Good afternoon, and welcome to Coats Group plc's presentation relating to the Rhenoflex acquisition. Jackie and I are delighted to talk about the second acquisition in the attractive footwear component space. The combination of Coats' footwear, Texon, and now Rhenoflex will create a world-class footwear platform. Coats is already the world leader in footwear threads, and now with the Texon and Rhenoflex acquisitions, will become the world leader in footwear structural components. Slide two. Let me start with a few highlights about Rhenoflex. This is a synergistic bolt-on acquisition that strengthens the Coats' position as a global leader in the footwear structural component market. This transaction builds on our recent Texon acquisition and further cements our move into the footwear component space, adding capability, complementary products, enhanced scale, and an opportunity to create value through synergies.
A few key points to mention regarding this transaction are. It consolidates our move into the highly attractive and fast-growing athleisure and sports footwear market. It further strengthens the business credentials in sustainability and innovation. We expect annual cost synergies of $6 million that are in addition to the $5 million of synergies already announced with the Texon acquisition. The purchase price is at an enterprise value of EUR 115 million or $117 million. On an LTM June 2022 basis, this represents a multiple of 9.3x EBITDA before synergies and a multiple of 6.2x on a post-synergy basis. When you combine both Texon and Rhenoflex, the deal represents 7.8x EBITDA on a post-synergy basis.
Consideration is to be funded via a 10% equity placing, and it's our intention to maintain leverage on the balance sheet within 1x-2x , which is our target range. Page three. Rhenoflex is a leader in performance-critical reinforcement solutions for the global footwear and lifestyle industries. The core product offering is footwear components that include heel counters, toe puffs, interlinings, heel grips, and eyelets. The business supplies into the athleisure and sports footwear segment. It also serves the lifestyle accessories segment with sustainable solutions such as recycled leather. Workwear and orthopedics are emerging segments. Rhenoflex is a supplier of choice for premium footwear brands such as Nike. It has manufacturing sites in China, Vietnam, and Germany. Lastly, the business is a strong innovation partner with unique and sustainable production methods and has a proprietary zero-waste production method called Rhenoprint, which is a true differentiator. Page four.
There is a compelling strategic rationale to acquire Rhenoflex. Coats has a strong and successful existing footwear and accessories business, which has been growing for the last decade. Texon and Rhenoflex each have circa 10% market share in footwear structural components, which jointly provides us with a circa 20% leading market share in a fragmented athleisure and sports footwear market. Acquisition of Texon and now Rhenoflex results in enhanced scale, reach, and capability for structural components. Rhenoflex has complementary product offerings across footwear components and fashion accessories. This strengthens our credentials in sustainability as well as enhances innovation capabilities through the addition of Rhenoflex's in-house R&D team. The acquisition is underlined by compelling cost synergies, strong revenue growth rates, and an attractive post-synergy transaction multiple, which Jackie and I will cover later.
The acquisition of Texon and now Rhenoflex allows Coats to consolidate its position in the attractive premium athleisure and sports footwear market. This combination establishes a global footwear platform with enhanced scale and reach. We have been the leader in footwear threads for many, many decades, and now we can say that Coats will become the world leader in footwear structural components. The combination of Rhenoflex, Texon, and Coats' footwear creates a business with sales of $425 million on a last twelve-month basis to June 2022. Page six. Rhenoflex is a highly complementary business to Texon and Coats across products, customers, and markets. Both Texon and Rhenoflex offer multiple product categories beyond the core athleisure and sports, such as orthopedic and work footwear.
The products on the left and right-hand side of the overlap section of the two circles serve as exciting additional commercial opportunities in the future. Rhenoflex has approximately 400 customers, which include leading footwear brands, and the customer mix is highly complementary to that of Texon. Rhenoflex's sustainable technologies and innovation, innovative product lines such as Rhenoprint provide a unique and differentiated offering that will consolidate our position in the market. Page seven. Rhenoflex is an industry leader with a portfolio of innovative and sustainable offerings that enhance our proposition to customers. Some examples are the Rhenoprint Multi-Zone, which is a proprietary zero-waste production technology. Product digitization through innovative manufacturing where integration of RFID chips happens with their structural components. Vegan product lines made from eco-friendly vegan materials.
Leather waste recycling, especially for the luxury brands in Europe. They also have circular production processes and extensively use environmentally friendly recycled and renewable materials. Now with that, let me hand over to Jackie.
Thanks, Rajiv. I'm on slide 8 now. The acquisition is highly synergistic and expected to generate annual cost synergies of $6 million, which will come through from the following areas, SG&A savings, efficiencies in procurement, and operational improvements. These synergies are expected to be realized by the end of the first full year of ownership, with one-off integration costs of $5 million. These are incremental to the standalone cost synergies of $5 million that are to be delivered from the acquisition of Texon. The combination of both of these businesses is therefore expected to deliver annual cost synergies of $11 million. We expect there to be further benefits from revenue synergies and other commercial opportunities that have not yet been quantified or factored into our business case.
We intend to say more about our plans at our future capital markets day, which we're scheduling in November. If we could move on to slide 9. We've looked at both our footwear transactions as one strategic move, and this follow-on transaction is highly attractive, has highly attractive financial terms for Coats and strengthens the commercial opportunity. Combined with Texon, this results in an attractive blended multiple of 7.8x on a post-synergy basis for the combined acquisitions of Texon and Rhenoflex. The combination of both businesses strengthens both our growth and margin outlook. We're expecting +8% revenue CAGR over the next 5 years, resulting from strong underlying market fundamentals and positioning with leading footwear brands. There is also a path to a greater than 20% EBITDA margin over the medium term.
If we could move to the final slide, which is the key transaction terms. The financial effects of the deal are highly attractive to Coats. The headline enterprise value is EUR 115 million, $117 million, representing a multiple of 9.3x pre-synergies, falling to 6.2x on a post-synergy basis. The acquisition will deliver high single-digit revenue growth, with opportunities to accelerate growth as part of Coats. Expected annual cost synergies of $6 million that are to be realized in the first full year of ownership with a $5 million one-off integration cost. The combination of both Texon and Rhenoflex is EPS accretive to Coats from year one. In terms of the overall structure, the acquisition will be funded through an equity placing of up to 10% of the company's issued share capital, announced separately today.
Our net leverage will remain well within our target range of between 1x and 2x , maintaining our robust balance sheet for strategic flexibility. The transaction is expected to close by the end of August, and we have a dedicated team to oversee the integration. On that note, I'll hand back to the operator to manage the Q&A.
Thank you, Rajiv and Jackie. We now have some time for Q&A. The session will begin shortly. If you would like to ask a question, please dial into the conference call using the details provided on the screen in front of you. Otherwise, stay connected to listen to the Q&A. We will pause for a few minutes to allow time for people to dial in. Once you're on the line, please follow the operator's instructions. Thank you, ladies and gentlemen. For our Q&A, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Due to today's time limit, we aim to get through as many of your questions as possible. Thank you.
Our first question today comes from Charles Hall from Peel Hunt. Your line is open. Please go ahead.
Hello, Jackie. Hello, Rajiv. Well done. You've been very busy.
Thanks, Charles.
If I could ask a couple of questions. When you did the Texon acquisition, you described that as a very well-invested business with plenty of spare capacity. Is it a similar situation with this business? And how do you see bringing them together and what would the combined business look like in terms of operations and management?
Excellent. Thank you very much, Charles. In terms of Rhenoflex, it is quite well invested. You know, we're very pleased with the current owner of Rhenoflex, you know, the PE company called Findos. They have taken good care of the asset. It's got adequate capacity. Actually, they're just opening up a brand-new factory in China, and they seem to have enough capacity for the next few years in terms of growth, you know, growth expansions. The second part of your question, Charles, was around how do we bring these two together. The plans are as follows. We will operate the Coats' footwear business, Texon and Rhenoflex, collectively as one business.
You know, all things going well, we will start probably reporting footwear as a separate division effective first of January 2023. The plan is to have a capital markets day in November in London focused on the footwear business, where we'll, you know, you all will have a chance to see the products, listen to the story, meet the management team, you know, it'll be an exciting day. The plan is to bring the three businesses together. I don't have detailed operational plans yet. We will be working that jointly with, you know, with both the companies over the next five, six days. We'll clearly have something to say at the capital markets day in November.
It should be a really good story because our philosophy, Charles, is one plus one equals three here, and that's what we'll be trying to create.
The EBITDA margin that you're targeting for Texon and Rhenoflex is over 20%. Presumably, that goes for the combined footwear business.
Yes, it will also be individually for both these businesses. You know, currently, Texon is at 15% EBITDA margin, Rhenoflex is 16%. You know, through growth pricing and the cost synergies, I think, you know, we see a path to get them both individually to about 20%. Clearly, collectively as probably the new division, including Coats' footwear, you know, it should all be above, you know, 20%. Our current footwear business is at high margins. It's actually higher than both, sort of, you know, Rhenoflex and Texon. I think, you know, we are reasonably confident in three years or less, all three parts should be around, you know, 20% EBITDA margin.
Perfect. That's very helpful. Thanks, Rajiv.
Thank you, Charles.
Our next question comes from David Farrell from Jefferies. Your line is open. Please go ahead.
Hi. Good afternoon, and congratulations for the transaction. Got a couple of questions. Just maybe explain a little bit the genesis of this transaction. Clearly, Texon was a competitive bid. I'm just wondering whether this had followed the same process. My second question was in terms of the financials of Rhenoflex. Do you think that they have, similar to Coats, seen an element of restocking and buffer stocking in the first half of this year, that perhaps we shouldn't anticipate to carry on over the next six months and then to 2023? Thank you.
Okay. Thank you very much, David. I guess in terms of the process, yes, this was a competitive process. The current PE owner, Findos, had an auction which started in April. We were competing against the European PE companies. I think the one thing which was slightly different in this case compared to, let's say, the Texon case, which was purely competitive. Even here it was competitive, but I think the values of the current PE owner and the management team were very much aligned with Coats in a way that the current PE owner was looking to find a good home for Rhenoflex.
The current PE owner is part of a very reputable and respectable family in Germany. For them, you know, sort of personal reputation is very, you know, very important. Value maximization was not one of the top three criteria that they were looking for. It was speed, certainty, and finding a good home. We were able to sort of, you know, provide all three. In terms of the footwear structural component, this is in line with a strategy that we had articulated five, six years back. You know, we've always said that in the apparel and footwear space, we are the world leader in threads. It is a very low priority for us to be able to acquire another thread company because we are taking organic market share.
For us in apparel and footwear, it was largely around adjacencies. Footwear has been a really winning business for us in the past decade. It's been growing, it's high margin. It was logical to look at footwear adjacencies. Coming out of the pandemic, you know, there were two categories that were very resilient during it, you know, during 2020 . The first one was, you know, athleisure, the other one was sporting, you know, sporting goods. We believe there are tailwinds behind these two categories for the next, you know, several years. If you look at the outlook statements of most of the leading footwear brands, they are quite bullish about athleisure and sporting goods. It's in line with strategy.
These are quality assets that we're buying. You know, the combined market share of both these companies will be circa 20% in the structural footwear components. As you know, in our threads business, we have 23% of the market, and it's a very fragmented market after that. Our view is now that we have a good platform, it's gonna be taking, you know, organic market share from here. It's something that both companies can do. We were really, really pleased to see the quality of the leadership teams, the quality of talent, the way they run the businesses, and the very strong customer relationships they have. I think both these acquisitions have ticked a lot of boxes. I think from our perspective, we don't view them as two separate transactions.
It's basically one transaction, two parts, because it was all part of the strategy to get slightly bigger in the structural footwear component sector.
Okay.
With respect to the second part of the question, David, the second part. Unlike apparel, which goes through this, you know, massive stocking and restocking, you know, plenty of fashion, you know, fashion related dynamics there. Footwear tends to perform slightly differently from apparel. It doesn't have those wild, you know, stocking and restocking, kind of, you know, builds here. Footwear, you know, 70% of the world's footwear is made in three countries, China, Vietnam, and Indonesia. Last year, Vietnam was shut down for three months during the third quarter because of COVID. The footwear supply chain is still in the process of recovering from the three-month closure. We don't expect it to be kind of, you know, a destocking second half. It'll be more of a normal second half.
Okay. Thank you very much.
Thank you, David.
Our next question comes from Maggie Shirley from Stifel. Your line is open. Please go ahead.
Hi, Rajiv. Hi, Jackie. Good evening.
Hi, Maggie.
Congratulations.
Thank you.
Two questions, more detailed. The presentation highlights that Rhenoflex uses quite a bit of recycled materials, right? Use of recycled plastics and leather. Given how many years it took you to build up the supply chain for EcoVerde, do these businesses have the same access and security in the supply chain, or is there work to do there in order to accelerate that growth, so security of supply for the recycled plastics, which in the past has been an issue for some people? The second question is the Rhenoprint technology, the zero-waste production technology. Can that be ported across other areas of the business, particularly in performance materials, or is that a slightly premature question?
Okay. Let me, you know, let me start with the second question, Maggie. I think it's a very, very deep and interesting question. If you just imagine the Rhenoprint as just basically like a 3D printing, okay? They put in exactly the same amount of material that they need to make the final product, and that's the reason why there's zero waste there. We do have something similar in our Performance Material, which we're using for the automotive, you know, carbon parts, which is exactly the same process, where we have these carbon yarns that are going through, you know, embroidery machines, and we actually make exactly the part that we need, again, with zero waste. Yes, there are some similarities. In the case of our Performance Material business, the limitation today is the speed of those machines.
So, t hat's one. Clearly there will be some sort of an overlap between what we're doing on the threads and yarn side with what we can use with this, you know, Rhenoprint. It is a pretty clever technology. It's quite unique, and yeah, we're excited about that. With respect to the recycled leather, now most of the customers are actually you know essentially the European luxury brands, you know, Prada, Gucci, et cetera. When they make those bags or purses, things like that, they buy rolls of leather, and then from those rolls of leather, they actually cut it to what they need. There's a lot of waste. Most of them today are actually paying third parties to take that waste off their hands.
What Rhenoflex does is very cleverly they say, "Okay, we will take care of your waste." They then grind that, make it into pellets, and then reintroduce them back within their supply chain. It is a very, you know, clever way of solving a problem that the customers have and actually reducing cost by, you know, by using the recycled leather. That, that's how they normally do it. Their exposure to PET or sort of, you know, recycled plastic is not that much right now. It's mainly in this. They do have products that they make out of plant-based material. That's also, you know, interesting for us.
Okay. Thank you. That's very clear. I appreciate it. Congratulations.
Thank you, Maggie. Thank you.
This concludes our Q&A and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.