"Coats Group Full Year 2024 Earnings: Misses Expectations"

In the ever-evolving landscape of industrial manufacturing, Coats Group plc, a global leader in industrial thread and footwear components, has recently released its full-year 2024 earnings report. While the company has shown resilience and strategic prowess, the earnings fell short of market expectations. Let's delve into the specifics of this earnings miss and explore the strategic initiatives that have shaped Coats Group's financial performance and future outlook.



The Earnings Miss: A Closer Look

Coats Group's earnings for the full year 2024 missed expectations due to several specific factors. One of the primary reasons was the structural softness in North American Yarns, which impacted the Performance Materials (PM) division. This weakness across all North America end markets led to a decline in revenue and earnings for the PM division. Additionally, the company faced in-year margin headwinds from the PM division, which affected the overall adjusted EBIT margin. Despite these challenges, Coats Group still managed to achieve an adjusted EBIT margin of 18.0%, which was ahead of the previously announced 2024 margin target of 17%. This indicates that while the company faced significant headwinds, it was still able to outperform its own expectations in terms of margin.

Strategic Initiatives: Paving the Way for Future Growth

The company's strategic initiatives, such as the de-risking of the UK pension scheme and the closure of the Toluca site, have had a significant impact on its financial performance and future outlook. The de-risking of the UK pension scheme involved a £1.3 billion buy-in delivered in September 2024, with a cash payment of £100 million. This move has ensured that 100% of benefits are now payable from the scheme, with no further cash contributions required. This has improved the company's financial position by reducing its future pension liabilities and freeing up cash for other uses. As a result, the company's net debt (excluding lease liabilities) has been reduced to $449 million, with leverage reduced to 1.5x net debt: EBITDA, comfortably within the 1-2x target range. This provides significant capacity to support the Group’s capital allocation strategy.

The closure of the Toluca site in the Performance Materials Americas manufacturing footprint was done to align with structural softness in North American Yarns. This move is expected to drive immediate margin improvement. The company's strategic projects actions are now largely complete, with $8 million incremental EBIT to be delivered in 2025 (taking total savings to $75 million). This will further improve the company's financial performance and future outlook.

Medium-Term Targets: A Confident Outlook

In light of the earnings miss, Coats Group has made several adjustments to its medium-term targets. These adjustments reflect the company's confidence in its growth strategy and its commitment to delivering value to shareholders. The new medium-term targets include:

1. Average Organic Revenue Growth: Coats Group aims for "greater than 5% average organic revenue growth." This target indicates the company's confidence in its ability to grow its revenue organically, despite the challenges faced in the past year.

2. EBIT Margins: The company expects "EBIT margins to grow to 19-21%." This target reflects the company's focus on improving its profitability and operational efficiency. The previous year's EBIT margin was 18.0%, which was ahead of the previously announced 2024 margin target of 17%. This shows that the company is confident in its ability to continue improving its margins.

3. Free Cash Flow: Coats Group expects to generate "greater than $750m adjusted FCF (after interest and tax and before dividend distribution) over the next five years." This target reflects the company's confidence in its ability to generate strong cash flows, which can be used to support its capital allocation strategy.

4. Leverage: The company aims to maintain a strong financial position, with leverage at 1-2x net debt:EBITDA. This target reflects the company's commitment to maintaining a strong balance sheet and financial flexibility.

5. Dividend Policy: Coats Group plans to retain its progressive dividend policy, which reflects the company's confidence in its ability to generate strong cash flows and deliver value to shareholders.

6. Acquisitions and Share Buybacks: The company sees an "increasing opportunity to enhance value-creation through acquisitions" and additional returns to investors if leverage is expected to fall below 1x net debt:EBITDA for a sustained period. This reflects the company's confidence in its ability to grow through acquisitions and deliver value to shareholders.

7. EPS CAGR: Coats Group expects an "EPS CAGR of greater than 10% (from 2025 baseline) post execution of M&A or share buybacks." This target reflects the company's confidence in its ability to grow its earnings per share through organic growth and acquisitions.

Conclusion

Coats Group's full-year 2024 earnings miss highlights the challenges faced by the company in the Performance Materials division. However, the company's strategic initiatives, such as the de-risking of the UK pension scheme and the closure of the Toluca site, have positioned it for future growth. The adjustments to its medium-term targets reflect the company's confidence in its growth strategy and its commitment to delivering value to shareholders. As an income-seeking investor, it is crucial to monitor Coats Group's progress and consider the potential for long-term growth and dividend income.