Synthomer plc

Good morning, everyone, and welcome to our full year results presentation. It's great to see you here at the Royal Society of Chemistry in London, with many others joining online. As usual, I'm here with Lilly, our CFO, and Faisal, head investor relations, and we look forward to answering your questions at the end. I will provide an overview of our performance and the significant steps that we have taken this year to safeguard, strengthen and refocus the business. Lilly will then walk through the numbers in more detail before I come back to show how we are making good and differentiated progress in each of the divisions and how that underpins our confidence for the future. Starting with performance. As you are well aware, market conditions have been amongst the most challenging in decades, both for Syntome and the wider industry. A prolonged period of suppressed demand meant that our volumes declined by 10% in the year, albeit at a slower rate in the second half. Total revenues were 15% lower at £2 billion. Whilst we saw greater resilience in our specialty businesses, the impact of this demand environment on EBITDA was significant, with margins also lower versus prior year, mainly due to higher production and utility cost. Our key priorities at the outset of the year was to protect and strengthen our financial platform, and here we made significant progress. Cash generation has been a key contributor with the group delivering a 24% improvement in free cash flow or £86 million in 2023. This impressive performance was driven by an intense focus on cost inventory reductions and resulted in a 96% conversion of EBITDA to operating cash flow of £136.3 million. It fundamentally underlines our ability to navigate severe trading conditions and is highly promising for the future. In line with our strategy, we have managed our portfolio as the first in what I expect to be a series of divestments. The sale of our laminates, films and coated fabrics business in February raised proceeds of $262 million. We are also grateful for the strong support that we had had from our shareholders in the £276 million rights issue last October. As a result of these actions, net debt more than halved by year-end 2023 and was 60% lower than at its peak. With the further covenant relaxation agreed this month and committed liquidity of more than £450 million, we are in a strong position to go forward. When we presented our new strategy to you in October 2022, I said that we would deliberately evolve to become a more specialty business. We recognized that significant parts of our portfolio were more specialized and closely aligned to exciting fast growth end markets, so that is where we decided to focus our efforts. These areas have been the most resilient from both the volume and the margin perspective during the year testament to our strategy as a whole. Clearly more than half of the group's revenues now come from our specialty businesses with EBITDA at an even higher proportion. That gives you a sense of the scale of our specialty portfolio and therefore the opportunity that we have to expand in these markets. We have also continued to streamline the business, reducing the number of sites from 43 to 36 since October 2022. Our ambition is to go further still, reducing to below 30 sites over the next 12 to 18 months. Good evidence that our evolution is underway can be seen from the EBDA margin improvement across all divisions in H2 versus H1, despite the massively subdued environment. Innovation continues to be a priority with 22% of our sales coming from products launched in the last five years or with protected IP. That is being driven by customer demand for both more sustainably made products and products that help them meet their own sustainability targets. Regulation is helpfully also propelling change and 64% of our new products now have a clearly defined sustainability benefit. In addition, we were awarded an A- rating by CDP, which brings us to the top quartile in the chemical sector. We have continued to reduce our own Scope 1 and 2 emissions and progress our other sustainability goals in line with our targets. These are all examples of how we are delivering on our strategy. They are evidence that our strategy is working with a different looking business beginning to emerge. Our job is to sustain the momentum and continue this evolution so there is much more to come in the year ahead. Whilst our efforts have been focused primarily on preserving cash, we continue to make disciplined investments to support organic growth and innovation. There is an opportunity to do more of this in the foreseeable future when we are in a better position to do so. Further divestments are in the pipeline with three processes underway. With interest rates peaking and the appetite potentially growing, I'm hopeful to see further progress in the first half. As always, we will not sell any assets below their fair value. We have done a lot to improve the reliability issues we inherited with the adhesive resins business, with the problems now confined to two out of six sites. The new management team are doing a great job to reposition this division so that it can rebound strongly when the markets return. There is a good business here but more work to be done in 2024 before we see its full potential. We are extending our excellence program to target an additional 30 to 40 million pounds in savings in 2024 and 2025 from procurement and production initiatives. These actions, alongside the large amount of strategic progress in 2023, give us confidence that Sintema can increase earnings and generate positive free cash flow this year, even if the macroeconomic situation does not improve. And when demand does start to come back, we expect to significantly increase our profitability, more than doubling EBITDA from current levels in the medium term. I would hand over to Lili now.

Good morning, good day to everybody. 2023 was undoubtedly a very difficult trading year for the chemical industry and for Sinsoma. In that context, I'm pleased that our decisive actions have halved the group net debt at the end of the year, with a particular highlight for me being the focus of business on cash generation. With free cash flow of £86 million, underpinned by a 97% EBITDA to operating cash flow conversion. Now starting with the financial summary, the results were in line with our trading update at the end of January. Group revenues for continuing businesses was 15.6% lower on a constant currency basis and just shy of two billion pounds, reflecting a 9.9% drop in volumes due to subdued end market demand. and increased global competition in some of our base chemical products. As Michael has already mentioned, the volume decline slowed in the second half, relatively to the first, and Q4 saw the first year-on-year improvement in group volumes for some time. Price mix was lower, reflecting the path through of lower raw material input costs. Consequently, group continuing EBITDA was 142 million pounds, a significant decline on 2022, reflecting the substantially lower revenue, but mitigated by strong pricing in our speciality businesses and our cost reduction program. The EBITDA margin in each of our three divisions improved in the second half versus the first. Depreciation and amortization increased to £104 million in the year versus 84 in 2022, reflecting a full year of owning a decent residence business and the re-profiling of those acquired fixed asset and the IRS 16. We expect 2024 depreciation to be in the mid 90s. Continuing business operating profit of 37.7 million pounds for the year, a decline of 77% in constant currency. Interest charge also went up as a result of the acquisition. We currently expect net financing cost of approximately 60 to 65 million in 2024 as a result of higher net debt and other changes to the group's financing arrangement. These continued operations, including laminate films and US paper and carpet business contributed around 50 million in revenue and an EBITDA loss of 3 million in 2023. As always, we included a schedule for special items in the appendix. The group underlying tax credit for continuing operations was £1.6 million, comparing to a £27.6 million charge in 2022. This year, the effective tax rates were lower than usual, reflecting an increase in deferred tax assets held off balance sheet in relation to the UK, due to uncertainty regarding their use in the foreseeable future. Now going forward, we continue to guide our ETR in the range of 23 to 25%, driven by the geographical mix of profits. Total group, continuing and discontinued, had underlying earning per share of 35 pence loss for the year, down from 152p in 2022, reflecting the lower earnings and higher number of shares. A note, that EPS is shown using the weighted average number of shares for 2023 of 85.4 million, reflecting the share consolidation and rights issue which took place in October last year. Now going forward, our basic number of shares is 163.6 million. Our net debt for the year end was just under 500 million with covenant leverage of 4.2 times. As Michael mentioned, For prudence, we have recently secured further covenant extensions, which I will come on to later in the presentation. Now turning on to each of the divisions. In CCS, revenue were 816 million pounds, down 19% in constant currency from prior year, mainly as a result of 13.8% fall in volumes. We have seen some cautious behaviour from our customers, given the subdued and user demand. Encouragingly, while reduced raw material costs were reflected in our pricing, the gross profit margin was helped up well, reflecting the more speciality nature of our portfolio. In addition, our efforts to tighten costs and various other strategic initiatives, such as the closure of our small Texas production site meant that the EBITDA margin increased year on year to 12.3% from 12.1%, with total EBITDA reported at 100 million pounds. Michael will come back to talk about the strategic progress we're making in this division, but we're pleased with the resilience and growth potential that we see, especially in our coatings and energy solutions businesses. The division today is more weighted to Europe, Our investment in this division will be more towards America, Middle East, and Asia to support growth. Coming on to adhesive solutions, revenues increased slightly on a constant currency basis, reflecting a full 12 months owning the business versus nine months in the prior year. On a like-for-like basis, there was a significant drop in volumes as a result of lower demand and destocking, amplified by the reliability issue in the acquired businesses. Volumes began to stabilize in the second half, reflective to the first, and EBITDA margin improved by 70 bps. The AS division in 2023 had a similar proportion of speciality to base revenue as the whole group, about 55% to 45%. Unlike the group as a whole, AS speciality products saw more stable volume, and we're able to largely maintain or increase our margins. However, as we've been flagging since last November, we've seen more intensive global competition in our hydrocarbon-based business. And we have therefore focused on our cost competitiveness, which include a small investment on strengthening supply in Europe that we recently announced. Having delivered all of the synergies actions identified at acquisition time, the big focus has, of course, become our performance improvement program to increase operational reliability and cost competitiveness, which delivered around £5 million of savings in the year. There is, however, much more to come in 2024, including areas of operations reliability, procurement and supply chain with total savings expected by 2025 to be around 25 million run rate per annum. Alongside profitability, the program also focused on inventories, which were reduced by more than 25 million in 2023, with further progress expected in 2024. And finally, health and protection and performance materials division. Here we saw a similar pattern with lower revenue driven by a 13.5% reduction in volumes and significantly lower prices. This reflects the very subdued demand environment that has persisted through the year, and EBITDA was significantly behind 2022. Within health and production, NBR volume fell by 13.4%. With reduced capacity in the market, we started to see a modest volume improvement in Q4, relatively to Q3, but this has not translated into margin recovery yet. We have continued to take decisive actions to reduce our cost, with the closure of our Clon NBR facility being the most significant one. As a result of the closure, we impaired 5.6 million of plant and equipment asset. Performance materials was also significantly impacted by the market demand environment, with volumes declined by 13.5%. We have also experienced pricing pressure, with raw material price reducing during the year. As I've mentioned previously, two parts of this business were discontinued during the year, with lemon and fumes divested, and our North America paper and carpet business closed. Further divestment on the non-core asset will follow. Our effort to enhance capacity utilization and efficiency meant that divisional EBITDA margin improved by 90 bps in the second half of 2023 versus first half. As I've mentioned, year-end net debt was 499.7 million pounds, a 50% reduction, principally reflecting the proceeds of rights issue in October 23, the divestment of lemon films business, and improved free cash flow. Against the backdrop of prolonged weak market condition, which resulted into a significant reduction of EBITDA year on year of more than 100 million pounds, we generated free cash flow of 86 million pounds. This is supported by our 97% EBITDA to operating cash flow conversion, including some benefit from additional factoring. Going forward, we expect the normal operating cash flow conversion to be around 60 to 70%. Captured in the free cash flow, we achieved 80 million pounds self-help savings, and inventory was down by 46 million pounds, line share of which was from our AS business. CapEx was 84 million pounds, in line with our guidance. Other than she and sustenance spent, we selectively invested in some growth areas, such as our APO line and a new innovation center in China. Looking into 2024, and Michael will discuss our new procurement and production excellence cost program, which he mentioned already on the top of the slide, we expect further inventory reduction in AS and our CapEx for 2024 will be at similar levels to 2023. We also have two key non-recurring cash items in 2024 that we have flagged before. £38 million EU fine was paid as planned in January this year. And during the year, we will make around £19 million in deferred contributions to one of our pension schemes. If microeconomic conditions do not improve, we will still expect to modestly free cash flow positive in 2024. although net debt would be modestly higher than at the end of 2023 as a result of two items outlined above and partially offset by further efficiency improvement. Leverage was 4.2 times net debt to EBITDA at the year end, down from 5.5 times at June 2023, and we expect to reduce this further over time through our divestment program, cash-generated business model, and operating leverage to a recovery. In the meantime, we have now have a more robust financial platform. We have committed borrowing facilities placed today, comprising a 300 million euro under RCF, a 520 million euro bond, and the UK export finance facilities of 288 million euros and $230 million. the RCF and UKF facility are subject to one leverage racial covenant. For Putin's purpose, the group agreed in March, 2024 with our banking group and UKF to extend the period of temporary covenant relaxation to ensure that appropriate headroom was maintained. We intend to refinance the bond during the course of 2024. In December, 2022, we put in place a two-year non-recourse receivables financing facility for a maximum amount of 200 million euros. Factored receivables assigned under the facility amounted to about 110 million at the end of 2023, an increase around 30 million from the 22 level. The group's current committed liquidity is in excess of 450 million pounds, with additional support from unused factoring programs. Let me end the slide on capital allocation. While we do intend to invest in carefully selected organic growth opportunities aligned to our speciality strategy, our key priority is to reduce our leverage towards our one to two time medium term target level. The board have confirmed that dividends will remain suspended at least until our leverage is below three times. Now in summary, I am pleased with the progress we made during a difficult year. We continue to focus on our short-term cash and cost actions and balances with selective investment guided by our strategy. Let me stop here and hand back to Michael to update you on strategy and outlook. Michael.

Thank you, Lily. Good. Slide 14 will be familiar to many of you now, and whilst there is a lot on it, these five pillars illustrate the key elements of our strategy and where we are focused. Some aspects are more subject to the current trading environment and balance sheet constraints than others, but all five pillars are executable, and where we have control, we have been making significant progress towards our ambition of becoming a specialty chemicals company focused on attractive end markets. This one-page strategic framework continues to guide us now and in the future. This slide illustrates the direction of our strategic evolution on three dimensions. We are gradually increasing the specialty nature of our portfolio and already started to see margins on materials improving in 2023, increasing our operating leverage going forward. In terms of our footprint, here we also are on a journey. As I have said previously, the US represents the largest opportunity for Sintermeer and we expect it to account for over a third of our sales in the near term. Asia is also of great importance for the business and will therefore be developed further. Our efforts to divest more non-core assets combined with internal consolidation opportunities will streamline the number of sites to less than 30, making us a more efficient organisation with less overhead and fixed cost. But most important, it will also allow more focused and meaningful capital allocation for future growth. Let me quickly go through each of our divisions to show how these various aspects of our strategy are playing out. CCS is currently our most specially rated division and therefore the best example of where we are trying to take this business by focusing on customer needs and allocating our resources accordingly. What's exciting is that CCS already has leading market positions, especially in Europe. Growth is being driven by our ability to offer solutions that can help our customers tackle both regulatory and sustainability challenges underpinning our GDP plus growth outlook. We are building out a strong specialty platform to accelerate organic growth. We are aligning the business more closely to the end customer, managing our existing customer better and enhancing our value proposition. With our global customers, we are now developing relationships with their regional leaders and opening more doors by doing so. A great example of this was with an important US customer where the value of our sales has quadrupled over the last 18 months. We have made modest investment to enhance our coatings capacity in the Middle East. We also expect to deliver increased sales in China as a result of our investment in the new innovation center that will be opened in Q3 of this year. Our efforts to further improve and strengthen our portfolio have continued. We are doing this with a particular focus on sustainable innovation where we think there is a good opportunity to enhance our differentiation and grow our margins. The growing demand for bio-based alternatives is one that we are responding to with customer sampling underway in the first half. We have also continued to optimize our asset base to increase our efficiency. We successfully exited from a small production site in Texas during the year. We will close our site in Fitchburg, Massachusetts by the end of 2024. These steps are helping us to improve utilization, reduce complexity and focus investment to drive organic growth. Our adhesives business has faced both a substantial deterioration in market demand as well as its own operational challenges that we have spoken about previously. Our focus has been on fixing the reliability issues that we inherited and to also make the division more cost efficient. They have already made meaningful strides to improve logistics and to supply a network and the new leadership team has a clear plan to ensure that this division can deliver on its full potential as the demand environment improves over time. A key priority was to broaden raw material supply and reduce working capital closer to group levels. We have made excellent progress in both areas and we will go further in 2024. Having successfully delivered the synergies we identified at the time of the acquisition, as well as a further £5 million of cost savings this year, our performance improvement plan is going further. We are now targeting total annualised savings of £25 million by 2025, largely by optimising procurement of key raw materials and improving reliability and production processes at key sites. Looking to the market itself, adhesives continue to represent a good opportunity for Syntomer. Specialty products account for 55% of divisional revenues, including products such as pure monomer resins, amorphous polyolefins and rosins. Similar, but clearly more pronounced to what we have seen in CCS, volume and margins were much more resilient in these areas than our base chemical products, which were subjected to increased global competition lower demand and less pricing power. We will focus future investment on expanding this specialty part of our portfolio. We will mirror our efforts in CCS to strengthen customer relationship management, enhance innovation and drive sustainability initiatives. We are expanding our specialty APO capacity in North America, which is expected to come on stream by the end of this year. Coming to health and protection. and customer demand growth for medical gloves has remained robust, driven by the long-term hygiene megatrend. With destocking coming to an end, we see an improvement in volumes, as Lilly mentioned, but margins remain low and we still depend on self-help measures such as the closure of our MBR facility in Kluang, allowing for a more reasonable capacity utilization in our main state-of-the-art site in Pasir Gudang. After these transfers, the division is now more cost competitive and will further continue to look for further efficiencies. A fact in this market is the lasting impact of very few but strong Chinese glove players that have changed the dynamics of this industry. In light of this, our objective is to proactively and globally position ourselves based on our proven capability as a market leader with critical mass. We have improved our intimacy with customers, building a much stronger understanding of demand and market flows, leading to deeper relationships that will serve us well as the market continues to gradually recover. We are already seeing the benefits of this approach, qualifying with new customers during 2023. We are also exploring a number of new low-capital partnership or alliance opportunities in the US and in China. And finally, we have been open in saying that the performance materials part of the portfolio is predominantly comprised of attractive but non-core businesses that we think have greater value outside of Syntomer. We have several formal divestment processes underway and we are considering a range of creative options for other non-core businesses. As always, we will update you as soon as a deal has been made. As I have alluded to already, ensuring excellence across all aspects of our operations has been a major focal point over the last few years. We are already seeing the benefits, not least in safety, where our record has been strong historically and we are steadily improving the sites that we have acquired in recent years. I have touched on the procurement initiatives. Whilst we think that our top strategic raw materials are generally well managed, there is a significant opportunity to improve the way we purchase the long tail of hundreds of other raw materials as well as our indirect spend and this is where we have identified material savings which will come through in 2024 and 2025. Finally, our excellence program is delivering improvements both in manufacturing and in commercial operations, where we have implemented a more customer-centric focus with stronger feedback loops. Turning to our outlook for 2024, we have had a reasonable start with improved trends in January and February. That gives us some cautious optimism, but we haven't seen enough to suggest the broad-based recovery is firmly underway. We have now created all the means and a solid financial base positioning us well until a demand recovery arrives. But even in absence of such any macro upswing, we still expect to make earnings progress during the year with modest free cash flow. We continue to consistently execute all elements of our strategy, which will result in growth, improved profitability and reduced leverage. To finish, I want to reiterate that through our near-term self-help actions, the recovery potential in a more normalised environment, plus our strategy execution, this business has the potential to more than double the current EBITDA levels. CCS has the greatest specialty weighting and you can see that clearly from its margin performance this year. We have been able to implement our strategy here more quickly, fuelling our confidence for further improvement in the short and mid-term when volumes recover. In adhesive solutions our challenges are both macro and operational with the major part of the current gap versus the Eastman deal model is from lower volumes which we expect to improve. More than half of the division has leading market positions in specialty areas and we are investing to grow. And finally, with global demand for medical gloves continuing at between 6-8% per annum, the oversupply situation is now gradually resolving itself, and we think that this part of the division can return to growth in 2024. In summary, it has been a very tough year, but we haven't stood still. We have made strong progress to execute our strategy and evolve our business. Our financial platform is materially stronger, and we will continue to further reduce leverage in the near term. A very important fact to note. We have taken a lot of cost out of the business and we have increased the margin on materials percentage substantially. This creates significant additional operating leverage when the volumes return. Trading since the start of 2024 has been encouraging and the situation is more positive than it has been in the last two years. But we remain cautious in our planning and our expectations at this early stage of the year. Let me stop here and both Lilly and I are very happy to take your questions. Thank you. Sebastian.