Good morning and welcome to the Coats Group PLC full year 2023 results presentation. We have here today Rajiv Sharma, Coats Chief Executive, and Jackie Callaway, Coats Chief Financial Officer. They will take you through the 2023 results and strategic progress, as well as the outlook for the business. I will now pass you over to Rajiv, who will start the presentation.
Thank you, Julian. Good morning everyone and welcome. Today I'm going to take you through the highlights for the year and then hand over to Jackie to present our financial performance. After that, I will take you through the divisional performance and a strategic update before closing with a summary and the outlook. Following this, we will move to Q&A before concluding the results presentation. 2023 has been a year of resilient consumer spending and an industry-wide destocking. Overall, we estimate the industry manufactured 20% less garments and shoes in 2023. In addition, performance material was impacted by a customer decision to insource production as well as facing issues in some of the U.S. end markets. With this as a backdrop, our reported revenues were down 9%. On an organic basis, full year revenues were down 14% in a market where the industry was down 20%.
We experienced an improving trend during the year where H2 was relatively stronger than H1. I'm proud of a team that excelled in defending price, taking market share, and executing well on all productivity programs and strategic projects. All divisions had tough competitors in the year due to post-COVID pent-up consumer demand and buffer buying by brands in the prior year. However, apparel and footwear brands are now at or near to normalized levels of inventory. This is a positive development and we will address the shape of the recovery later on. While we are clearly not able to control the industry backdrop, I'm very pleased that we have again been able to increase our share of the global apparel and Footwear market by around 200 basis points.
In Performance Materials, which operates across a number of industrial end markets, we have achieved some significant contract wins, in particular in the automotive market that should support future growth. Part of our overall market share gains is because we are the clear market leader in sustainable threads. Our recycled product revenues have increased 44% to $172 million, an outstanding result given the lower market volumes. We are also pleased to report we have increased our adjusted EBIT margin in the year by 160 basis points to 16.7%. Indeed, in the second half, we achieved our 2024 17% margin target, one year ahead of plan and on depressed volumes.
Our increased margin is the result of a number of self-help actions such as effective pricing strategy despite input cost deflation, significant procurement savings despite lower volumes, structural cost savings achieved from multi-year strategic projects that were announced in March 2022, integration synergies from the two Footwear acquisitions, and good cost control and day-to-day savings. In addition, the funding position of a UK defined benefit scheme continued to improve during 2023. This allowed us to activate the agreed off-trigger mechanism to suspend deficit repair payments in December 2023. As a result, 2024 cash generation will include GBP 2 million per month tailwind while these payments remain switched off. Over a full year, this would amount to roughly $30 million of less cash outflow.
The Board has increased the final dividend by 15% to $0.0199 per share, reflecting confidence in the business strategy and the ability to deliver strong margin and cash through the cycle. Subject to approval at the AGM, this higher payment equates to a full year dividend of $0.028 per share, also an increase of 15%. Slide 5 is a reminder of the key attributes impacting 2023 results. This positions us well for the market recovery. Some of these attributes are structural while others are based around more tactical actions that we have taken, all based on our prior experience of winning through market cycles. The major areas of focus to get fitter include Footwear, M&A and integration, portfolio optimization and consolidation, investment and innovation in particular sustainable products, and a range of other actions which deliver greater efficiency and cash generation.
As a result of these actions, we have an even stronger business that is well positioned with the major brands in the most attractive segments of our markets. Coats is the world's number one supplier of sewing thread and Footwear structural components. We are also number one or number two in every supply market that we operate in. This global scale and our strategy positions us well as the market recovers. Here in slide six, you can see the evolution of industry inventory levels over the last few years for a sample of leading apparel and Footwear brands. The peak of inventory was reached around quarter 3, 2022. During 2023, brands have worked hard to bring inventory within their supply chain down. This resulted in a very significant 20% decline in manufactured garments and Footwear.
Since each brand is at a slightly different place on their inventory reduction journey, the slide should be seen as direction. We believe apparel inventory levels are now in the range of what is normal, and Footwear inventory will approach normal levels in the next few months. We are seeing order activity pick up in apparel, and we expect Footwear to follow suit in the second half of this year. As you can see, the narrative from brands in recent public releases adds to further support to what we have been seeing regarding the inventory levels. We are proud to have been included in the 2023 list of the world's top 25 best workplaces by Fortune and Great Place to Work. This award is in recognition of a positive culture and work environment.
I do believe a positive culture that's built on a foundation of strong values and great talent results in financial success for the group. We will play a short video now, after which Jackie will provide an update on our financial performance.
Thanks, Rajiv. Let me begin by summarizing the key highlights of our financial performance for 2023. We've continued with our improving margin performance despite the backdrop of a difficult demand environment due to the industry destocking, and we are very pleased to be able to say that we have already delivered our 2024 group margin target of 17% in the second half of 2023. This margin performance has been supported by rollover pricing gains from our 2022 actions alongside productivity improvements, which have more than offset our inflationary pressures. We are also pleased to say that both our strategic projects and synergy delivery were well ahead of schedule, with more benefits delivered in 2023 than previously expected. This has been another critical area to drive forward our margins while the market has been going through the destocking cycle.
On strategic projects, we are on track to deliver our committed $70 million of savings by 2024, and I'm happy to confirm this will be done for comfortably lower than the original $50 million cash costs we estimated to spend on these projects, at around $35-$40 million. On acquisition synergies, we have delivered run rate synergies of $19 million per annum by the end of this year, which is well ahead of the $11 million total synergies we originally targeted to deliver by 2024. Alongside the difficult demand environment, we have also seen rising interest rates, but we are very pleased to have managed interest costs well despite this external headwind. We have also continued to manage our tax rate, which has helped us to deliver flat earnings year on year.
All of these positive updates show that despite a difficult demand environment, we're able to focus on controlling the controllables and self-help initiatives to significantly underpin performance and set ourselves up to be fitter and stronger for the future as demand starts to return. We delivered free cash flow of $131 million, which is significantly ahead of last year. This was assisted by managing all of our cash levers well, including flexing our own inventory levels. Last year on highlights, we've continued to make further positive progress on the funding position of our UK pension scheme and are now in a fully funded position on a technical provisions basis. This has allowed us to trigger the off-trigger mechanism agreed with the pension trustees and turn off monthly payments to the scheme of GBP 2 million from January 2024.
This provides a sizable, circa $30 million tailwind to group free cash flows going forward. Slide 10 sets out the financial summary and our key financial metrics. Let us now take a deep dive on these financial metrics, starting with revenues. Overall, the year-over-year decrease in group organic revenues was 14%, and this was driven across all of our 3 divisions as a result of destocking in apparel and Footwear and a customer loss and certain phasing issues in Performance Materials. It is important to note that there was a significantly improving trend throughout the year, with the first half organic revenues down 19% and the second half revenues down 10%. This is largely due to the signs that the destocking cycle is coming to an end and more normal buying patterns are starting to gradually return.
Overall, our constant currency revenues were down 6%, which included an 8% contribution from the full year ownership of Texon and Rhenoflex acquisitions. Group EBIT was flat year-on-year at $233 million despite the top line headwinds, which reflected our very strong margin performance. Overall margins were up 160 basis points to 16.7%, and as I said earlier, this meant that we have already hit our group 17% 2024 margin target in the second half of the year. At a reported level, the constant currency sales and EBIT growth was primarily impacted by hyperinflation accounting in Turkey, which requires us to translate results back at period end rates. Adjusted EPS of $0.08 per share was flat year-on-year as we held EBIT flat despite the challenging market conditions.
Finally, on this slide, and as I mentioned earlier, we performed very well in terms of cash generation, with well-controlled working capital contributing to this. Now moving on to the details of our strong EBIT and margin performance on slide 11. EBIT saw a significant headwind on volumes due to the destocking cycle in apparel and Footwear and also the loss of a customer and certain phasing issues in Performance Materials. It is worth noting that some of these volume headwinds are also due to the strong comparators in 2022, particularly in the first half, which saw a significant amount of bounce back post-COVID. The volume headwinds are both direct volumes from selling less, but also in part due to the lower utilization of our factories. As volumes return, we expect to see similar positive utilization impacts across our portfolio.
Offsetting these volume headwinds has been a number of factors, including the price and self-help measures against lower net year-on-year inflation. I'm particularly proud of our strong price defense in difficult market conditions, along with our record manufacturing and sourcing productivity and procurement benefits. On inflation, we've seen tailwinds during the year from certain raw materials and freight as they reduced from the 2022 highs, which is alongside continued recurring inflation in the remainder of our cost base, for example, on our labor costs. In 2024, we expect this recurring inflation to continue alongside modest levels of raw materials, freight, and energy inflation. We have a strong track record of offsetting inflationary pressures and remain confident in our ability to continue to do so in the future.
Once again, we've delivered ahead of schedule on our strategic projects, with $37 million of incremental year-on-year benefits delivered in the year, taking total benefits from these projects since they began to $57 million. In addition, we saw a very positive incremental year-on-year contribution from our 2022 acquisition synergies of $15 million. To date, we've delivered $19 million of annualized synergy actions, which is well ahead of our original guidance of $11 million synergy savings by 2024. The above impacts have led to a very strong EBIT margin in the period of 16.7%. This was 160 basis points up year-on-year, and as I mentioned, this leaves us very confident in achieving our 2024 group margin target of 17%. Moving on, let us now look at segmental margins on slide 12.
These are shown on our three new segments, apparel, Footwear, and Performance Materials, which we've been reporting on since the start of 2023. To help year-on-year comparability and underline performance, we've also shown some pro forma numbers for the Footwear and Performance Materials divisions. Starting off with our apparel division, we saw strong margins of 17.5%, up 150 basis points year-on-year. This means we've already delivered our 2024 margin target despite the significant volume headwinds we saw in the period, which is very encouraging. As mentioned previously, key drivers of the strong margin performance are pricing and self-help actions, more than offsetting inflationary pressures. This segment also benefited significantly from our accelerated strategic project activity and general cost discipline. In Footwear, margins were at 22.8%, again meeting our 2024 margin guidance of greater than 20% a year early despite the difficult demand environment.
Synergies from the acquisitions are coming through faster than anticipated, and on a pro forma basis, which assumes acquisition contribution in the full prior period, margins were up a significant 510 basis points. In Performance Materials, reported margins in the period were 8.6%, 50 basis points up year-on-year on a reported basis as we start to see the impacts of our strategic project activity coming through, albeit there was offset from the significant volume headwinds. Excluding the duplicate costs of around $5 million incurred as part of the setup of the new plants in Mexico, underlying margins for the segment were back to double digits at 10%. Outside of the Americas, PM margins remain a healthy double digit. We expect further margin progression in PM margins as the full benefits from our strategic projects are realized.
On slide 13, we show the bottom half of the profit and loss account, and there are four areas I'd like to cover off on this slide. Firstly, exceptional and acquisition-related items of $49 million, which includes $18 million spent in relation to our strategic project initiatives, $22 million of amortization costs in relation to our acquisition of Texon and Rhenoflex, and $6 million of Footwear integration costs. Secondly, you will see that net finance costs were slightly lower than last year despite the rising interest rate environment during the year. Interest costs on our facilities were up $11 million, reflecting both rising rates but also the new $240 million debt we took out to fund the Texon acquisition midway through last year.
This increase was offset by a number of tailwinds, which include a $6 million mark-to-market gain in relation to hedging instruments, mainly around Sterling strength, and a $5 million lower pension finance charge in the period due to the IAS 19 surplus position on the UK scheme. The third item is the continued reduction of our underlying tax rate to 29% in line with our guidance. The final item to flag is the proposed final dividend of $0.0199 per share, which is a 15% increase on the 2022 final dividend and reflects the Board's ongoing confidence in the medium term. Moving now to slide 14, where we see the very strong cash generation in the period. At an adjusted free cash flow level, we delivered $131 million compared to $114 million last year.
This was a very strong performance compared to historical delivery and further shows our ability to underpin performance and deliver solid cash conversion even in difficult market conditions. This performance has been underpinned by tight control of our working capital, in particular our own inventory levels. This is why it's continuing to spend on the most value-added CapEx opportunities, including expanding our footprint and growth and productivity opportunities. Total CapEx spend was $31 million in the year in line with our guidance. Closing net debt of $384 million, excluding leases, was below the end of 2022. This level of net debt equates to leverage of 1.5 times, which is in the middle of our target range of between one and two times. On slide 15, we lay out the latest funding position of our UK pension scheme and the journey we have been on to get where we are today.
As a reminder, at our last triennial valuation in 2021, this showed a technical provisions deficit of GBP 193 million, which resulted in an agreed set of funding contributions up to 2028. We are delighted to be able to say that the deficit has now reached a fully funded position on the scheme, which has allowed us to turn off monthly cash payments to the scheme of circa GBP 2 million in line with the switch-off mechanism agreed with the trustees earlier in 2023. This equates to an annual tailwind to free cash flow for the group of around $30 million. Aside from the funding position, which has moved forward very encouragingly, we continue to work collaboratively with the scheme trustees, and we share a continued ambition to de-risk the scheme in full by removing it from the group balance sheet in a cost-effective manner.
We will update in due course on this progress. On slide 16, I wanted to take this opportunity to remind you of our approach to capital allocation. In short, we see many attractive opportunities to reinvest our capital to drive growth, both organically and via M&A, where we continue to follow strict investment criteria. Rajiv will give some more details on our thinking here later in the presentation. We will also continue to focus on supporting our pension obligations, although, as I have already mentioned, we are pleased to have reached a fully funded position here, which means we have turned off monthly payments to the scheme from January. However, as I mentioned on the prior slide, we will consider prioritizing a one-off payment which fully de-risks the U.K. pension obligations if this can be achieved in a cost-effective manner.
We also remain very mindful of the need to deliver a progressive dividend to our shareholders, as has again been demonstrated today with 15% growth year-over-year in the final dividend payment. We will do all of this whilst maintaining a strong balance sheet of between 1x and 2x leverage. The Board will revisit this capital allocation policy once we've fully de-risked the U.K. pension obligations. Lastly from me, and as with previous announcements, we've provided future modelling guidance for the next financial period, the latest of which is set out on slide 17. I'm not planning to go through this in detail, but we will be very happy to arrange follow-up calls if you have any questions on this.
I conclude my presentation today by reiterating the excellent margin and cash performance during the period despite some significant industry headwinds, the ahead of scheduled delivery of our strategic projects and delivery of increased acquisition synergies, and our continued progress on the U.K. pension scheme funding and de-risking strategy. Now I'd like to hand back to Rajiv.
On slide 19, the gradual recovery we are seeing is shown in the chart with H2 sales more than H1. We expect to see this gradual recovery continue through 2024. The market was down 20% last year, and our apparel division experienced a 12% sales decline, suggesting that we have outperformed the market in 2023.
This outperformance comes from a global scale, supply chain flexibility, and customer responsiveness alongside our ability to offer customers technical service with notable wins from newer, faster-growing brands, as well as share gains from traditional customers who want to access our sustainable products. Our cloud-based digital platform enables greater operational efficiency for us and for our customers and facilitates stickier customer relationships as ERP systems become increasingly integrated. We are a provider of premium quality products with the widest range of sustainable products. This, along with superior customer service, have been the primary reasons for us taking 200 basis points of market share. Our tried-and-tested pricing strategy was executed well despite most input cost moderating after a period of high inflation. Our playbook of winning with the winners, where we proactively align with winning brands in the most attractive segments, was equally well executed.
We have also worked hard to improve our margins, and we have reached our 2024 divisional target margins in the second half of 2023, which, as I've said, is a year earlier than planned. We are very pleased with this. On slide 20, Footwear's revenue trajectory reflects industry destocking for the entire year. The journey to normalized inventory levels is slightly lagging that of apparel. We expect industry inventory to normalize in the first half of this year, with a gradual recovery expected in the second half. In Footwear, too, the number of shoes manufactured were down 20%, while our organic sales was down 16%. Including the two acquisitions, our divisional sales were up 24% in CER terms. Like apparel, we are pleased to outperform the market.
We have added 200 basis points of market share to take the total to 29% in Footwear threads and 25% in Footwear structural components, giving us a blended market share of 27%. We have many of the same positive attributes as in apparel. This includes market leadership, global scale, technical expertise, and a focus on innovation and sustainable products. This helps us take market share. Our focus is to grow with premium Footwear brands in the most attractive parts of the sports and athleisure segments. We are pleased that our share gains in performance have been achieved while we have been busy integrating Texon and Rhenoflex into Coats. We have delivered $16 million of integration synergies in the year, significantly ahead of the $11 million originally planned by the end of 2024.
Encouragingly, we have also started to deliver on some of the many longer lead-time cross-selling opportunities available to us. The Footwear division has deep customer relationships and technical expertise, which accelerates cross-sell. Our success in 2023 gives us confidence to crystallize more cross-selling opportunities in 2024. So on slide 21, we take a closer look at the progress we have made with our 2022 Texon and Rhenoflex acquisitions. The strategic rationale for these two acquisitions was and is compelling. We have created a global leader in Footwear threads and structural components, focused on innovation in the most attractive segments of the market, and ready for the market recovery. As a result of outperforming our own integration synergy expectations, we have extracted incremental value from this combination by driving margins higher and the expected EBITDA multiple lower than Coats.
Having driven the adjusted EBIT margin from 12% pre-acquisition to a 16% margin in 2023, we have achieved the margin that is consistent with our pre-acquisition business case, despite much lower volumes in the market during the year. As markets recover, we will see the full benefits of the combined offering and synergies. Slide 22 shows Performance Materials, in which there was a 17% organic revenue decline in the year. The biggest single adverse revenue impact relates to a major personal protection customers' insourcing decision at the end of 2022. There was also some customer de-stocking in composites and a few performance material threads markets. Finally, there were phasing issues with U.S. customers in the telecom end markets. However, even against this challenging backdrop, we won meaningful new contracts, most notably in the automotive sector with certain premium European automotive OEMs and electric vehicle manufacturers.
We also picked up new awards in composites and performance threads. We have continued to move the adjusted EBIT margin higher in Performance Materials, with a 60 basis points improvement to 8.6% in the year. The margin in PM has been favorably impacted by our strategic projects, where we have been moving production to Mexico to overcome labor availability challenges in the U.S. We said at H1 that our new site at Huamantla, Mexico, was fully operational and that we had completed the installation of new bonding technologies at our existing factory in Mexico. Towards the end of 2023, we also commenced pilot production at our second new plant at Toluca, Mexico, and production will gradually increase here in 2024. We have been simultaneously consolidating our U.S. footprint from five sites to two sites, and this work will end in H1 of 2024.
Were it not for the duplicate cost of running factories in the U.S. while building new ones in Mexico, our margin would have been higher at 10%. However, the lower volumes in Performance Materials have held margins back. While there are efficiencies from the strategic projects yet to come through, the path to reach the 2024 margin target of 13%-14% is also dependent on the recovery in volumes across personal protection and the telecom segments. Jackie has set out for you our capital allocation priorities. Here on slide 24, I would like to give you additional detail on our thinking regarding organic investments and also how we approach M&A. One of our differentiators is our deep customer relationships, global scale, and a strong financial position. This enables us to invest in programs that are aligned with major brand focus areas through the cycle.
The same cannot be said about many of our competitors. We make organic investments where we believe it will enhance our growth prospects or drive operational performance. As a rule of thumb, we will invest to strengthen our position in higher growth markets. This overlaps with our investment in our three strategic pillars of innovation, sustainability, and digital. For example, our ongoing investment in a range of new sustainable products and recycling technologies, as well as our significant multi-year investment in our digital capabilities such as ShopCoats. Our investments in high operational standards are good for our efficiency and good for growth, giving customers and brands confidence in the standards present in our supply chain. Our M&A investment strategy is focused on attractive adjacencies or adding unique technology or IP to our core business that helps organic growth and margin expansion over time.
These must have many of the same attributes we look for from our organic investments, as well as cultural fit. We favor M&A opportunities that bring cost synergy potential and cross-selling opportunities with our existing businesses, as this helps create value and deliver attractive shareholder returns. On slide 25, it covers the progress of our strategic projects. We originally announced these projects in March 2022 with expected total savings of $50 million by 2024. In March 2023, we expanded the scope of these projects to increase the expected savings to $70 million from a cash investment of $50 million. We now expect to deliver $70 million savings from a cash outlay that is considerably less than the $50 million investment previously expected. These projects have continued to deliver accelerated savings, with $37 million delivered in the year and $57 million in total over the last two years.
In addition to the Mexico projects, we have also been transforming our operations in China and India during the year. In India, we have streamlined our warehousing and distribution networks. In China, we have adjusted our supply chain to bring greater focus to the domestic market that is premiumizing. We have now also commenced the consolidation of a UK Footwear site into our existing international operations, bringing it nearer to Footwear production centers. On slide 26, you can see the significant portfolio work carried out during the past two years. This includes the acquisition of Texon and Rhenoflex, footprint consolidation and optimization as part of strategic projects, and exits from a number of less attractive geographic markets with subscale operations. During 2023, we sold our small operations in Madagascar and Mauritius to a local player. In August, we sold our European zip business to a private equity company.
The outcome of all these changes has resulted in a stronger and fitter business ahead of the market recovery, with an increased focus on the most attractive growth markets. In addition, the efficiencies have helped deliver an enhanced margin, enabling us to generate good levels of cash. On slide 27, we cover sustainability, which remains integral to what we offer to our customers and how we conduct our operations daily. At our results announcement in March 2023, we announced ambitious new medium-term sustainability targets for 2026. These enable us to measure our progress towards our 2030 targets and then onto our 2050 net-zero target. Along with our Great Place to Work target and award, we set out on this slide the main areas of sustainability in which we are targeting further improvements.
We have come out of the blocks very quickly against our baseline and have delivered improvements against each of our targets in relation to the prior year baseline. Our new sustainability hub in Madurai, India, shown on the slide, has a range of equipment allowing it to use more recycled or bio-based raw materials and dyes. The local team of sustainability and innovation experts are collaborating with universities, research institutes, and industry associations to access the latest know-how and technology. Working in close collaboration with its sister hub in Shenzhen, China, it allows us to offer the widest range of sustainable products to our customers. This capability is increasingly important to our customers and a key differentiator. So now turning to recap the highlights of the year and then onto the outlook. 2023 has once again demonstrated the strengths of the Coats strategy and business model.
While the market backdrop has been undoubtedly challenging, there are signs of a gradual recovery in apparel. We should see a gradual recovery in Footwear and Performance Materials in the second half. We have continued to gain market share. We have delivered significant savings and integration synergies, and this, in part, has enabled us to push our Group-adjusted EBIT margins higher. We have exercised prudent cost control and delivered strong cash generation, and we have exited 2023 with a robust balance sheet. There have also been further significant progress to redress the UK pension scheme, which will benefit cash flow this year. All this means we can look to 2024 with confidence, continuing to proactively manage the business as we wait for a more broad-based gradual recovery to take hold. Slide 30 contains the key elements of our outlook statement. We are expecting modest revenue growth with an H2 weighting.
We will continue to control our costs, and we have increased confidence we will achieve our group's 17% EBIT margin target this year. The gradual recovery and our continued investment in sustainability and efficiency should enable strong profit growth and cash generation over the medium term. This concludes today's presentation, and we will now commence the Q&A.
Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. That's star 1 on your telephone keypad. To withdraw your question, it's star followed by 2. And please do also remember to unmute your microphone when it's your turn to speak. Okay, we do have our first question coming through. It comes from Charles Hall from Peel Hunt. Charles, you may proceed with your question.
Morning, Rajiv. Morning, Jackie. And very well done on. Morning, Charles. The set of results in pretty trying circumstances. So congratulations on that. Just had a couple of questions. Could you talk a little bit about pricing? Because it was particularly impressive to increase pricing and market share with a volume downturn. What does that say about your market position where your competitors are on pricing? And what do you see for this year on pricing?
All right. Good morning, Charles. And thank you for those comments and the question. So on pricing, in 2022, in the midst of very high inflation, we actually delivered about $116 million of price through a lot of actions. There was roughly about $20 million of annualized spillover from the previous year into 2023. And that's what you see here. We did not initiate any global, widespread price increases. The focus last year was all on price defence, and we have been very successful at defending prices.
So that's been the $22 million that you see in the financials in terms of price. It's basically a rollover from actions that were taken in 2022. Having said that, as we start to see the volume recovery and apparel happening this year, we are looking at price actions across the board. It's going to be tactical. It's going to be dynamic. And we expect to get price this year, which is going to be slightly more than last year.
Got it. That's great. And then on the recycled thread, very impressive increase there against a backdrop of a declining market. Is that a sign that the brands are rapidly moving over to recycled? And where do you sit against the competition on that product line?
So I think the recycled polyester threads have been really, really strong, the sales.
So last year, it was primarily driven by a lot of the premium brands that had already made significant announcements previously to start moving their garment production or shoe production towards more sustainable products. So we saw a big pull-through from brands. And sustainable products have been a big source of market share gains last year. We have also worked very hard to unlock supply side. So today, we have over 30 qualified recycled polyester suppliers. We also have about seven or eight recycled nylon suppliers that we have unlocked in the last 12 months. So from the supply side, we are ready for taking care of higher volumes in this area. And I expect recycled product sales to further increase this year. As you can see, $172 million is a very material number in terms of the group revenues last year.
We'll start to see that continuously go up this year and beyond. In terms of the price difference, Charles, it's very hard to say sort of generically, globally, because it varies segment by segment, country by country. But broadly, I would say we do enjoy a 10%-15% price premium over our nearest competitors. And that price premium is much higher compared to some of the local competitors that we face in the markets.
Perfect. Thanks, Rajiv.
And just one more point to remind the audience here. At the end of the day, price is only 1% of the cost of a garment or a shoe. So the 15% price premium in the grand scheme of things is not that significant for the brands or the tier ones. But what we do deliver in terms of sustainability, compliance, service, and speed far outweighs the price premium that we get in the market.
That's great, Hannah Nichols.
Thank you, Charles.
Our next question comes from Bruno Charlier from BNP Paribas. Bruno, your line is now open.
Thank you for taking the question. I was just wondering if you could talk about how organic sales growth developed in apparel and Footwear as we traveled through H2. It looks like apparel returned to growth in the last two months of the year while Footwear saw a strong improvement too. And then further, just on apparel, you talked about early but encouraging order trends that are now evident. Could you perhaps unpack this a little for us and talk about what you are seeing in more detail?
Sure. Absolutely, Bruno. So I think broadly, at a group level, what we experienced last year was every quarter was slightly better than the previous quarter. And in the second half, we did see an improving trend in apparel. The first couple of months of this year, clearly, apparel has started to get into the growth sort of area here, which is a positive sign. The sentiment in the market is slightly positive on the apparel side.
The good news is quite a few of the Tier 1s are actually hiring labor, which, again, is a positive sort of leading indicator as to what's to come. So I think apparel, in terms of the destocking, it ended in the fourth quarter last year. And we are sort of seeing a gradual improvement in terms of sales and sort of return to growth. Footwear has the Footwear destocking started about six months behind apparel.
So just to give you a reference point, apparel destocking started in the middle of 2022. It was long and deep. It lasted 18 months. Thankfully, it's over in the fourth quarter of last year. Footwear destocking started in the first quarter of last year. It's behind apparel, but it's showing the same sort of trends in terms of recovery. We expect Footwear restocking to end sometime in the first half of this year and then Footwear to get back into a gradual growth mode starting early part of the second half of last year. The trend in the first half of this year for Footwear has been more flattish compared to H2 of last year. That's because destocking is still continuing in some parts of the Footwear industry. Overall, we are very encouraged by what we are seeing.
Our outlook statement clearly indicates that we will deliver growth this year, which will be more weighted towards the second half of the year.
Understood. Just on that second half weighting, are you able to provide a little bit of a steer in regard to how we should be thinking about the very near term and H1? Are H1 sales expected to be lower, flat, or grow slightly? Just any color would be greatly appreciated.
Okay. I think it's going to vary division by division, Bruno. So apparel, we should see some growth. As we had indicated in March of last year, when the destocking ends, the shape of the recovery is going to be like your Nike Swoosh. It's going to be slow, gradual. It's not going to be a V-shaped recovery. That's what we're seeing in apparel.
Apparel should see some growth in the first half. Footwear will be going more sort of sideways. Same thing with Performance Materials compared to the second half of last year. You will start to see some growth in the other two divisions in the second half. It's very hard to give you an indication as to what that'll be because it really depends on the volume recovery and what happens in the second half. But I am more bullish on the Footwear side because Footwear generally tends to follow what's happened in apparel. What we are seeing in terms of the brand sentiment, the Tier 1s, it's all leading towards a recovery starting in Footwear towards the middle of the year.
Understood. That's very clear and useful. Just finally, just on the margin, the margin in H2 looks very strong, comfortably ahead of what's targeted in 2024, I guess, with the volume recovery still to look forward to, some cost reversing in PM. But are there any offsets that we should be thinking about or a degree of investment that would need to be injected into the business as we gear up for a volume expansion or as volumes start to expand?
So Bruno, we are very happy with the margin, as Rajiv and I have mentioned on the call. So as you rightly point out, we saw a very strong margin in the second half of last year and achieving our 17% margin a year early. Look, as we went through the destocking, there are some costs that we took out of the business in the second half of next year.
A little bit of that will need to come back in. So a more normalized rate for the second half of last year is around that 17% margin. I think from here, we see good opportunities to further expand. So we've got our strategic projects coming through. We've got the synergies coming through. But really, to come to a full conclusion of what a more normalized margin's going to look like going forward, we really need to see the shape of the recovery, which, as Rajiv has said, we'll see that as that develops throughout this year. So that's where we are on the margins at this point.
Can I just build on that, Bruno? So we said in March of 2022, almost two years back, that we will get to 17% margins in 2024. What I can reconfirm today is that I am very confident that we will deliver 17% as a group this year. There are essentially two kind of variables that one needs to factor in. The first one is mix. And the second one is adding some cost back into the business as the volumes recover. And a lot of that is going to be dependent on the shape of the recovery that we expect to see in the second half for at least two of the three divisions.
Understood. That's very clear. Thank you very much.
Our next question comes from David Farrell from Jefferies. David, your line is now open.
Yeah. Good morning. Thanks. I've got a couple of questions, please. Firstly, in terms of the triennial review that's being undertaken on the pension, is the best-case scenario here that when that concludes, you basically say, "Look, no more pension contributions for the next three years, and then we can do away with this kind of on-off trigger switch." And by extension, does that need to happen before you can do something more permanently with the pension?
No, David, it doesn't. We do have a triennial valuation coming up in March this year. What we've agreed with the pension trustees is that we need to stay within the range of 99%-101% of the technical provisions. We're probably sitting at about 101% at this point. And while we remain within that 99%-101%, we can keep our deficit payments off.
As we've mentioned today, we turned those off in January, and that saved us about GBP 2 million of cash a month, which is about $30 million a year. So we'll go through, and we'll do that triennial valuation in March. And we expect that to really come to the summer conclusion of what we see now, which is fully funded and probably sitting at about 101%. But we need to go through that process. Separately, we are looking at, "Can we really take this pension liability off balance sheet?" And that is a little bit opportunistic.
We've always said that this is capital allocation, and we will look to allocate some capital to do this so long as we can get it at a price that makes sense. It's a little bit opportunistic because the insurance market is quite busy. So we'll continue to look at this throughout the year. We'll only do this if we can get the right price in terms of taking the pension liability off balance sheet.
Okay. Thanks. Kind of second question is a follow-up to that. On my model, we kind of de-lever by kind of 0.5 turns per year, which basically means by the end of this year, you're back towards kind of 1x net debt to EBITDA. I appreciate pension is a capital allocation opportunity as is inorganic growth. But where do you and the Board stand in terms of buyback given the valuation of the stock?
So I think on this, David, we still remain very focused on capital allocation in terms of opportunities to either do a full buy-in of the pension or we see we've got a very, very strong pipeline in the inorganic area as well. So we see that there's good opportunities to deploy our capital either with the pension buyback or with some M&A at this point in time. So at this point, we haven't put buybacks on the table. Now, the Board will come back and look at capital allocation once we fully de-risk the pension scheme. But until we do that, that's something that we wouldn't consider in terms of buybacks at this stage.
Okay. Thanks. And final question for me. Just in terms of the competition, clearly taking a lot of market share, and that run rate is sustained at kind of 200 basis points per year. Are you seeing the competition fully exit the market, or are they lingering around hoping to kind of buy back on some of that market share gains that you've taken?
No, I think we are seeing at least the leading competitors, they're clearly lingering around. They have not gone away. They continue to fight. But what we are seeing is lower down in terms of the long tail of competitors, we are seeing the small and some of the midsize under significant financial distress. And some of them probably have even closed operations. And there might be some consolidation in the tail of our competitors as we go through the year.
Okay. Thanks very much. I'll turn it over.
Thanks, David.
Our next question comes from Colin Moody from RBC Capital Markets. Colin, your line is now open.
Hi all. Thanks for taking my questions. Just two here. One, could you remind us where your sales volumes are at now versus kind of the pre-COVID level? I believe at H1, you flagged it was 15% lower. And just my other second quick question is, obviously, the Footwear synergies acquisitions, really good run rate at $19 million, perhaps being a bit cheeky, but is this the end of the road, or is there further room to be done there? Thanks.
Okay, Colin. So firstly, on volumes here, last year, our sales were down 14%, but in volume terms, we were down 16.16%. And this is in the backdrop of the industry being down 20% in terms of manufactured garments and shoes. So that's sort of the backdrop here. We are still 12% below 2019 levels, which was the last normal year before the pandemic. So the way I look at it, Colin, is that we have some upside as far as catch-up is there till we get to sort of 2019 levels.
As volumes improve and we are able to manage the mix appropriately, we should see operating leverage over the next couple of years. In terms of the Footwear synergies, we delivered $16 million last year. We should get about $3-plus million this year. And that's probably where it's going to halt in terms of the Footwear synergies.
Great. Thanks. Very clear.
Okay. You had two questions, Colin. So we answered the volume one. Was there anything else?
The other question was on the Footwear synergies. That was just for two questions.
Got it. Thank you. Thanks, Colin.
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. That's star 1 on your telephone keypad. Our next question comes from Maggie Schooley from Redburn Atlantic. Maggie, your line is now open.
Hi. Good morning, everybody. I had two questions as well, if I could. The first one, perhaps being a bit longer term. So investors recently have been questioning if we've hit peak Footwear and if that's passed, and a market that's grown anywhere around the 8% level for the best part of 20 years perhaps could be growing at 6%. And if that's the new norm, I know you outlined at your Capital Markets Day the moving parts that underpin your expectations of medium-term growth of 8%. And not all of that was market growth. So I was wondering if you could remind us the constituent parts of your medium-term thought process on the Footwear growth. That's the first question. And the second question is, just within Footwear, I know it's a more concentrated market, and I think you have a very broad skew.
But can you give us any indication if there is increasing fragmentation in your end market customers? So as the brands are starting to see fragmentation, are you starting to see the same thing? And if that's the case, by geography, where do you think that this presents some opportunity for you?
All right. Maggie, good morning. Thanks for the two questions. So on the underlying Footwear industry growth, so as we had said in the Capital Markets Day, our sort of we are still confident about the medium-term growth rates of about 8% in Footwear. And that is broken down into 4% for the underlying market and 4% as actions that we would be taking. So it's price, mix, innovation, sustainability. That's how we break it up. We're reasonably confident in the medium term, we will get to the 8%.
So on the underlying market growth, so we have assumed 4% and not 6%, as most sort of analysts say. If it happens to be 6%, that's going to be upside for us. On the second question in terms of fragmentation versus consolidation, we haven't seen anything dramatically different, Maggie. You've still got the big brands. Some are doing much better than others. Some are some of the European brands, I think, are well-positioned going forward because they've taken care of the inventory issues. They're spending a lot on innovation and sustainability. They're coming out with new sort of models. And I expect this industry to really be at the leading edge of innovation as far as performance and customer comfort is concerned. If you look at the last three years, you've had New Balance doing very well. You had On Running doing very well and Hoka.
So again, I think you will see a lot of the industry, again, focus on the sports and athleisure part of it. And there, it'll be around fashion, performance, and comfort.
Okay. Very clear. Thank you very much for the answers.
Thank you, Maggie.
Our next question comes from Joe Spooner from HSBC. Joe, your line is now open.
Good morning. Can I ask the question around volumes in a slightly different way? Because I guess one of the things that's been happening with the business is you've been modifying the footprint of the factory network. When you look at the capacity utilization of the factories as they are today, where do you kind of broadly view that that is kind of sitting? And historically, where is kind of normal in terms of that capacity utilization?
So Joe, again, it depends on sort of division by division. So within Apparel and Footwear, broadly, good capacity utilization would be between 75% and 80%. And the balanced 20% is for managing the spikes and the seasonal peaks that happen here. So that's on Apparel and Footwear. Last year, we were at around 60-62% capacity utilization in Apparel and Footwear. Within the Performance Materials factories, especially composites and personal protection, they need to be running at higher capacity utilizations around between 85% and 90%. And they were at about 68-70%. So what that means is because of the destocking that's happened and customer phasing, which were factors last year, we have enough capacity within the system to take care of the market recovery and more.
Thank you. Then just turning to the Footwear division, I guess one of the opportunities that you outlined at the outset of those acquisitions was that opportunity to cross-sell the products between the various different customer groups. Can you give an update on where you are on that? Is that still at the beginning, or have you made some progress there?
No, we have made some progress. We've actually had some customer wins where. So if you think of Footwear as three components, you've got the Coats threads. You have Texon structural components and Rhenoflex structural components. And when you do the mapping brand by brand, Tier 1 by Tier 1 of these three sort of product categories, who's on which shoe model, we have unlocked a reasonable amount of cross-sell opportunities. And we have started to win them in the second half of last year.
I would see that to accelerate as we go forward this year and next year. And not only cross-sell, I think at some point, we'll start to see upsell when the industry volumes come back. So this has been a very positive development for us. And it started slightly earlier than what we had anticipated at the time of the acquisitions.
Thank you. And just a final one. I think you noted that the cost of delivering some of the strategic project benefits is coming in lower. Can you give a sense of why that is? And then also, as you look forward, are there more kind of exceptionals expected
ahead? So Joe, we originally guided $50 million cash cost to deliver the $70 million of strategic projects.
We've updated our guidance today to say we'll still continue to deliver the $70 million of benefits, but it'll be a cost of around $35 million-$40 million. What we've actually seen is we've managed to dispose of some properties as part of the footprint optimization that we've done. And we've generated some cash through those disposals, which that's allowed us to come in at that lower value. Most of the actions now, pretty much most of the actions to deliver the strategic projects has been undertaken. There's a little bit more of cost to come in this year, probably about another between $5 million and $10 million of cash costs coming through this year in terms of exceptionals.
Thank you.
Our next question comes from Kevin Fogarty from Numis. Kevin, your line is now open.
Hi. Thanks very much. Thanks for the presentation and the questions. If I could have two, please. The first one is on visibility over customer inventories. Clearly, this has been a kind of longer destocking cycle than you've experienced historically. And I just wondered, throughout that, has there been any sort of change in the level of visibility you've got over customer inventory levels? Appreciate you're seeing sort of greater activity in apparel currently and obviously Footwear sort of improving. But I just wondered, sort of has that sort of your view or your knowledge of customer inventories kind of improved during the cycle, and particularly with a view to Performance Materials, just sort of what that might look like and confidence of those inventories kind of running down, I guess? And then sort of on a slightly kind of related point, obviously, you're on sort of working capital.
You've had a good improvement in 2023, kind of reflecting that demand environment. As we sort of roll through to resumption to growth this year, do we get back to a sort of normal working cap investment for you guys, or is there sort of further to squeeze out of this? Just any sort of commentary on those two would be great.
Okay. So on customer inventories, you're right to say that this time around, post-pandemic, the destocking has been deeper and longer. In Apparel, it's lasted 18 months. In Footwear, it'll be close to 18 months. So yes, it's longer and deeper. Last year, visibility of customer inventories was not very high. So I think everyone was speculating, etc., etc.
But as we got towards the end of the year, I think there was far greater disclosures by the big brands in terms of where they are in their inventory cycle. We are reasonably confident that in Apparel, inventories have normalized. And that's based on a few factors here, Kevin. One is that the leading indicators that we see in terms of sampling activity, customers being more confident about sharing their full-year forecast, Tier 1s hiring, all that are sort of lead indicators that things are going to get back to normal where demand and supply will be closely matched. And this thing will be repeated in the Footwear, again, towards the middle of the year. We're also seeing in the Performance Materials division, lead indicators and sentiment improving. The tender activity has certainly picked up across Europe and the U.S.
We're starting to see some of the government funding being released. The sort of Build Back Better Act, which was approved by Congress and the U.S. in 2021, it's taken some time to see the funding flow through into the market, but we're starting to see that. And that will be reflected in the tier ones investing in more capacity and then placing more orders to the likes of Coats. So I think overall, the sentiment, even in Performance Materials, is sort of shifting and moving in the right direction.
And then Kevin, just on your working capital question, we did have very strong working capital last year managing both our inventories very well and also our collections. So we had an inflow last year. This year, as we start to see that sort of return to growth, we will be investing a little bit into working capital. So it'll be a small outflow for this year.
Great. Thanks for the clarity, and that was really helpful. Thanks a lot.
Our next question comes from Thomas Rands from Davy UK. Thomas, your line is now open.
Thank you. Good morning, Rajiv and Jackie. I was just wanting to ask about Performance Materials. And could you remind us of the contract wins within automotive, what the actual end product was, and what the opportunity pipeline is looking like in a post-COVID world for automotive? And maybe more generally across Performance Materials, what new project opportunities there are and growth opportunities within that division? Obviously, lots of focus on Apparel and Footwear. I just wondered about Performance Materials, please.
Yeah. So I'll give you two of the more strategically important wins. So in the automotive sector here, we have seen some wins with the electric vehicle manufacturers. So we got we have product with Tesla now, sort of the Mercedes electric vehicles, things are coming through. And this is largely for airbags and seat belts. So that's where the wins are. We had disclosed that in towards the end of 2022, a significant Tier 1 in personal protection decided to insource their production. And that was a major part of the sales decline of Performance Materials last year. So that customer is having discussions with us. And there's a possibility in the second half, they might bring back some of the volumes, not all, but at least some of the volumes back to us. And that's going to be a really positive sign here.
Just to add some more color on Performance Materials, so if you just look at the headlines, you might feel that, "Oh my God, what's happening with sales and margins?" But actually, if you go under the skin and you look at it by geography, Asia and Europe have done very, very well. Our margins in Asia are 22% in Performance Materials. And in Europe, it's 18%. And in both these geographies, we were held back by destocking in the industry. So really, what that means is a lot of our issues are centered around U.S. and Mexico, where we have worked hard to go down from 5 factories in the U.S. to 2, and we're building new capacity in Mexico. And as the volumes start to flow through, you'll see the operating leverage come through in U.S. and Mexico.
So in U.S. and Mexico, we were held back by two factors. The first factor was some industry issues, customers sort of insourcing, etc. But we also were constrained by the supply side. And as those supply constraints unlock during the year, we should get back to normal in the second half. So overall, Performance Materials, if you start looking at the parts, it's actually a pretty good story in Europe and Asia. And it's an improving story in North America. Sorry, your second question, Thomas.
I was just on M&A is still a key part of capital allocation and the strong kind of recent Footwear acquisitions. I was just wondering what the M&A pipeline is looking like and what seller expectations, if they've changed at all in the last kind of six, 12 months.
Well, I can share with you, the M&A pipeline is stronger today than it was 12 months back. I think as you go forward in the next few years, you'll start to see some of the weaker players consolidate or be sort of willing to sell. So we will see opportunities over the next few years in terms of acquisitions. We have been very encouraged by the two Footwear acquisitions that we have done. Clearly, there would be consolidation opportunities in terms of Footwear components over the next few years. Even in apparel, I would say, if there are any tactical opportunities that we see where the price is right and the value creation opportunity is strong, we would not mind looking into those areas too.
Great. Very clear. Thank you very much.
As a reminder, to ask a question, please press star one on your telephone keypad. That's star one on your telephone keypad. Our next question comes from Charles Hall from Peel Hunt, Charles. Your line is now open.
Rajiv, could I just ask about China as to how you're set up with the growing domestic brands and whether that's helping sales performance in that region? And secondly, obviously, we've got an election in the U.S. coming up, and Trump is talking about tariffs on China. How do you see that affecting your Chinese business and the business overall?
All right. Great questions, Charles. So let me start with China domestic. So we have been pivoting our business in China over the last two years to focus more on domestic brands and domestic sales. And that is actually a pretty good growth part of it. We have seen year-on-year growth of close to 20% in the domestic sales in China.
We also did some investments in terms of trying to make our supply chain and our manufacturing more adaptable to the requirements of domestic Chinese customers. So I think all that is moving in the right direction. In terms of the Trump tariffs, so as you probably are aware, in 2019, Trump imposed significant tariffs in China. There was an impact, and we saw sales decline at that point in time. And because it happened so suddenly in 2019, it took a while for the supply chain to adjust. And then we had the pandemic. But I think if it happens this time, I think we and the industry are very well prepared for it.
And if it happens, it'll actually be a net positive for Coats because you will see migration of business from China into Southeast Asia, South Asia, and Mexico, Central America, where the margins are higher, our ability to serve customers is much better. So overall, should that happen next year, I think it'll be a net positive for Coats.
Got it. That's very clear. Thanks very much.
We currently have no further questions, so I'd like to hand the call back to Rajiv Sharma for closing remarks. Rajiv, over to you.
All right. Thank you very much, Bruno. I just wanted to take maybe the last two minutes to summarize. So last year, I would say, is defined by outperformance in many, many areas. It was a deep destocking cycle that we saw. Interest rates were still high, inflation was still high, and demand visibility was very low last year.
So in that environment, delivering a 14% decline in sales was not a bad thing. And that clearly shows that we have taken market share. We were really, really pleased with the 200 basis points market share gains in Apparel and Footwear. That has been very, very helpful. And part of the market share story has been our 44% growth in sustainable products that we saw last year. And that should continue going into this year. Margins were very strong, coupled by a lot of self-help that we've done, strategic projects, synergies, productivity programs across the board. And I'm really proud that we defended price really, really well last year. So that's, again, a very important thing here. We also achieved the off-trigger for the UK pension. So that's roughly a $30 million less cash outflow this year. So that's a really positive thing here.
But I think the proudest moment for me was when Coats was nominated to be in the top 25 best workplaces in the world. So that takes a lot of time to build a culture, the right environment, positive impact on the workplace. And that's where all 15,000 employees across Coats sort of participated and achieved very well. And I fundamentally believe that a positive culture, great talent, eventually leads to significant shareholder gains over the medium term. And then lastly, I would say we are well prepared for the recovery. Our cost structure is in place. One should expect operating leverage over the next 12-24 months as volumes recover. And I'm quite excited about the future. So with that, I'd like to thank all of you for your time and for your questions. And I look forward to meeting some of you later on this evening.
Thank you. Thanks, everyone.
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.