Good morning, everybody, and welcome to today's Coats Investor Call. My name is Drew, and I'll be your operator today. During today's call, there will be a Q&A session. To register a question, please press star followed by one on your telephone keypad, and to withdraw your question, please press star followed by two. I will now turn the call over to Jackie Callaway, Coats CFO, to begin. Please go ahead.
Good morning, and thank you for joining us. Today, we are delighted to announce that we have delivered a major step to full de-risking of the U.K. pension scheme. We have a series of slides that explains what has been agreed and the implications of this transaction, which will take about ten minutes to run through before we move to Q&A. Starting on slide three, which sets out the key elements of the transaction with PIC. We have agreed a GBP 1.3 billion buy-in, which ensures the remaining 80% of benefits payable from the scheme. This builds upon the transaction we announced in December 2022, which covered the first 20%. As a result, the transaction today ensures that 100% of risks related to the scheme's liabilities are now hedged.
This comes at a cost of up to GBP 100 million, or $128 million, which will increase leverage to an anticipated 1.6x-1.7 x in 2024. This remains comfortably within our targeted range. This funding is structured as a GBP 70 million upfront contribution and a GBP 30 million loan to the scheme, while certain costs are finalized and we realize long-term assets of circa GBP 90 million. These long-term assets are a common feature of a pension scheme and will be realized in the normal course of business, either via redemption or on the secondary market. Back in January 2024, we temporarily switched off deficit contribution payments of circa $30 million per year, and these contribution payments will now permanently cease as a result of this transaction.
The transaction also confirms that no further cash contributions will be made, which provides certainty over the group's improving free cash generation. We will use the better cash generation to accelerate revenue growth or return cash to shareholders. Later in this presentation, we'll give our updated capital allocation framework. Slide four highlights the significant progress we've made over the last ten years to now eliminating the pension deficit. While we have made significant cash payments to the scheme, we've also worked hard on a collaborative basis with the pension trustee to get to the situation we are in today.
On slide five, we thought it was useful to outline the key events on a timeline between 2013 and today, as well as what comes next, through to the point where we have the option to convert to a full buy-in, buy-out and remove the pension liability from our balance sheet in 2027. This lengthy journey from back in 2013 to today's positive news demonstrates Coats' intention to always be a good corporate citizen and to do the right thing for its wider stakeholders. Focusing on what comes next, the planned activities between September 2024 and late 2026 include: finalizing the detailed insured benefits and data. In conjunction with the pension trustee, we've already completed significant due diligence on this data over the last eighteen months. Realizing circa GBP 90 million of long-term scheme assets.
As I mentioned earlier, these long-term assets are a common feature of the pension scheme and will be realized in the normal course of business, either via redemption or on the secondary market. Paying to PIC a GBP 80 million deferred premium and finalizing data true-ups, and at the end of the process, we will see if there's any surplus funds. If so, some or all of the loan will be returned to us. And for reference, the loan also covers the expected costs of finalizing all the administration needed to achieve the full buy-out, including the existing business-as-usual administration expenses of circa $5 million per annum. On slide six, I wanted to put on record our thanks to advisors and the pension trustees. It has been a combined effort, and we could not have delivered this outcome without each of you and your efforts.
Given we have achieved certainty on pensions, the board has updated our capital allocation framework. It should not be a surprise, but we think it is helpful to provide clarity. In priority order, we are aiming to accelerate organic growth with $30 million-$40 million of CapEx per annum, as well as developing new products. We then intend to pay a progressive dividend, which in recent years we've been growing at circa 15% per annum. We then are looking to execute on value accretive M&A, where we have a good pipeline of potential transactions, and we can do all of this while maintaining financial leverage within our target range of between 1x and 2 x. Should leverage fall below 1 x for a sustained period, then the board will consider additional shareholder returns, such as buybacks.
We have an exciting future underpinned by a clear capital allocation policy. So now moving to slide eight, and to summarize. The U.K. pension liability risks are now 100% hedged, which is the major event. To achieve this, we will pay up to GBP 100 million of cash. To finalize the transaction, it will take 24-36 months, given the requirement for data true-ups and asset realizations. This gives us the option to remove the scheme entirely from the balance sheet in 2027, and this transaction and the outcome is an exciting step forward that will help to accelerate growth and generate greater returns. And on that note, we'll be happy to answer any questions you have. I'll pass back over to the operator.
Thank you. If you would like to ask a question on today's call, please press star followed by one on your telephone keypad. If you wish to withdraw your question, it's star followed by two. We'll just ask you now to pause momentarily just whilst we wait for our Q&A to begin. Thank you, everyone. We will now begin the Q&A session. Our first question today comes from Charles Hall from Peel Hunt. Your line is now open. Please go ahead.
Morning, Jackie. Well done. Great result to finally get here.
Hi, Charles. Would you mind just speaking up a little bit for us?
Can you hear us? Is that better?
That's much better. Thank you.
Excellent. Just a few questions. Obviously, there'll be an interest charge connected with the cash payment. How does this affect your profit guidance for the year?
Yeah, so I think, in terms of numbers, Charles, the only number we see changing at this point is an increase in net debt of GBP 100 million, which was, you know, which came out of the bank account for us today. We don't see any other changes to guided numbers, so no change to expectations for this year's numbers.
Got it. That's clear. And then secondly, on the dividend, you alluded to the 15% you've been growing in the past and talking about aggressive policy. Is that a sort of indication that it'll be broadly that sort of level in the short term?
Yeah. So I think on the dividend, we've always had a progressive dividend policy. We will always look to move forward with that. I think a good indication, the fact that we've had it at 15% in the past is a good indication for the next few years on where that dividend will sit.
Perfect. And then lastly, on M&A, does this change your appetite for acquisitions or the scale of acquisitions you might do, given that obviously it puts up the net debt to EBITDA?
So absolutely not. It doesn't. As you saw with our capital allocation framework, M&A forms a big part of what we want to do going forward. I would note that we start to deliver quite quickly as we move into next year, and we're very much as we talked about at our half-year results, we're focused on looking at exciting pipeline and certainly, particularly in the area of footwear adjacencies, potential bolt-on acquisitions where we can use our balance sheet.
Perfect. Thank you, Jackie. That's all very clear.
Thank you, Charles.
Our next question today comes from Bruno Roumier from BNP Paribas. Your line is now open. Please go ahead.
Thank you for taking my question. I guess the first one is just around the mechanics of the loan. Could you provide some further color in terms of what are the key drivers that may influence how much of it may be recoverable, and I guess how we should be thinking about that?
Thanks for the question, Bruno. So the loan of GBP 30 million , we've put this in place because we do not want to get to the end of wrapping up all the estimates that we've got here and wrapping up the pension scheme and having a surplus that is very difficult from a tax perspective to get back out of the scheme. So there's a couple of things that we do need to finalize over the next two to three years. One of them is GMP equalization. So we need to go through that process as all other pension schemes need to do. So we need to do that. We've got the ongoing administration costs of $5 million per year, plus any wind-up costs.
That's in the GBP 30 million pound loan, and also, we just need to realize those long-term assets. As we go through those three key steps, we'll see what surplus we've got at the end. If there is a surplus, it'll be returned to the group. So from a cost perspective, it's gonna cost somewhere between GBP 70 million and GBP 100 million. We won't know that final cost until we get through the next, two to three years.
That's very clear, and I guess aside from some of the de-risking benefits and the implications on capital allocation, are there any softer benefits from this latest action? I guess by that I mean, how much of your time has been consumed by the, in recent years, how restrictive has it been in terms of strategy, if at all?
So it's actually a really good point, Bruno. We've spent a significant amount of time, certainly in my four years here as CFO, I've spent a significant amount of time in this area. For us, it'll be great to move forward, particularly in our engagement with potential new investors, and to just talk about our core business and not to spend a lot of time explaining, you know, the pension scheme. We do feel that this has been a quite an overhang to the stock. So we're delighted to have the news today and have this, you know, fully bought in and now on a journey to getting it off the balance sheet over the next two to three years.
That's great. Thank you very much. That's all for me, and congratulations.
Thanks, Bruno.
Our next question today comes from David Farrell from Jefferies. Please proceed with your question.
Hi, thanks for taking my question. I just wanted to kind of explore any ongoing pension contributions relating to the outstanding U.S. and German pension liabilities that you've got on your balance sheet. Are there any kind of ongoing cash costs that are being paid into either of those?
Yeah, so we, in terms of, pension schemes outside of the U.K., David, we have, we have a scheme in the U.S. That scheme is actually in surplus, so there's no funding requirements there. We have a couple of schemes in Germany. Those are pay-as-you-go schemes, so there's not material amounts going into those schemes. And then we have a tail of much smaller schemes, which are, I described it, they're not material and even in our aggregate.
Okay. And could I just ask in terms of the incremental returns to shareholders, you kind of mentioned saying a sustained period below 1x . Other companies in the sector have engaged with buybacks with leverage at over 1x , perhaps 1 .5x . Why is below 1x the right number to start that?
Yeah, we for some time have had a policy of keeping our leverage between 1x and 2x . We certainly want to grow both organically and inorganically. So I think that where we set that target of one, you know, gives us the ability to use the balance. 1x and 2x gives us the ability to use the balance sheet to fund inorganic growth. Should it fall below 1x for us and we don't have any immediate M&A opportunities, then we would look at other ways of returning capital to shareholders, and that would be most likely via some form of buy-back.
Okay, great. Cool, and yeah, congratulations. Great, great to see this hit the screens today.
Thanks, David.
As a reminder, if you would like to ask a question on today's call, please press star followed by one on your telephone keypad, and if you wish to withdraw your question, it's star followed by two. Our next question comes from Maggie Schooley from Redburn Atlantic. Your line is now open. Please go ahead.
Yes, good morning. Good morning, Jackie. Congratulations. I know this has been a long time in the making. I just had one quick question to follow up. And clearly, you think leverage will go down over the next couple of years, and you have historically displayed that even when paying the pension contributions. But given, you know, challenging markets, would you still expect that deleveraging to be between 0.3x and 0.5 x? And what gives you that confidence? And perhaps, you know, when we think about your leverage and the way that clients pay you, there's very little credit risk. But if you could just kind of talk to us a little bit about the confidence in these challenging markets of that deleveraging.
Yeah, I think, Maggie, we've seen, you know, as we reported in our half-year results, we've seen. We've gone through recovery of the destocking. We've seen the business return to growth. So and we are, as we stand at this point, we're trading in line with expectations. So, I think looking forward, we remain confident on the outlook. We've dramatically improved the quality of the earnings of the company. So we do see that we will delever around sort of 0.3 to 0.4 annually going forward. That, that's how I describe it at this point.
Excellent. Thank you so much. I really appreciate it, and congratulations. I think very material positive today.
Thanks, Maggie.
Thank you all. It looks like we have no further questions in the queue today, so I will hand it back over to Jackie for any closing remarks.
Thanks, Drew, and just I'd like to close by thank you everyone for joining the call today. As we've mentioned, this is exciting news for us. I'm sure there may be some further questions that come out over the next few days. We'll be happy to take those on a one-to-one basis. Thank you very much, everyone, and have a good day.