputed agencies like Great Place to Work. We committed to have 80% of our employees working in a Great Place to Work certified site by 2022. Last year, we achieved 83%, reaching the target a year earlier.

We also reached our energy reduction target of 7% a year early and expect to continue reducing energy intensity in 2022. We also delivered 159% growth in EcoVerde, a rage of 100% recycled polyester products. Revenues grew from $37 million in 2020 to $96 million last year. We are on track to meet our 2024 commitment to have all premium polyester threads made from 100% recycled materials.

Our fourth annual sustainability report has been published today. It has more details on our sustainability strategy, targets and performance. If you would like to discuss more on a sustainability strategy, please contact Victoria for a meeting. During 2021, Coats has added climate change and circularity through its existing focus areas of water, waste energy, social, and recycled materials. This builds on a strong internal culture of health and safety, diversity, equity, and inclusion. We have committed to reduce emissions by 46% in this decade and reach net zero by 2050.

By 2030, 70% of our global energy consumption will come from renewables, and all Coats products will be made completely independent of new oil extraction materials such as polyester and nylon.

We will also shift to circularity, creating products and packaging solutions that enable recycling and reuse both within our own operations and across the wider garment industry.

As part of a sustainability strategy, we have earmarked $10 million to fund the scaling up of green technologies and materials that are relevant to our industrial supply chain. We have begun to repurpose our Asia innovation hub to focus on the application of biomaterials. We are really proud of our sustainability journey and look forward to the future with confidence.

Next, we have a short video in which Adrian Elliott, our Head of Apparel & Footwear, talks about why sustainability is important to our customers and how it gives us a competitive advantage.

[Video Presentation] (00:15:28-00:17:35)

Moving on to innovation. We launched 21 new products that delivered $37 million of sales during the year. Examples of innovation within A&F include Lattice Lite Eco, a revolutionary fiber-laying technology using sustainable materials to create footwear composite materials for the next generation of high-performance super shoes. We also launched EcoRegen, a biodegradable thread made from 100% lyocell that supports greater circularity in the apparel industry.

In PM, we launched FlamePro Orbit that has lighter weight, higher performance, improved strength and more safety. We also developed Epic Patriot for US non-flame retardant military applications with a specially formulated lubricant. Our innovation pipeline to deliver sales and margin growth remained strong. Our focus remains on three areas: First, Personal Protection with the growth of protective wear and multi-hazard protection; two, Composites with the trend towards light-weighting for cars, sports, footwear and the protection of data and cables or of energy pipelines; and three, biomaterials to accelerate the future of sustainable products.

And with this, let me hand over to Jackie to present the financials.

[Jackie W. Callaway]

Thank you, Rajiv, and hello to everyone on the call. Let me start by summarizing the key highlights of our financial performance for 2021. We have seen strong and accelerating sales growth with 29% organic sales growth versus 2020, and 6% versus 2019. We saw sales growth across both of the A&F and PM businesses driven by demand recovery and positive end market sentiment across all of our regions.

At the beginning of 2021, we highlighted to the market the heightened inflationary pressures we expected to see during the year and the areas of raw materials, labor and freight. Coats is a company that operates well in an inflationary market and has a well-defined and tested playbook. Consequently, we moved quickly to mitigate these inflationary challenges by successfully implementing pricing actions and self-help programs.

Our adjusted operating profit of $193 million was broadly back to pre-COVID levels and significantly up on 2020 as we saw demand flow back and this performance was despite some severe COVID disruption in Asia in the second and third quarters.

On cash, we delivered a very strong $113 million of adjusted free cash flow which was supported by a proper recovery as well as continued tight control of working capital, and capital expenditure. This

[ph]

moved (00:20:18) our balance sheets in a particularly strong position with leverage of 0.7 times and provides us with the funds to invest selectively in the most attractive, organic, and inorganic opportunities to deliver further shareholder value going forward. We have commenced a number of strategic projects and we expect these projects to have a material impact on our operating margins with incremental operating profits of around $50 million by 2024.

Slide 19 sets out the financial summary and our key financial metrics, which saw a significant improvement versus 2020. To aid comparison and to better assist the speed of recovery, we've also included the 2019 organic comparators.

Let's now take a deep dive on these key financial metrics starting with revenues. Overall, the year-on-year increase in group revenues was 29% on an organic constant currency basis. And this recovery was driven across both an A&F and Performance Materials, although I note the A&F segment was harder hit by COVID in 2020.

Against 2019, both of our businesses have performed very well, with a return to pre-COVID 2019 sales levels resulting in a 6% organic growth versus 2019 for the group. Group operating profits were up 75% on an organic constant currency basis to $193 million as a significantly increased volumes delivered upside margin benefits. As a result, margins recover to 12.8% and I will cover the key profit lever movements in more detail shortly.

Versus 2019, operating profits and margins were slightly down. This is primarily due to the COVID disruptions seen in our Asian businesses in the second and third quarters and the operational impacts in our US business as a result of labor availability issues. Some of the strategic projects announced today will address these structural labor availability issues in the US.

Finally, on the slide, EPS and free cash flow were both also well up year-on-year due to the proper recovery we have seen, as well as lower interest charges and a normalization of our effective tax rate. I'll give more details on these items later.

Now, moving on to operating profits and the next slide provides an overview of the movement and group operating profits and margins during the year. Operating profit recovered quickly following the significant COVID disruption in 2020, as additional volumes positively benefited operating margins. We continue to offset inflationary pressures such as raw materials, freight and wages through price and productivity initiatives.

Whilst we expect inflationary pressures to continue into 2022, our early actions on price and productivity initiatives leaves us well-placed to continue to mitigate these, as we have successfully done in the past. At an SG&A level, and as expected, we saw many of the temporary cost savings put in place in 2020 reverse alongside a natural increase in variable cost of selling with a strong demand that we have seen. The above impacts lead to a significant increase in operating margin in the period, which is up 330 basis points to 12.8%.

Let's now look at segmental margins on slide 21. Both segments saw significant improvement from margins from 2020 as volumes came back into the business due to the COVID recovery. A&F margins have recovered to a very healthy 15%. This recovery was as a result of excellent commercial and operational delivery, pricing actions, and procurement self-help initiatives, offsetting heightened inflationary pressures and the COVID disruptions during the year. These operating margins are ahead of pre-COVID 2019 levels by 30 basis points on a reported basis.

PM margins are up 270 basis points year-on-year to 7.1% as a result of the improving volumes. However, they were held back by the continuing labor availability issues in the US. It is noted that excluding the US business where we are facing these localized labor issues, PM margins were very healthy 14.4%. And as already noted today in relation to the US and as part of the strategic project activity, we will address the labor availability issues in the US. And as a result, we expect a material improvement on PM margins.

On slide 22, we show the bottom-half of the profit and loss account, and there are four areas I'd like to cover off on the slide. First, the exceptional and acquisition-related items of $14 million, which include $12 million spent in relation to our pursuit of strategic acquisition opportunities during the year. Our approach to acquisitions remains disciplined and we will continue to look for companies with complementary capabilities that can further strengthen the core technology innovations or intellectual property, which can be scaled to deliver growth and value for customers and shareholders.

Secondly, you will see that net finance costs were significantly lower than 2020, primarily as a result of the $4 million interest receivable in relation to a historic indirect tax claim in Brazil. In addition, we had lower interest on our borrowings due to lower interest rates and lower average levels of net debt.

The third item is the normalization of our underlying effective tax rates to 31% after the spike that was caused by COVID in 2020. As profitability had normalized to pre-COVID levels in 2021, so has the effective tax rates as expected. The final item to flag is the proposed final dividend of $0.015 per share, which is 15% above 2020 levels and reflects the strength of the group's balance sheet, the strong growth and recovery out of the COVID pandemic, and the board's confidence in the strategy and growth outlook for the group.

Moving now to slide 23, where we see the strong cash generation for the year. At an adjusted free cash flow level, we delivered $113 million compared to $28 million last year. This is a very strong performance, although I note there are some non-recurring benefits within this number as a result of the COVID actions taken during 2020, for example, the non-payment of staff bonuses, which would usually be paid in March.

The increase in cash generation was largely due to the recoverability and operating profits that I've talked about earlier, but we also maintain our discipline across other cash levers as set out in the slide and this was despite some increase in working capital via inventories to support customers given supply chain disruption. Our closing net debt of $147 million, excluding leases, was lower than at the end of 2020 as a result of the strong adjusted free cash flow noted earlier, more than offsetting our ongoing pension payments and our return to paying shareholder dividends following COVID.

This level of net debt equates to leverage of 0.7 times, which is slightly below the target range of between 1 and 2 times. We have also maintained a comfortable liquidity position with committed facilities headroom of around $330 million. I would like to reiterate our capital allocation policy, which remains unchanged. We are focused on reinvesting inorganic growth opportunities in line with our disciplined acquisition strategy, supporting pensions and paying a progressive dividend.

On slide 24, I gave an update on our UK pension position following the most recent triennial valuation, which had an effective date of the 31st of March 2021. I'm pleased to say, we reached agreement with scheme trustees well ahead of schedule and the valuation resulted in an improved technical provisions deficit of £193 million. This was £59 million below the previous valuation. As a result of this, we've been able to agree the same level of annual contributions going forward at £22 million or around £25 million when included admin expenses and levy. These contributions will run until 2028, but we now expect the deficit to be paid off slightly ahead of the previous schedule.

On an IAS 19 accounting basis, the UK Pension Scheme is now in a healthy surplus position of $108 million and that largely reflects the differing valuation methodologies of gross liability between the accounting methodology and the more prudent technical provisions basis of accounting that drive a cash funding of the UK scheme. The improvement in the accounting position to a surplus on our balance sheet predominantly relates to actuarial gains of $203 million, which was driven by a higher discount rate due to high corporate bond yields, as well as asset outperformance and the contributions we have made to the scheme during the year.

On slide 25, we set out a specific financial guidance in relation to the strategic projects that we are undertaking. For the overall project, we anticipate some $50 million of bottom line EBIT benefits to be delivered in 2024. The footprint aspects of this program will largely be focused on key end markets with the resulting material improvement in PM margins, as I mentioned earlier.

The total exceptional reorganization cost to achieve these savings will be around $35 million, with the majority of that occurring in 2022 and with the remaining actions planned to occur in 2023. As a result of the timing of these actions, we expect the full run rate of savings for 2024 to be achieved before the end of 2023. In terms of the near-term impact on 2022, we expect incremental EBIT benefits of $5 million to $10 million to be delivered this year.

Lastly, from me and as with previous announcements, we have provided future modeling guidance, the latest of which is set out on slide 26. 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 and indeed, the strategic project financials I just covered on the previous slide. I conclude by reiterating the strong performance of the group in the year, the accelerating sales growth, the continued mitigation of inflationary pressures, the ongoing strength of the business and balance sheet, and the future margin progression as a result of strategic projects.

And I would like to hand back to Rajiv.

[Rajiv Sharma]

Thank you, Jackie. I'm now going to display our highlights slide, talk through the outlook before opening up for Q&A. Commercially, operationally and financially 2021 was a really strong year for Coats. I would like to thank all my colleagues for their tireless work, remarkable resilience and fortitude. I look forward to updating you in the middle of the year on the progress of the strategic projects that were announced today.

Our focus is to accelerate profitable sales growth and transform the company to be even more successful in the post-pandemic world. Finally, in terms of the outlook for the rest of the year, the strong end to the year has continued into the start of 2022 and despite some evidence of stock replenishment from customers during this period, we expect continued growth for 2022 as a whole. We remain confident in our ability to mitigate inflationary pressures through pricing and productivity actions. We now anticipate the group's full year 2022 performance to be modestly ahead of our previous expectations.

Thank you very much for your time, and now I hand back to Victoria.

[Victoria Frances Huxster, Head-Investor Relations, Coats Group Plc]

Thank you, Rajiv. We now have some time for Q&A and the Q&A session will begin shortly. If you'd like to ask a question, please dial in to the conference call using the details provided on the screen in front of you on page 30 of the slide deck, otherwise, just stay connected to listen to the Q&A session. We will pause for a few minutes to allow time for everybody to dial in. Once you're on the line, please follow the operator's instructions.

[Operator]

Thank you for standing by.

[Operator Instructions]

The first question today comes from Charles Hall at Peel Hunt. Charles, please go ahead.

[Charles Hall, Analyst, Peel Hunt LLP]

Thanks. Good morning everyone and well done on a very impressive statement. Few questions. Firstly, can you just talk a little bit more on pricing? You've obviously had pushed through a fairly significant amount in terms of recovering $60 million or so of additional costs last year through pricing and productivity and presumably similar sort of level this year. Do you feel the pricing environment has changed? Is that a sort of post-pandemic feel or is there something that you're doing that is different this time around?

[Rajiv Sharma]

Okay. Good morning, Charles and thank you very much for complements here. I think the pricing environment last year was reasonably favorable for a few reasons, one is, overall inflation as far as raw materials were concerned. But I think more importantly, the reliability of supply became a really big issue. And pretty much everyone up and down the value chain in our industry was aware that in order to get goods from one country to another country, you might have to ship it by air, you might have to hire more people because of kind of COVID related absenteeism, et cetera. So, bizarrely enough, last year, the pricing environment was quite favorable and it was relatively easy to get price last year.

[Charles Hall, Analyst, Peel Hunt LLP]

And do you see that as an ongoing situation where customers are much more concerned about getting on time in full than purely the best price?

[Rajiv Sharma]

I think 2022 is going to be more of the same, Charles. I think reliability of supply is going to be the number one priority for most of the brands. And then, after that, it's going to be quality, sustainability, et cetera.

[Charles Hall, Analyst, Peel Hunt LLP]

Yeah. Got it. And I know your exposure to Russia and Ukraine is tiny, but if you could just give a bit of insight into what operations you have got there in terms of revenues and people and how things are?

[Rajiv Sharma]

Okay. So, let me start with the Ukraine first. We have 8 employees and 2 contractors. Our number one priority is their safety. And I won't be talking more about them primarily for the – sort of for their own safety there. We don't have any manufacturing in Ukraine. It's primarily a warehousing operation and the revenues in Ukraine is 0.3% of group sales and profits close to negligible. So, I think, overall, from a financial standpoint, it's not really relevant. The key focus for us is really the people and making sure that they're safe and we are investing a lot of time and energy to make sure that they are safe. And I'm happy to report as of this morning they were all safe.

With respect to Russia, Russia accounts for roughly 0.6% of group revenues. We have 11 employees there. It's getting more hard to ship product into Russia. And given with what's happening with the banking system there, it's hard to get cash out of Russia. So, I think, from a practical standpoint, it looks like getting products in and cash out is going to be a challenge in Russia this year. We are actually evaluating our options as far as Russia is concerned. But again, even in Russia, it is very important for us to make sure that the employees there are safe. And if we do decide at some point in the future that due to unforeseen circumstances we can't continue, then we'll make sure that we'll take care of the employees.

[Charles Hall, Analyst, Peel Hunt LLP]

Great. Thanks for that. And then lastly, you've obviously had an exceptional charge relating to an M&A transaction. And Jackie sort of went into some detail on that, but do you want to just give a bit of color on what happened there and your thoughts about future M&A?

[Rajiv Sharma]

Right. So, I guess with sort of respect to that M&A, I'm sure you know that we can't go into too much of detail here. We are bound by NDA. But it's fair to say that we were looking at a reasonably large acquisition. It was transformational in some ways. We had reached into advanced stages of due diligence. And I guess at every stage actually sort of assessing the balance between risk and reward. And there came a point where the risk was slightly more than what was acceptable to us and we decided not to sort of continue going forward with it.

I think the key point here is to highlight two things I think. One is the ambition that we have and we have been talking about it that we want to move beyond just smaller bolt-ons into mid-sized companies or some transformational deals. And that's what we were trying last year. The second thing is, it just shows the discipline in the company that we will not get sort of unreasonably attracted by something which might look good on the surface, but carries a lot of risk.

So, I think the overall discipline around M&A continues in the company. And going forward, we have stated our ambition. We are looking for slightly larger acquisitions. The areas that we're looking at continue to be the same. So, it's essentially Performance Materials. It's the Coats digital solutions, which is our software business in apparel. And if we get any opportunities as far as consolidation in the core business that's concerned, we'll certainly be looking at that. So, that doesn't change.

[Charles Hall, Analyst, Peel Hunt LLP]

Great. That's very helpful. Thanks.

[Rajiv Sharma]

Thank you, Charles.

[Operator]

The next question today comes from David Farrell of Jefferies. David, please go ahead.

[David Farrell, Analyst, Jefferies International Ltd.]

Hi. Good morning and yes echo Charles comment on a great set of results and outlook. I've also got three questions. The first one is regarding non-US Performance Material margins. I think in the first half they were 16.5% and for the full year they were 14.4% which is just the second half they dropped off quite substantially. Can you just confirm what's been going on there please?

[Jackie W. Callaway]

Hi, David. It's Jackie Callaway here. Thanks for the question. I think both actually the A&F and the PM margins benefited in the first half from the temporary cost savings that we put in place in 2020. And as we've seen, they have normalized during 2021, but it's probably a bit more weighted towards the second half of the year.

[David Farrell, Analyst, Jefferies International Ltd.]

Okay. And then, I just wanted to ask around kind of the competitive landscape. Clearly, 200 basis points of market share gain is quite exceptional for you guys. I wonder what the ability of the second and third players in the market is to catch up with you in terms of their sustainability offering. Clearly, at the tail end it's going to be difficult. But the largest competitors working on new product would think might come back and take some market share back obviously?

[Rajiv Sharma]

Okay. David, I guess if you look at last year's market share gains of 2 percentage points, I would say that half of that came from our global competitors. So, it's the lack of the number two, the number three, the number four and the number five. And the balance, 50% of that came from the long tail that we had here. With respect to innovation, sustainability, they all have new products. They all have their own version of sustainable products. If I look at our EcoVerde sales, which is our recycled polyester thread sales, last year, we did about $97 million of sales.

Based on market intelligence, customer feedback, third-party sourcing information, it is our belief that collectively, all the other players are doing about $15 million of recycled polyester thread sales. So, compared to $97 million of Coats, so kind of collectively, the rest are doing around $15 million. So, the gap is pretty wide. I think the gap will remain widened into the medium term. But I do expect the number two and number three companies to catch up in the future.

[David Farrell, Analyst, Jefferies International Ltd.]

Okay. And lastly, before I turn it back over, just wondered in terms of your client base, so Disney, very much in the premium end, I just kind of wondered how negotiations are going with the kind of the more fast-fashion labels as they step up their sustainability agendas?

[Rajiv Sharma]

Right. So, are you talking about pricing, David, or just general negotiations?

[David Farrell, Analyst, Jefferies International Ltd.]

No. I think traditionally, they've not been willing to pay your prices. They would take an inferior...

[Rajiv Sharma]

Right.

[David Farrell, Analyst, Jefferies International Ltd.]

...thread.

[Rajiv Sharma]

Yeah.

[David Farrell, Analyst, Jefferies International Ltd.]

But I expect given where they want to be in terms of sustainability, that might have changed and they'd be coming back to you.

[Rajiv Sharma]

Yeah. Yeah. Okay. So, I think if you look at the $97 million of EcoVerde sales that we had, roughly one-third of that went into sort of new customers, European fast-fashion brands. And we're actually seeing sustainability as a big lever to not only gain market share, but also to get pricing premium. So, roughly, the price premium that we're getting from some of these fast fashion brands is between 7% and 9% compared to comparable products there.

So, yes, in the past, a lot of these fast fashion brands were very price-sensitive. But I think, given what's happened in the last three, four years, a lot of these brands are looking to reinvent themselves and focus more on sustainability.

[David Farrell, Analyst, Jefferies International Ltd.]

Okay, that's great. Thanks very much. I'll turn it back.

[Rajiv Sharma]

Thank you, David.

[Operator]

The next question comes from Maggie Schooley at Stifel. Maggie, please go ahead.

[Margaret Schooley, Analyst, Stifel Nicolaus Europe Ltd.]

Thank you. Good morning, Jackie. Good morning, Rajiv.

[Rajiv Sharma]

Good morning, Maggie.

[Margaret Schooley, Analyst, Stifel Nicolaus Europe Ltd.]

How are you? Just a few questions.

[Rajiv Sharma]

[ph]

Great (00:43:50).

[Margaret Schooley, Analyst, Stifel Nicolaus Europe Ltd.]

Composites, with the EV acceleration in automotive, which was quite clear over COVID, can you give us an update on your discussions with the automotive OEMs? I know your time-to-market on acceptability has been quite quick for what is a long-term supply chain, so just an update on how things are going there.

And then secondly, potentially an

[ph]

unfair (00:44:16) question and more longer term, but you've had a very good movement on the pension. I know there's a difference between the technical and accounting issue, but it would suggest that perhaps this gives you more long-term options, perhaps premature. But any understanding of what could possibly be done longer term on the pension, would be helpful.

And then lastly, on water consumption, given huge amounts of water consumption in the industry, I know you have some pretty aggressive targets, but if you can give me an update on those projects to continue to reduce water consumption in the production of your product, that would be very helpful.

[Rajiv Sharma]

Okay. So let me start with the Composites. Then, I'll ask Jackie to talk about pensions. I'll come back and talk about water consumption. Yeah, so Composites clearly remains a high growth area for us. I think this decade, Maggie, the growth is going to be fueled by two sort of areas in Composites. One is going to be telecom. So, this whole thing around 5G rollout and fiber-to-home rollout, which is still in its nascent stage right now and there's still a lot of homes that need to be connected. So we see that growth structurally very strong this decade. And that's going to fuel a lot of the composite growth.

The automotive composites that you're talking about, the whole light-weighting of cars electrification, today the business that we have is largely with existing legacy automotive brands who are looking to lightweight some of their existing cars that they have. We are in discussions with several EV companies to see how we can actually make for them battery trays, which is the biggest issue that they have today in terms of heat – heat dissipation and light-weighting.

I am reasonably confident that in the next few years, this is going to become a bigger and bigger part of the Composites portfolio. And if all goes well, probably by the end of the decade, this is going to require a massive large factory somewhere in the western world.

Jackie, do you want to pick up on the pensions?

[Jackie W. Callaway]

Thanks, Rajiv. And so, Maggie, we did comment that we've been very pleased with where we landed with the valuation on the pension, the UK pension. That's put us in a position now where we've set up a joint working group with the trustees to look at the longer term derisking of the scheme. Now that is a longer term journey.

It's probably somewhere around the sort of 8 to 10 years. But we've kicked off those discussions and I hope to be able to update you on those, probably at the half year or next year's full year results.

[Margaret Schooley, Analyst, Stifel Nicolaus Europe Ltd.]

Okay. Interesting. Thank you. And on water...

[Rajiv Sharma]

Okay. Just on water here, I think – so a couple of things here. One is that we are focusing more and more of recycling of our existing water. So, we don't consume a lot of external water coming in. So that's the first thing. The second thing that we're doing is looking at a dyehouse, where we use a lot of water either for cleaning the machines or in the dyeing process. And we're working with the dye and chemical suppliers to make sure that we can actually use less water in this whole process along with less chemicals.

The third thing that we're doing is, in terms of our own production and how we load the factories, we are looking at smarter ways to actually manage the loading of machines wherein we can optimize water. And the fourth thing, which is quite basic is stop the leakages that happen across multiple factories. A large factory can have sources of leakage. So I think those are the four basic things that we're doing in terms of water consumption reduction.

The other thing is we have invested in a start-up in terms of waterless dyeing here. And that seems to be maturing to a point where now those machines are starting to go into customer sites. And if this mature – if this technology can mature and scale up, it's basically going to revolutionize the way we manufacture and it's going to be zero water consumption. So we're looking at the transformation side of it. But in the meantime, we're also doing the basic blocking and tackling, measuring the water consumption, recycling and reusing of water.

[Margaret Schooley, Analyst, Stifel Nicolaus Europe Ltd.]

Very helpful. Thank you

[ph]

across all fronts (00:48:43).

[Rajiv Sharma]

Thank you, Maggie.

[Operator]

The next question today comes from Mark Fielding of RBC. Mark, please go ahead.

[Mark Fielding, Analyst, RBC Europe Ltd.]

All right. Thanks for taking my question. Got sort of three questions here that link into things you've been talking about already. I mean, firstly, maybe you could just talk, obviously, in terms of EcoVerde, you've talked about the 2024 target. Just maybe talk a bit more about how you see growth over the next year or so. And I know in the past there was bottlenecks in terms of things like raw materials, et cetera, for that. Just checking that there's no issue there in terms of manufacturing capacity from your side as you

[ph]

need (00:49:27) to grow into it. Maybe tell that question first?

[Rajiv Sharma]

Okay. Thanks, Mark. I guess with EcoVerde last year, we did $97 million. The expectation this year is that we'll do around $150 million. It could be higher, it could be lower. This is just an estimate right now here. There are no supply issues so we have enough of recycled polyester suppliers across the world.

As you would expect, a lot of our EcoVerde sales depend on how the brands are planning to market their final products. So, it needs to be in line with whatever the brands are doing as far as the entire garment is concerned. There's no point in having a recycled polyester thread when the rest of the garment is made out of oil – oil-based products. So, we are clearly seeing growth in this area here. More and more brands are now trying to get the entire garment or the entire shoe made out of recycled materials. I think we are confident about $150 million this year and that's going to significantly increase the following year.

[Mark Fielding, Analyst, RBC Europe Ltd.]

Okay. And actually can I just ask a follow-up linked to that, with the launch of the sort of

[ph]

all natural side, (00:50:40) obviously EcoVerde, you said basically uses your existing manufacturing infrastructure. Is it the same if you go all natural? Is there going to be more meaningful shift to your manufacturing processes?

[Rajiv Sharma]

So, if we go all natural, we can still use the existing machines, the existing labor, the existing standard operating procedures. So, there isn't any incremental investment we need to do there. And just in terms of plant-based or eco products here, that is the end game, all right? Recycled products is basically a transitionary phase between where we are and where we need to get to as an industry. And so, we have started with this all natural plant-based products last year, and I'm hoping that over the next couple of years, we'll start to see more and more of that growing.

[Mark Fielding, Analyst, RBC Europe Ltd.]

Great. Thank you. Now, technically, my second question is actually my third because I had a follow-up there, but just can you talk about, obviously, up strongly on where we were in 2019, very strong finish to the year. Just maybe talking a bit more detail about how you see inventory build in the market. Obviously, you said, there's been a focus on things like reliability, where are we in inventories versus past levels, do you think structural inventory in the market change, et cetera?

[Rajiv Sharma]

So I think last year – if you look at the growth last year, it came as a result of three factors. One is the pent-up demand that was sort of building during the COVID year. The second one is buffer buying. Essentially, that is brand buying more than what they need to offset the uncertainty around the supply chain issues across the world. And the third one is sort of in a normal restocking in the inventory. So I think these are the three factors that led to the volume growth last year. I think these three factors will still be in play this year. And, hopefully, then by first quarter next year, we'll start to see supply chain issues normalizing, the inventory build-up sort of getting back to its sort of normal levels and pent-up demand being sort of addressed. So I think this year is going to be more of the same.

[Mark Fielding, Analyst, RBC Europe Ltd.]

And just to clarify now then in terms of inventory levels and where we are, my impression we're not back where we were in 2019 yet. But is there a risk at some point that we roll past this and we go to a destock or do you think that's not a problem?

[Rajiv Sharma]

I don't think that's going to be a problem, because there's still be supply chain issues this year.

[Mark Fielding, Analyst, RBC Europe Ltd.]

Okay. And then, finally, a follow-up to the earlier question on the H1, H2 split in margins and margins being lower in the second half. I know it's Jackie's comment about the benefit from temporary savings. I suppose just, it's been a while since we've seen a normal year. Is there any seasonal factors as well or any other factors should we think about the second half margins as more of the base for future forecasts? Or is it more the year level as a whole that you think is representative?

[Jackie W. Callaway]

No I don't think you can make those comments, Mark, with those assumptions about the second half or the first half. I think, we just had that – we had a year where we've come out of 2020, and it's been a bit of an odd year in terms of how that played out with costs. I don't think you can read anything more into than that.

[Mark Fielding, Analyst, RBC Europe Ltd.]

So when you say, it's a simple analyst and I'm adding the roughly 300 basis points to margins from your cost saving plan today, the full year level is probably a good representation because you say there is a lot of moving parts through the year, the amount of closures, et cetera, is that fair?

[Jackie W. Callaway]

No I think what we're saying on the strategic projects is that, you look forward into 2024 and you basically, we're seeing a $50 million incremental EBIT until 2024. So that's what we're – that's what we've put in as guidance on that.

[Mark Fielding, Analyst, RBC Europe Ltd.]

Perfect. And that would be relative to the full year base rather than the sort of second half run rate, I suppose, is what I'm saying?

[Jackie W. Callaway]

I think that's a fair assumption. Yes.

[Mark Fielding, Analyst, RBC Europe Ltd.]

Perfect. Great. Thank you.

[Operator]

The final question today comes from James Zaremba at Barclays. James, please go ahead.

[James Zaremba, Analyst, Barclays Capital Securities Ltd.]

Hi, Good morning. Yes. One – this is just a clarification on clarification in kind of the market share point. So, I guess, sort of from what you've said with David's question, it sounds like the kind of market share from number two to five players driven by the EcoVerde certainly seeing as something which you'd expect to kind of continue on a medium-term basis? But then I guess, maybe if you could just comment around the market share gains versus the tail. Is that related to the reliability kind of focus you said in place at the moment and – or is that something a little bit more structural? And how you see that kind of continue in services quite exceptional growth coming from market share?

And then a second question would just be around the cost restructuring. I guess it would be, how much this relates to the bolt-ons as you've made in the last few years in North America? And I guess is there any risk that how you're perceived as an acquirer changes if you're making, I guess, significant restructurings to some of those bolt-on businesses? Thank you.

[Rajiv Sharma]

Okay. So, let me start with the market share question you have, James. So, the market share gains against our near global competitors is driven by two factors, one is a global scale and our ability to actually be very reliable in terms of supply that will be the primary reason. The secondary reason was EcoVerde's sustainability performance that we have. So, these two factors were the biggest in terms of our top global competition. With respect to the long tail, it's basically reliability of supply. Most of the long tail; do not play in the sustainability arena.

[James Zaremba, Analyst, Barclays Capital Securities Ltd.]

Thank you. And...

[Rajiv Sharma]

And your second question around the cost of the changes there. I think if you just take a step back, James, we have been flagging for at least two years, maybe three, that we're having challenges with labor availability in the US that is a significant issue for us. We were hoping that, after all the COVID subsidy or the COVID support that the federal and state governments were actually providing to citizens in the US that people would kind of get back to work that has not happened yet. And we now have concluded that the labor issues with respect to Coats and with respect to the manufacturing areas that depend on unskilled or semi-skilled labor is going to be a challenge even in the medium to long term. So we have to look at structural responses, which are part of the strategic projects that we are announcing.

There's no point in running a factory at 65% capacity utilization because you'll be losing money all day. So, the whole idea is to make sure that we are able to have our factories in area where we can have labor and we can satisfy customers. And, again, just to add some more color to the US here. For the last three years, our factories have been running at roughly 65% capacity utilization. The order book that we have had for the last three years has been very strong. So from a customer standpoint, demand had been very robust. Were we to fill – to fulfill all the demand that we have, our factories would have been running at 85% to 90% capacity utilization.

The fact we don't have people in the factories is sort of constraining us here. So, these strategic projects that we have announced today are purely driven by the fact that we need to improve customer service in certain geographies. The way you improve customer service is to make sure you've got the right capacity, the right machines, the right labor in place to actually meet the demand. And that's what we're doing right now.

[James Zaremba, Analyst, Barclays Capital Securities Ltd.]

Perfect. Thank you. And then maybe just a follow-up, I guess that sounds, one which

[ph]

just has come about due to kind of the US business (00:59:12) last year. Of course, you've got the cost-savings in the other regions. Is this kind of – we saw that you had a big program a few years ago and second one now.

Is it kind of only biting off what you can chew at one point in time, or is it sort of actually the footprint is where you'd want them over the next five-plus years on the back of this?

[Rajiv Sharma]

I think it's an excellent question, James. So the program that we announced in 2018 and completed in 2019 was largely focused around SG&A optimization. This time around, it's basically footprint optimization and portfolio optimization. So, that's the primary driver in order to improve customer service in certain geographies. At the moment, we do footprint optimization and consolidation of footprint you will have synergies as far as SG&A is concerned. So, off that $50 million that Jackie mentioned in terms of incrementally, but in 2024, we expect half of that is going to come from footprint optimization, the other half is going to come from associated costs being taken up.

[James Zaremba, Analyst, Barclays Capital Securities Ltd.]

Perfect. Thanks. And congratulations on the results as everyone else.

[Rajiv Sharma]

Thank you, James.

[Operator]

We have no further questions in the queue, so I'll hand back to Rajiv for any closing comments.

[Rajiv Sharma]

All right. Thank you. Thank you very much for your questions, all of them very interesting and deep questions. You know, we are really excited about the performance that we delivered last year, but I think we're even more excited about this year in the future. And I think this is – last year's performance is just evidence that the strategy that we had in place, the execution, the globally footprint, I think we're in a sweet spot right now and I can just see that the medium to long-term is looking very, very bring. Just as a data point, the last crisis that happened in 2009, we had a V-shape recovery. But more importantly, we had a five year bull run after that. And I can see that coming out of this crisis here it's going to be an equally strong three to five years.

So, thank you very much for your time and look forward to meeting some of you this evening or tomorrow.

[Operator]

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.