Coats Group (COA) Investor Update summary

Pension de-risking transaction and UK pension scheme progress

• Completed a GBP 1.3 billion (£1.3bn/$1.7bn) buy-in with PIC, fully hedging 100% of UK pension scheme liabilities, following a previous transaction that covered 20% of benefits.

• All financial and demographic risks for the UK scheme are now fully hedged, with annuity policies matching pension payments to members.

• The transaction eliminates all future deficit contributions, permanently ceasing annual payments of around $30 million and improving free cash generation.

• Total cost is up to GBP 100 million, funded by a GBP 70 million upfront payment and a GBP 30 million loan to the scheme, with leverage expected to rise to 1.6x-1.7x in 2024 but remain within the 1x-2x target range.

• The process to finalize the transaction, including asset realization and data true-ups, will take 24-36 months, with the option to remove the scheme from the balance sheet by 2027.

Capital allocation and financial outlook

• Updated capital allocation prioritizes organic growth ($30-40 million CapEx per year), progressive dividend (historically 15% annual growth), and value-accretive M&A.

• Financial leverage will be maintained within a 1x-2x target range; if leverage falls below 1x for a sustained period, additional shareholder returns such as buybacks will be considered.

• No change to profit guidance for the year despite the increased net debt from the pension transaction.

• Deleveraging of 0.3x-0.4x per year is expected, supported by improved earnings quality and business growth.

• Enhanced free cash flow supports future growth initiatives and possible shareholder returns.

Strategic and operational impact

• The pension de-risking frees up management time and removes a significant overhang for investors, enhancing engagement and strategic flexibility.

• Fully insuring the pension scheme allows for potential removal from the Group balance sheet at minimal future cost.

• The move secures benefits for pensioners, eliminates volatility, and reduces uncertainty for investors.

• M&A appetite remains strong, with a focus on bolt-on acquisitions, particularly in footwear adjacencies.

• Non-UK pension schemes are either in surplus or not material, with no significant ongoing funding requirements.