Coats profits hit by one-offs, underling growth seen continuing in 2019

Coats Group reported a 25% fall in statutory earnings but grew underlying profits 23%, with the industrial thread maker saying it had started the new year with “continued positive momentum” in its core businesses.

The FTSE 250 group generated revenue of $1.4bn for calendar 2018, up 4% or 6% if currency swings are ignored. Core divisions Apparel and Footwear grew thread revenue 4% and accelerated Performance Materials by 7%.

Reported operating profits fell 5% to $147m and earnings per share to 3.9 cents from 5.1 cents the year before. These numbers included increased exceptional costs of $48m related to management’s Connecting for Growth strategy, UK pensions and further $8m set aside to cover potential legal costs relating a historic environmental matter affecting the Lower Passaic River. There was also an exceptional loss of $18.4m on disposal of the non-core North American Crafts business.

Excluding such costs, adjusted operating profits were up 21% to $195m, or 24% if excluding currency swings or 23% if also excluding the effects of acquisitions. Adjusted operating margin increased from 11.8% to 13.8% despite the wider environment of rising input costs.

Cost control was strong thanks to $15m of savings in the first year of Connecting for Growth, where total savings have been increased to a net $23m from the original target of $15m.

On top of this programme, chief executive Rajiv Sharma said Coats was grew margins through realising price increases, delivering productivity and procurement gains, as well as keeping tight control of the cost base.

With Apparel & Footwear delivering continued market share gains and Performance Materials showing increased momentum, the group also acquired Threadsol, developer of cloud-based software solutions to fit with the existing Coats Global Services business, to provide enable “brands, retailers and manufacturers to drive productivity gains, supply chain control and speed to market”. A further strategic investment was made in Twine Solutions, developer of a digital thread dyeing system

'We enter 2019 in a strong position, with continued positive momentum in our core Apparel and Footwear and hi-tech Performance Materials businesses,” said Sharma.

He added: 'Whilst we are cautious around the current macroeconomic uncertainties, based on our current assessment of business trends we remain confident in delivering another year of improving performance through effective execution of our strategy.”

House broker Peel Hunt said the results were in line with expectations, expecting the shares, now trading on a 15.4x p/e ratio to pause for breath after a strong run.