Synthomer plc

Good morning and welcome to our first half 2024 results presentation. As usual, I will be joined by Lili Liu, our CFO, to present our review of Sintermeer's strategic, operational and financial performance in the period. And then our Head of Investor Relations, Faisal Taba, will join us as we look forward to answering your questions at the end. In terms of the agenda, I will start by providing an overview of our performance and the further steps that we have taken to transform the business in line with our strategy. 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 we are positioning ourselves to succeed in delivering our medium-term ambitions. Starting with trading, after a sustained period of extremely challenging market conditions both for Sintermeer and the wider industry, our markets were more stable overall in the first half and our performance evolved broadly as we had anticipated at the start of the year. As such, we delivered revenue, earnings and EPS progress in line with expectations. Overall, activity levels continued to incrementally improve, led by market share gains in our adhesives business and an improvement in volumes from the very low levels of last year in our MBR business, while CCS division was more stable and at a strong and improved margin. We have made earnings and margin progress principally as a result of our self-help measures in an environment of reasonably stable markets. Our net debt was higher than at the start of the year for a number of reasons that we have previously flagged and which Lilly will talk about in more detail, but this has not changed our expectation that we will deliver positive free cash flow for the year as a whole. We will come back to recent trading in more detail later in the presentation. But again, our overall outlook for 2024 is unchanged, with some earnings progress expected, even if market conditions do not significantly change. Meanwhile, we continue to make good progress with the strategy we presented to you in October 2022, which was founded on Sintermeer evolving to become more specialty focused, more geographically balanced and more efficient. We are proud of some of the creative solutions we are implementing to continue to advance our strategy, despite the relatively challenging market conditions and the constraints of our balance sheet. Alongside other developments, such as our investment to better serve our growing customer base in China, evolving our approach to innovation and sustainability and our non-core divestment program, we continue to explore capital light technology alliances with partners in the USA and in China, which are important consumer and producer markets in the rapidly changing space of medical gloves. Overall, I am very encouraged by the progress we have made to further transform the Group. A different looking business is beginning to emerge, with improving geographic reach, a significantly consolidated manufacturing footprint, down from 43 to 32 sites in less than 2 years, 55% of revenues now from specialties, more sustainability focused products than ever before and improving customer centricity scores. In essence, we are doing what we said we would do and that strategy is delivering. Our job is to sustain the momentum and continue this evolution and the good news is that we see no shortage of opportunities in being able to do that. I'll come back to talk about some of these developments in more detail in a moment, but first over to Lilly to run through the numbers in detail.

Many thanks, Michael, and good morning all. I'm delighted to report our H124 results, which reflect the progress we made both strategically and operationally in the half. Starting with the financial summary, the results were in line with our expectations with progression at the revenue, earnings, and EPS level. Group revenues for continuing businesses were 3.5% higher on a constant currency basis, at just over a billion pounds. This reflects a 10.7% volume growth driven principally by adhesive solutions and health and protection businesses recovering from the historically low levels seen last year. Our more resilient CCS division, which is already around three quarters specialty, continued to trade robustly. We saw a lower price mix of 7.2%, mainly reflecting the path through of lower raw material input prices versus H1 2023. Overall, we were encouraged by an improved gross profit contribution as a result of operating leverage, and our H1 2024 result also benefited from £13 million of self-help actions across the group. However, as we indicated at the start of the year, we knew we would also be absorbing some higher operating costs, partly due to wage inflation and increased bonus accrues relative to last year, impacting also our corporate cost line. Notwithstanding this, we were able to deliver group continuing EBITDA of 76 million pounds, a 7.6% increase versus comparable period on constant currency. Our EBITDA margin of 7.2% showed an improvement against H123, with each of our businesses contributing to the margin expansion. Continuing business underlying operating profit was 29 million pounds for the half, an increase of 18.7% in constant currency. The interest charge was slower, reflecting the successful rights issue in October 23, partially offset by the timing of the bond interest payment. We continue to expect net finance cost to be approximately 60 to 65 million pounds in 2024, increasing to 65 to 70 million pounds in 2025 as a result of a full year of higher coupon following the recent bond refinancing. These continued operations, including the Kanbans business, divested in April 2024, contributed an EBITDA of £2.6 million for the period. The underlying effective tax rate expectation for the group continues to be in the range of 23% to 25%. But for 2024, our ETR is expected to be outside of the normal range due to the small profit before tax amount and some small movement in group tax provision. The total group continued and discontinued at underlying earnings per share of 1.3 pence for the half, up from an 8p loss in H1 2023. and our special items are coming down for the continuing operations and comprise mostly acquired intangible automatization and restructuring and site closure costs in the period. As always, we have included a schedule for special items in the appendix. As guided, our net debt at the end of June was higher than at the end of 2023, mainly due to payment of European Commission fine in January, and the leverage of 4.7 times well within our covenant. We'll come back to what we expect the year end later in the presentation. Turning to each of our divisions, in CCS, revenue was 430 million pounds, down 2.1% in constant currency from H1 2023, mainly as a result of the path through of raw material price, which came down versus H1 23. Volume was up 0.7%. Our coatings, consumer materials, and energy solutions business continues to perform well, whereas the construction business faced some market challenges. Encouragingly, while reduced raw material costs were reflected in our pricing, the gross margin has helped up well, reflecting in more speciality nature of our portfolio. In addition, our efforts to tighten costs and various other strategic initiatives meant the EBITDA margin increased year-on-year to 12.3% from 12.1%. despite absorbing the higher operating costs I mentioned earlier, with total EBITDA reported at 53 million pounds. The division typically is more H1 weighted. This year we expect such weighting to be partially offset by further cost benefit in the second half. We continue to develop and expand our market presence in the US and Asia, leveraging our leading European positions in many product areas. We're very pleased with the further progress we achieved in turning around the adhesive solutions division. Revenue increased by 2.2% in constant currency, bolstered by 11.7% volume growth, Our speciality product portfolio continue to be robust with good pricing management and modest volume growth. We're coming to our base product have higher volume growth as our improved reliability and cost competitiveness enable us to regain market share. EBITDA grew by 43% versus H123 on constant currency driven largely by our performance improvement plan, which realized circa 8 million pounds in benefit in the first half of 2024. Although clearly we have ambition to go much further. Overall EBITDA margin of 7.1% was of 210 bps improvement, encouraging progress given we have absorbed the higher operating costs described earlier. The business also reported further inventory efficiency to date in 24, with further gain expected over a longer period. And finally, coming to health and protection and performance materials division. Revenue was up 13.8% in constant currency, benefiting from 21% volume growth, which was partially offset by the power through of lower raw material price. Within health and protection, NBR volume grew by 37% from the historically low point of H123, although that only takes them back to 2017 levels. The benefit of self-help capacity reduction from the mold spalling of our clone plant was offset by the unit margin, which remained substantially lower than the pre-pandemic levels, although they did begin to improve a little in the second quarter. Our plant utilization is currently around 70%. The performance materials side of the division grew volume by 12%. with some business benefiting from Red Sea supply disruption, but also continued experience ongoing pricing pressure, especially with raw material price reducing. Overall, our effort to enhance capacity utilization and efficiency meant that the division EBITDA margin improved by 40 bps in H1 2024 compared versus H1 23 with EBITDA increased by 24.4% in constant currency. We made good progress in the non-core part of the division. To date, we have disposed the laminate films and compounds businesses. closed the US paper and carpet operations, and we have further divestment program ongoing. As I mentioned, our half-year net debt was 561 million pounds, as expected, higher than the year-end position of 500 million, reflecting the European Commission fine payment of 39 million pounds, the pension contribution, and the typical seasonality of working capital investment in the first half. partially offset by the proceeds from the compound's divestment. We expect to drive this number down in the second half, with free cash flow becoming at least modestly positive overall for the year. In terms of the contributors to that, we expect further progress with our multi-year self-help programs which already delivered £30 million benefit in the first half of 2024, with additional savings expected as our procurement programme really gets underway during the second half. We reported working capital outflow in the first half as previously communicated. This is partly due to seasonality between the two halves and partly due to higher raw material price versus December 23 level. It is worth noting, however, average raw material price for H124 was lower than H123 as reflected in the P&L. With our continued focus on inventory efficiency, coupled with seasonal unwind, we are expecting good working capital inflow in the second half, assuming no significant increase on raw material price. CapEx was £38 million, and our overall expectations for the year remain to be similar to that of the last couple of years. Other than shear and sustenance spent, we selectively invested in some strategically important areas, such as our APO line, a new innovation center in China, and new production capabilities in the US for our CCS divisions. If microeconomic conditions do not improve, we will still expect to be at least modestly free cash flow positive in 2024, although the net debt will be more higher compared to end of 2023 as a result of the European Commission fine. We successfully issued our bond in Q2 2024. Together with the various financing activities we have completed in the last couple of years, we have extended our debt maturity with the next major financing requirement by 2027. And we're now on a much more robust foundation, supporting the ongoing delivery of our strategy. leverage was 4.7 times net debt to EBITDA at the half year end, higher than the 23 year end level by 0.5 times due to the aforementioned factors, but well within our covenant. We have committed liquidity more than 500 million pounds with additional support from unused portion in our factoring program. Let me reiterate our capital allocation priorities While we intend to continue 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 through a combination of increased EBITDA, continued robust cash generation, and non-core divestment proceeds. The board has confirmed that dividends will remain suspended at least until our leverage is below three times. In summary, I'm pleased with the strategic and operational progress we made. We continue to focus on our short-term cash and cost actions and balance this with selective investment guided by our strategy. Let me stop there and hand back to Michael to update you on our strategic initiatives and outlook.

Thank you, Lili. Slide 13 will be familiar to many of you by now, but we keep coming back to the strategy because it really does drive our thoughts and our actions on a day-by-day basis across the group now and in the future. I have also said before that some aspects of the strategy are more subject to the current trading environment and balance sheet constraints than others, but they are executable actions for us across all five pillars and all three of the enablers that run across the page. In addition, we have consistently sought to find creative solutions across the group to help deliver the strategy despite the challenges both the industry and Syntomer are facing. Our strategic upstream investment to strengthen the hydrocarbon supply chain for AS Division in Europe, the disciplined growth investment in APO capacity in the US, the coatings capacity growth in the Middle East or the new innovation center in China are good examples for this. These are executable steps that have allowed us to recycle or reallocate our resources towards the areas where we see greatest opportunity, steadily improving our potential for greater returns on capital over time. The ambition, as you know, is to make Sintermeer a more specialty-weighted, more geographically balanced and more streamlined business. As you can see, this is a journey that we are only partway through, but the consistency and quality of our business is improving. One point I will note here is the considerable progress we have made in the last two years to reduce our site footprint through non-core divestment and rationalization. As we get close to our target of less than 30 sites, we are becoming a more efficient organization with less overhead and fixed cost. Most importantly, it means both the sustenance and the gross capital that we do deploy is increasingly going to our best assets and opportunities and ensures a proper allocation of capital. Now let me quickly go through each of our divisions focusing on the key actions or developments we have taken in the period to drive our strategic priorities. CCS is currently our most specialty-weighted division and therefore the best example of where we are trying to take the whole organization by focusing on customer needs and aligning our resources accordingly. We have continued to strengthen the organic growth capability of this division and its geographic balance, including extending our leading market positions in European markets to other markets globally. We are doing this through a more end-market aligned approach with strategic key account management for top global customers and marketing to additional regional leaders in North America and Asia. In the period, we commissioned a small investment which enhances our coatings capacity to support growth in the Middle East. We are also increasing our focus on growing our customer base in China with the recent commissioning of the Group's new innovation center in Shanghai, providing a platform for growth in a country that is and will be fundamental to the global chemicals industry, which I have mentioned before. Alongside our growing focus on value selling and optimising our product mix, we have undertaken an intensive review of our approach to innovation, exploring in particular initiatives that have made us more end-market focused and enabled us to get products to market quicker. And we continue to respond to the growing demand for more sustainable alternatives with our bio-based emulsion polymer platform for coatings progressing to market in 2024. Finally, we have continued to optimize our asset base to increase our efficiency. All our plans are supported by and integrated with our asset optimization projects and other cost control and capacity management activities. For example, we recently ceased production at our Fitchburg, Massachusetts site ahead of schedule. We are also making modest new investments to advance our strategic focus on organic growth, including by increasing the manufacturing flexibility of our key facilities. All this resulted in a further increase in relative profitability, despite the challenging market environment and flat volumes. We are encouraged by the strong progress Adhesive Solutions is making with its principal focus which remains on increasing the operational reliability and cost efficiency primarily of the acquired adhesive resins operations. Good progress has been made with the performance of key facilities improving significantly during the first half. We now have monitoring systems in place to identify yield and other efficiency opportunities and task forces on site at our main facilities in the US and the Netherlands to unlock them. We have continued to broaden our raw material supply. For example, as mentioned, we made good progress in the period in our project to strengthen our supply chain for hydrocarbon resin production in Europe through investment in certain raw material production assets from Arakawa, which will be managed under contract by Dow in Berlin, Germany. More recently, we have focused on end-to-end supply optimisation, including planning, procurement and logistical enhancements. Overall, our performance improvement plan delivered £8 million of benefits in the first half and we continue to target total annualised savings of £25 million by 2025. At the same time, we are beginning to focus more on growth. To some degree, our improved reliability and cost competitiveness is already allowing us to recapture market share, but increasingly we are building on this progress by targeting new business. We continue to invest in expanding our specialties capability, for example our APO capacity in North America, coming on stream in Q1 of next year. We continue to strengthen customer relationship management and build our portfolio of innovation projects, many of which will benefit from sustainability considerations. Our customers have shown increasing interest in collaborating with us in this area. Having put in place ISCC Plus certification of our major manufacturing sites, we are well placed to partner with them to create more sustainable value chains. Finally, another priority for the division has been to reduce working capital closer to its group levels and in the period the division successfully reduced inventory by a further £4 million. Overall, I am pleased to confirm that the turnaround of AS division is well underway. Coming to health and protection and performance materials, recognizing that much of the division has base chemicals characteristics, our differentiated approach to our core health and protection business is to strengthen its overall competitiveness. In the period we completed the mothballing of our Cloang facility, reducing our MBR capacity by around 20%. Production is now consolidated at our site in Pasir Gudang and we've successfully transitioned across all our customers. With capacity utilization in Pasir Gudang now at 70%, helped by the site consolidation and increasing volumes, we are finally in a position to earn some money again with that business. In addition, we continue to explore a number of partnership opportunities to capture growth and value from this business with little or no capital investment, including in the USA and China. We also continue to focus on truly understanding our end markets and customers and remain agile to potential opportunities as conditions evolve. For example, we recently re-designated our specialty vinyl polymers business in Harlow as core, following a review of a number of growth adjacencies in Syntimer Focus end markets that the team has identified. Separately, we have continued to enhance our overall value proposition to our customers through selective investment in process and product innovation and sustainability of our most differentiated products, for example in nitrile latex for thin gloves and bio-based acrylate monomers. Turning to portfolio management, we recently completed the divestment of our compounds business and our rationalisation of other non-core activities continued to progress, including the process to divest the SPR business for European paper, carpet and foam markets. Ensuring excellence across all aspects of our operations is pillar 3 of our strategy. We are seeing the benefits, not least in safety, where we achieved another strong performance in the first half. We are steadily improving the sites that we have acquired in recent years and our data tells us that the longer the sites are part of Sintermeer and our management systems, the better their performance. On procurement, you will recall that we launched a project in Q1 to identify and capture material savings in this area. There is an increasing speed of specific actions to achieve the targeted benefits of 30 to 40 million pounds, which we expect to come through in 2024 and 2025. Finally, our Synex program, which focuses on building the group's capability to deliver end-to-end continuous improvement in processes and systems, goes from strength to strength. The team completed three end-to-end site missions in the first half, and a further 10 are currently underway or in the pipeline for the remainder of the year. Meanwhile, the commercial excellence team has rolled out a number of detailed initiatives based on customer feedback, which have already resulted in a significant improvement in our customers' willingness to recommend us. We are proud of an increase in our Net Promoter Score by 9 points and confident that this will translate into accelerated organic growth. Innovation, particularly aligned to our sustainability agenda, remains an important priority for the Group. The opening of our China Innovation Centre in Shanghai, completed in just six months, represents a step change in our ambitions to serving potential customers in China with our specialty products. Our innovation efforts more broadly are increasingly focused on creating more sustainable products, both as a commercial proposition and as important to our purpose as an organisation. As part of this, our industry-recognised Product Sustainability Scorecard continues to guide our innovation strategy, with 69% of new products launched over the last 12 months with clearly defined sustainability benefits. In the period, we made good progress towards launching several products with bio-based feedstocks such as a new emulsion polymer platform for coatings in CCS or adhesives that support debonding for a more circular economy in AS. These are supported by achieving ISCC Plus certification at seven of our key sites in the period, placing us at the center of our value chains for more bio-based and circular products. Our sustainability efforts are also recognized by key external rating providers. In the period, for example, we retained our silver rating in Ecovadi's annual sustainability assessment, which is only awarded to the top performing 15% of all companies assessed and with an advanced rating for carbon management. Turning to our outlook, on current trading we are cautiously encouraged that volumes continue to improve from historically low levels. However, evidence of a sustained end-market demand recovery continues to be limited. Accordingly, our outlook that we provided at our full year results in March remains unchanged. We continue to expect to make some earnings progress on a continuing group basis and be at least modestly free cash flow positive even absent broad-based macroeconomic demand improvement. As we have previously said, this progress is supported by our AS Divisional Performance Improvement Programme, the annualisation of delivered savings, procurement excellence savings from H2, partially offset by higher operating costs, mainly wage inflation and normalisation of bonus accrual. In summary, we are continuing to make good progress to execute our strategy and evolve Sintermeer in a fundamentally stronger business. Trading was in line with expectations with revenue, earnings and EPS progression and we are reiterating our guidance for the full year. Our self-help initiatives are working and these, together with operating leverage, are driving our EBITDA and margin progress. Our strategic transformation towards specialty solutions is progressing well through disciplined resource and capital allocation and some innovative thinking. We continue to believe that our end markets are a long way from their potential in a demand recovery scenario, but in the meantime we have a lot of opportunities for generating further operating leverage that are in our own hands to deliver and will serve us well once all end markets start to recover. We are encouraged by our progress to date and we believe that we are increasingly well positioned to deliver our medium-term targets and ambitions. Let me stop there and both Lilly and I are happy to take your questions.