Synthomer H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2025

Key Takeaways

  • Positive Sentiment: Despite a weak market, Synomer improved gross margin by over 100 bps in H1 and more than 400 bps over three years, demonstrating strong pricing power and operating leverage.
  • Negative Sentiment: Group revenue fell 8.8% on a constant currency basis, with Q2 volumes hit by end-market volatility following new US tariffs and customer “wait and see” attitudes.
  • Positive Sentiment: The company launched a new £20–25 million cost reduction programme, including the removal of 250 positions, to offset subdued demand and support earnings progress.
  • Positive Sentiment: Portfolio simplification continues with the May divestment of William Blythe and site closures, reducing manufacturing sites from 43 to below 30 and targeting fewer than 25 overall.
  • Neutral Sentiment: Synomer assumes subdued demand in H2 but expects to deliver some earnings growth and broadly neutral free cash flow for 2025, underpinned by self-help actions.
AI Generated. May Contain Errors.
Earnings Conference Call
Synthomer H1 2025
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning and welcome to our first half twenty twenty five results presentation. As usual, I'm joined by Lily Liu, our CFO and Faisal Tabba, our Head of Investor Relations. Lily and I will present our review of Syntomer's strategic, operational and financial performance in the period. Together 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 continued progress we are making despite clearly subdued end markets.

Operator

Lily will then walk through the numbers in more detail, before I come back to present the key developments in our three divisions, in the execution of our strategy, and how we are continuing to position Syntomer to deliver our medium term ambitions. I start with trading. In the 2025, we were able to deliver gross margin, EBITDA and relative margin progress, mainly through continued strategic delivery and cost reduction measures which we are becoming quite good at. We view this as a robust performance overall, given the weak market environment the industry experienced particularly in the second quarter of the year. The gross margin improvement by more than 400 basis points over three years and more than 100 basis points in the first half of this year shows our pricing power and operating leverage which are very important now and even more going forward in a better demand environment.

Operator

Both revenue and volume broadly tracked 2024 in Q1, but demand conditions became considerably more volatile in the second quarter following the announcement of new US tariffs. Many customers have adopted a wait and see attitude in the face of the sometimes day by day changes in the tariff situation, and this has affected activity levels in the short term even as most of the longer term trends in our end markets remain reasonably stable. Our net debt was higher than at the start of the year, broadly in line with our expectations. This mainly relates to the seasonal Net Working Capital profile, which is why we are confident that free cash flow will be positive in the second half. In terms of the outlook, we are assuming that demand remains subdued as a result of the trade tensions and geopolitical situation for the remainder of the year.

Operator

We have therefore stepped up our strategic and operational efforts to transform the business, including a new 20,000,000 to £25,000,000 cost reduction programme, which includes removing a further two fifty positions across the Group. This will help to mitigate these headwinds and enable us to deliver some earnings progress and broadly neutral free cash flow for the year as a whole. We also continue to change the portfolio in line with our strategy of making Syntomer a more resilient and more specialty focused chemicals business. In May, we completed the divestment of William Blythe, our non core inorganic chemicals business, together with a site closure in China, we have now reached a milestone of less than 30 manufacturing sites, down from 43 when we began this process in late twenty twenty two. We are not done with portfolio simplification.

Operator

We have two formal non core divestment processes currently underway, and we are giving consideration to broadening our divestment program to accelerate the Group's deleveraging and focus the portfolio further on end markets where we see profitable growth. We also continue with our efforts to allocate capital and other resources in a smart way. You will recall that last year, we began a technology partnership in The US to leverage our intellectual property and expertise in medical glove ingredients, and in the first half, we added additional services for our US partner, which contributed positively to earnings. Our sustained focus on targeted innovation, including into more sustainable products for our customers, resulted in good successes in the period and added exciting opportunities ahead. I'll come back to talk further about some of these developments in a moment, but let me first hand over to Lily to run through the numbers in detail.

Speaker 1

Many thanks Michael, and good morning all. I'm pleased to take you through our H1 twenty five results, which show EBITDA and margin progress over the prior period, despite the backdrop of increased demand uncertainty created by tariff policy changes. As usual, I'll start with the financial summary. Group revenue for continuing businesses was 8.8% lower on a constant currency basis at just over £925,000,000 This was largely driven by lower volume, especially in Q2 after the tariff announcements, as well as reflecting pass through of lower raw material prices and the robust prior year period for Energy Solutions and Coatings businesses. Despite this, we delivered EBITDA and EBITDA margin growth overall, with encouraging progress in our D SIF Solutions and HPPM divisions, partially offset by lower performance of Energy Solutions within CCS.

Speaker 1

The gross margin for our businesses improved by 110 bps versus prior year. Supported by £17,000,000 from cost efficiency programs and reliability improvements, as well as a lower bonus accrual comparing to 2024, we were able to deliver Group continuing EBITDA of £78,000,000 a 5.4% increase on constant currency basis. EBITDA margin continues to improve versus prior period, now standing at 8.4%. Continuing business underlying profit was £28,300,000 for the half, in line with H1 'twenty four, with slightly higher depreciation in the period, reflecting the capital expenditure profile. Underlying finance costs increased by 4%, higher coupon from new bond partially offset by lower base rates.

Speaker 1

We continue to expect net financing costs of around £60,000,000 to £65,000,000 for the year. Cash interest cost continues to be lower than P and L charge by around £5,000,000 We continue to guide the underlying group effective tax rate around 25%. For 2025, our ETR is expected to be significantly outside of the normal range due to geographical mix of profit and loss and adjustment on deferred tax assets in The US and UK. Discontinued operations, being the William Blaise business, contributed an EBITDA of £3,600,000 up to its divestment in May 2025. The total Group continued and discontinued had underlying earnings per share of 3.6p loss for the half, down from 1.3p in H1 twenty twenty four.

Speaker 1

Special items are coming down for continuing operations and comprise mostly intangible amortization and restructuring and site closure costs in the period. As always, we have included schedule for special items in the appendix. As usual, our net debt at the June was higher than at the December year end, reflecting seasonal working capital movements, which I will take you through in more detail in a moment. And our leverage of 4.8 times was slightly higher than at year end, but within the covenant. Turning to each of the divisions.

Speaker 1

In CCS, revenue was £372,000,000 down 12.2% in constant currency from H1 twenty twenty four. Volume was down 6.5%, in part reflecting a strong prior period, including a good coating season and tariff induced demand uncertainty. But the biggest driver was lower oil and gas drilling activity, which resulted in smaller orders from our oilfield services customers in the high margin energy solutions segment. We have seen some improvements in our construction business in Europe, which has particularly challenged in 2024. But this was not enough to offset the muted activities elsewhere, particularly in The US.

Speaker 1

The energy solutions slowdown was also reflected in a mix reduction of 5.7%. As a result, EBITDA reduced to £35,000,000 or down 34% in constant currency. In response, we have taken decisive steps, introducing the cost reduction program in the period that Michael mentioned. CCS bears a substantial share of group's overall cost base, and so, while this is already bearing some fruit, we anticipate acceleration of this savings in H225, driving more balanced performance between the halves for 2025. Now, we're very pleased with the further progress achieved in improving the Adhesive Solutions division, which increased EBITDA by 64.8% in constant currency versus H124, raising EBITDA margin to almost 12%.

Speaker 1

Revenue was 1.4% lower in constant currency, in line with 1.8% volume reduction. This was partially driven by required operational shutdowns and delays to a capital investment project on our specialty line. The site and the contract work are managed by third party. The project came on stream in July and so we expect it to make positive contribution in H2 twenty twenty five. Our improved reliability and cost competitiveness has enabled AIS to remain resilient in a period of market volatility, with the business continuing to report operational efficiencies and cost savings expected through 2025 and beyond.

Speaker 1

Now finally, Health and Protection and Performance Materials division. Revenue was down 12.4% in constant currency, reflecting a 10.2 volume contraction and pass through of lower raw material price. Within Health and Protection, NBR volumes fell by 16%, reflecting some pre buying in the supply chain prior to Biden administration's changes to U. S. PPE tariff went into effect in January 2025, which muted customers' demand in H1 twenty five.

Speaker 1

Our customers expect this to moderate in H2 twenty five. Margin per ton in H and P benefited from mix effect, as demand for our higher margin reusable products was more robust than for disposables in the period. But this continued to be substantially lower than the pre pandemic levels. Our Pasigudan plant utilization is currently around 65 to 70%, with the industry as a whole at lower levels. We received further income from our US technology partner, where we support their efforts in building a new US NBL plant, including for a new package built and delivered in the period.

Speaker 1

The Performance Materials side of the division reflects the volatile market conditions for these businesses and two manufacturing shutdowns in the period. Process optimization and cost efficiency initiatives have driven performance improvement and margin progress. We continue to focus our efforts on enhancing capacity utilization and efficiency within the division, resulting in 180 bps EBITDA margin improvement versus H1 twenty twenty four, increasing EBITDA by 21.5% in constant currency to nearly £17,000,000 As Michael mentioned, we have also disposed of William Bligh's business this year and ended operations at our Ningbo site in China, with further divestment programmes ongoing. As I've mentioned, our half year net debt was £638,000,000 higher than the year end position of £597,000,000 as we expected. This increase reflects our typical seasonal working capital investment, bonus payout, a CapEx phasing and translation of foreign currency debt, partly offset by the proceeds from William Bligh's divestment and increased receivable factoring.

Speaker 1

We reported working capital outflow in the first half, as is typical for us, with higher activity levels in June versus December reflected in the working capital balances. Our continued focus on inventory efficiency, coupled with seasonal unwind, we are expecting good working capital inflow in the second half. We demonstrated exactly the same pattern last year between the two halves. CapEx remains disciplined, with forecast full year spend now expected to be just below prior year. Increased spend versus H124 is driven by project timing.

Speaker 1

Other than health, safety and sustenance spend, we selectively invested in some strategically important areas, such as our new speciality APO line in ACE, Middle East capacity for CCS, technology improvements, and lower carbon solutions for our customers. Cash tax benefited from refund in H1 twenty five, which we expect to unwind to a neutral position by year end. And pension costs in excess P and L are significantly lower than last year as guided. Taken together with further self help actions, we expect a positive second half free cash flow and a broadly free cash flow neutral position over 2025 as a whole. Regarding our co debt facilities, the remaining stub of the 2025 bond was repaid in early July.

Speaker 1

Our RCF expires in July 2027 and UCAD facility has maturity to October 2027. As always, we keep our financing needs under review in case of opportunities ahead of that. Net debt to EBITDA was 4.8 times at the half year on covenant definition basis, which mainly adjusts for IFRS 16 and is therefore about 0.4 times to 0.5 times higher than using headline net debt and EBITDA figures. Leverage was slightly higher than the 2024 year end due to the aforementioned factors, but well within our covenants. In the period, we extended the time of additional headroom under the covenants through 2026 in the event that expected recovery in demand is more drawn out.

Speaker 1

Prior to the £129,000,000 bounced up repayment in early July, our committed liquidity facilities totalled more than £400,000,000 with additional support from the unused portion in our factoring programme. Let me reiterate our capital allocation priorities. While we intend to continue to invest very selectively in organic growth opportunities aligned to our specialty 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 cash generation focus, supplemented with proceeds from divestments. The Board has confirmed that dividends would remain suspended at least until our leverage is below three times. In summary, I am pleased with the strategic, operational and financial progress we have made in the period, through difficult market conditions.

Speaker 1

We continue to focus on our self help actions, balancing this with selective investment guided by our strategy. Let me stop here and hand back to Michael to update you on our strategic initiatives and outlook.

Operator

Thank you, Lily. I would like to begin this section as usual by reiterating the key elements of the strategy which continue to guide how we are transforming the business. All five pillars and three enablers provide executable actions for us also in the current trading environment. The period since we launched the strategy in October 2022 has not been the easiest environment to demonstrate progress, but our actions are showing a positive effect on the quality of the portfolio. I mentioned our significant and continuous gross margin improvement, and together with all the work we have done on the operating and overhead costs, we have increased the operational leverage in the business substantially, resulting in a drop through rate from revenue down to EBITDA of 30% or more.

Operator

As previously outlined, our ambition is to make Syntomer a more specialty weighted, more geographically balanced and more streamlined business, and whilst this will always remain work in progress, the quality of our business is improving. While individual periods can be heavily affected by mix effects, we are moving towards the specialty objectives while broadening out the geographic exposure. One point I would like to draw out is the progress we have made in the last three years to reduce our site footprint through non core divestments and rationalization, and how we continue to challenge ourselves here. Following the divestment of William Blais and another site rationalization, we have now reached a milestone set out in 2022 of having less than 30 sites globally. And we are today setting a new objective of further streamlining our footprint to less than 25 sites.

Operator

This allows for a more meaningful capital allocation, reduces CapEx intensity and eliminates cost. While we will continue our overall production strategy of producing in region for region to be close to our customers, we believe there are further opportunities to make Syntomer a simpler, more efficient organization with less complexity also in terms of overhead and fixed cost. In addition, it allows the growth capital to be deployed to our best assets and opportunities. Having sold laminates and films in 2023, compounds in 2024, and William Blige earlier this year, we have a number of other non core divestment processes underway, fully in line with our specialty solutions strategy launched in October 2022. At the same time, we are giving consideration to broadening our divestment program to accelerate deleveraging.

Operator

Now let me run through each of our divisions, touching on the key actions or developments we took in the first half to advance the strategy. CCS is our most specialty weighted division, and it faced a very mixed demand environment across its end markets in the period, as Lily has described, with some encouraging signs in construction and consumer materials, more than offset by the energy solutions market situation and The US slowdown. In response, we stepped up our efficiency measures in the first half, and CCS actions are an important part of the new 20,000,000 £25,000,000 cost reduction programme we have initiated. This focuses on capacity management including temporarily idling excess capacity and reducing shift patterns, and includes a broader review of operating costs including headcount, and implementing a number of inventory management measures to enhance cash flow. Alongside these near term actions, we have continued to further align CCS with its strategic end markets, and we are targeting specific growth segments during this generally subdued demand environment, such as data centers and energy transition related opportunities.

Operator

We successfully continue with our strategic key account management for top global customers and are using targeted marketing to further develop relationships with additional regional clients in North America and Asia. Alongside our growing focus on value selling and optimizing our product mix, We changed the group's CRM system in the period to what I believe is now best in class and this will boost our targeted and data driven customer approach in all three divisions. Our innovation process becoming more end market focused to enable us to get products to market quicker. We launched a number of new construction products in the first half, and our bio based emulsion polymer coatings are progressing to market for launch in the second half. We are making selective investments in our manufacturing capability in The US to enable the localization of products previously only made and imported from Europe.

Operator

And we enhanced our coatings capacity in The Middle East to support further growth in the region. The recent reduction in global oil and gas drilling activity levels has resulted in a tough period for CCS earnings in H1, but I am convinced that the business continues to offer significant opportunities. Turning to Adhesive Solutions. The division delivered consistent and significant progress in earnings driven by further solid work on its reliability and performance improvement plan. This is supported by the division's total customer focus and end markets that are overall more consumer led and hence more resilient than other parts of the group.

Operator

The principal focus of the plan put in place by the incoming divisional management team in 2023 has been on increasing the operational reliability and cost efficiency of the adhesive resin business acquired in 2021 and integrated in 2022. At the start we had issues in most of the six acquired sites, but this has steadily been improved and today there is only one third party hosted site in The US left where I would say we have further work to do. An important site in Europe delivers now record output levels. The plan realized a further £5,000,000 of benefits in the first half, and has achieved a total of £30,000,000 in benefits to date. We remain on track to exceed the current £35,000,000 target by the 2026.

Operator

The optimization of our supplier network for key raw materials, including planning, procurement and logistics enhancements, has been a main focus and we continue to seek opportunities to reduce working capital intensity. Our improved reliability and cost competitiveness means we are regaining market share, and we are building on this progress by targeting new business. Our key investment project to increase the specialty APO capacity at our Texas facility commenced several weeks behind schedule due to third party contractor issues, but has been on stream and working well since mid July, and is now contributing to divisional earnings in the second half. The division also made progress with a number of strategic growth initiatives designed to build on our leading positions in a range of specialty adhesive applications, leveraging our multi year relationships with many high quality customers and global production network. For example, in April we announced a novel whole value chain partnership with Henkel, focused on enabling carbon emission reductions in its hot melt adhesive product portfolio.

Operator

This partnership follows Sintemer's recent launch of Clima branded products. Products with this designation deliver at least a 20% reduction cradle to gate in the product carbon footprint by using renewable energy in the production process. Henkel and Sintermehr have jointly developed a framework that links this renewable energy use directly and certifiably to specific adhesive products, enabling measurable reductions in carbon emissions. This partnership approach to sustainability improvements is supported by our investment in ISCC plus certification of our major manufacturing sites. In addition, AS has a number of other customer collaborations for sustainable fast moving consumer goods packaging applications progressing, which we anticipate to begin to add sales in the second half.

Operator

Finally, our new Innovation Center in Shanghai has improved our technical reach in China. Overall, I am pleased with the continued momentum in the AS division, where we have more than doubled the EBITDA margin in two years to a very promising 11.9% in H1 twenty twenty five. Coming to Health and Protection and Performance Materials. Recognizing that much of the division has base chemicals characteristics, our differentiated approach is to focus on improving cost efficiency whilst enhancing our overall value proposition through selective investments in process innovation and sustainability. In the period, our Health and Protection business had to be agile in responding to evolving market dynamics, working closely with customers as they reacted to recent changes in the global latex gloves market.

Operator

These were mainly the result of the tariffs announced for Chinese imports in summer twenty twenty four by the Biden administration, which came into effect in January 2025 and are set to increase in 2026. While we have not seen a meaningful uptick in volumes as yet for our Malaysian customers due to massive pre buying, these tariffs have made them more competitive in the critical US market and we anticipate this to benefit the Malaysian value chain over time. Meanwhile, in H1 twenty twenty five, we received good single digit US dollar millions in income for our services from our open ended technology partnership to support growth in the onshore US glove market. 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. As I mentioned, we continued to strengthen our overall cost competitiveness and implemented further operating cost efficiencies to align with market developments.

Operator

We also closed a manufacturing site in China, but maintained the business via a different business model. Within Performance Materials, Specialty Vinyl Polymers out of Harlow, antioxidants in China, and our European paper activities delivered a robust performance in H1. In February, we were proud to announce that Syntomer, together with Neste of Finland and PCS in Singapore, has established one of the first ISCC certified value chains to manufacture bio based nitrile latex for the glove industry. As mentioned, we successfully completed the divestment of William Bliss in May and further divestment processes are ongoing. Ensuring excellence across all aspects of our operations is pillar three of our strategy.

Operator

On procurement, you will recall that we launched a project last year to identify and capture material savings in this area. We realized £5,000,000 in benefits from this project in the first half and expect cumulative benefits of more than £20,000,000 to have come through by the end of next year. Our SYNNEX programme, which focuses on building the Group's capability to deliver end to end continuous improvement in processes and systems, has continued to deliver the expected financial and operational benefits. We consistently invest in broadening our expertise across the group in this important area. SYNNEX led the implementation of the group wide new CRM system and we are proud of an increase in our Net Promoter Score by 13 points over the last two years, which will translate into greater organic growth over time.

Operator

Turning to the Innovation and Sustainability Agenda, we made further progress on a number of key initiatives which underpinned the group's future growth. I have touched on several of these already, including the Henkel collaboration, so I do not intend to spend long on this slide. However, to pull out a few key points: In the period, we added the number of sites with ISCC plus certification up to 11 from eight. This continues to move us onto the center of our value chains in supplying more bio based and circular products to our customers. We are now beginning to use advanced data analytics to speed up polymer formulation innovation, and our sustainability efforts continue to be recognized by key external ratings providers.

Operator

Turning to current trading and outlook. Whilst our direct tariff exposure is limited as a result of our in region, for region manufacturing strategy and our efforts to pass on potential surcharges, the indirect consequences are adding uncertainty and volatility to our customers' demand patterns. Customers are cautious overall, resulting in smaller order sizes and a wait and see approach. However, at the same time, we are seeing customers reporting low inventories in many markets, and we also recognize that there are always growth opportunities in selected markets for us, as I mentioned a few of them when talking about the divisions. For 2025 as a whole, our outlook is for some earnings progress on a continuing group basis and for free cash flow to be broadly neutral.

Operator

We are on track to deliver the self help actions we had already built into our outlook since the start of the year. We are assuming that the subdued end market conditions we have seen in Q2 will persist for the remainder of the year, but that the effect of this will be mitigated by our existing and additional cost reduction programs as outlined before. These programs will logically provide additional run rate savings in 2026 as well. In summary, we are continuing to drive strategic and financial progress in a challenging environment. We have delivered significant gross margin improvement, demonstrated pricing power, and showed the EBITDA growth we committed to.

Operator

The building blocks of our earnings recovery remain intact and there is evidence that longer term relevant market dynamics for Sintomer are becoming more supportive, including a continued improvement in European infrastructure and construction spending for example. In the meantime, we continue with our proven self help programs built on strategic and operational portfolio changes, margin improvements and cost savings. We have a total focus on de risking and deleveraging the balance sheet through rigorous capital discipline and further cost and portfolio actions. We remain encouraged by our progress to date in difficult markets and we believe that we are well positioned to deliver our medium term targets and ambitions. I finish here and hand over to questions which both Lily and I are happy to take.

Speaker 2

Thank you. Jan, it is star one to ask a question. Our first question is from Tom Rilsworth from Morgan Stanley. Please go ahead.

Speaker 3

Thanks very much, Michael and Lily, for the opportunity to ask questions on your presentation. Two questions if I may. The first one is about the kind of the economic conditions. I mean you're not alone in your commentary around the wait and see attitude and the low inventories at customers, albeit one of your well, actually Eastman in The U. S.

Speaker 3

Has spoke about a new phase and the inability to understand where customer inventories are. So I'm wondering if we take this to its conclusion like what happens in its conclusion? It seems like the system is running down on inventories. You're losing volumes as a result. What's the tipping point?

Speaker 3

Do things just continue to get worse until I just can't see where this evolves through the second half or at what point you expect there to be an inflection as a result of these new inventories? So just your kind of insights there as to how this cycle plays out. My second question is around your strategic ambition with potential for further divestitures. How are you thinking about that in the context of legacy costs? I'm guessing that the targeted sales that you've completed to date and the ones that you have in mind are ones where there's low kind of integration with the group as a whole.

Speaker 3

But as you go deeper into that, will you be forced to have to address further cost cuts, which again may come with a cash out initially as well, mitigating some of the value realization that you're achieving by divestitures. So can you just kind of as you think about divestitures, can you unpack for us how you're thinking about those legacy costs? Maybe they're issue, maybe they're not. Thank you.

Operator

Yes. Thank you. Your first question on the conditions, I think it's clear in the whole industry, there are difficult conditions basically since April 2022. What we see recently, it's much more volatile. Like in our case, we reported May was not a good month.

Operator

June was a good month. If we look now into how how July and August started, it's actually quite reasonable. So I think there's a lot of volatility, and that's driven by the uncertainty overall in in this world. I think we shouldn't speculate on how this is going on. We reported relatively low inventory levels at customers, which means that at one point, they will have to restock.

Operator

So overall, I don't expect things to get worse, but also I think for the second half of this year, I don't see any clear reasons why it should get much better. What we are doing, we continue with our self help. I mentioned another $2,025,000,000 pounds on on cost reductions. I mentioned our internal portfolio management, which we have shown in several businesses that we can upgrade the margins. Our gross margin is going up.

Operator

Our EBITDA margin is going up. So I think there are a lot of there's a lot of self help to be done. I think it's clear that at one point, this overcapacity in the industry will balance out, but I think we just shouldn't speculate when this comes because it is already now a very prolonged situation which we have since, as I said, since April 2022. On the divestments, we are pretty much sticking to our strategy, but we would like to create something potentially in addition. That's why we announced this additional review that really reduces our leverage and reduces our debt.

Operator

So something that has impact. So we are continuing fully in line with our strategy with the two divestment processes we have we have announced. But we are just we just don't want to to make a bad deal. And we made three deals, films and laminates, compounds and William Blais. They are all three good deals.

Operator

And we don't want to do something bad because we are not under pressure. We have enough liquidity. We just have to get the debt down over time and the leverage to get down. And that's why we are looking into additional opportunities, and we will see where they come from. There will be no cash costs attached to it.

Operator

It will be a divestment, and it will be something that has a a very substantial impact on our net debt and especially of our leverage. And that's why some of the deals we just don't want to make, the ones, honestly, we would have liked to have done the two divestments we announced previously already, but we couldn't do them because either the contract was not fine, and you don't wanna come back with a difficult SPA situation two years down the road. And the second one is just the valuation was not in line, what we believe the business is worth it. And in addition, it wouldn't have a sufficiently positive impact on leverage.

Speaker 3

Okay. Thank you very much.

Operator

Thank you.

Speaker 2

Our next question is from Sebastian Bray from Berenberg. Please go ahead. Your line is open.

Speaker 4

Hello, good morning and thank you for taking my questions. I'll ask them one by one. When we look at the wider portfolio and what can be sold, I'm thinking, is it under consideration to put the whole company up for sale at this stage? And if not, could nitrile latex be divested? It's relatively straightforward to carve out.

Speaker 4

It doesn't have the same type of dissynergy effects that other parts of the portfolio would have. Then I imagine there'd be interested buyers in Asia. That's my first question.

Operator

Yes. I can answer. I think the first one is a clear no. We are not looking into selling the whole company. I think that's not in the interest of anybody like this at this point in time.

Operator

And your second question, NBR, definitely, it is a base business. It has a different it is in a different division. So I think we shouldn't go now into details on what we are looking at, but definitely, NBR has features which are not in the two other divisions, CCS or AS divisions. I think we just look at all the opportunities again, as I said, which which reduce leverage and which represent the value each of our businesses have. So definitely, MBR could be a candidate at one point in time, but let's see now how it goes.

Speaker 4

That's helpful. Thank you. And if I look at the cash flow profile of group, if it turns out that weak demand persists into the first half of next year and the company really needs to go into defensive mode, how low could CapEx go? It's edged up slightly in H1. I appreciate the guidance as it forward to decline slightly year on year, but could it go all way down to EUR 50,000,000, 60,000,000 if needs be?

Operator

I mean, Sebastian, in a way, we are in quite defensive mode since a while. And that's the reason why we did increase our EBITDA from 7.3 to 8.4%, which I think is quite substantial. All the cost reductions we have, the gross margin improvements, I think there's a lot of a lot of decisive actions that we have taken in the past. Now if I look at the next

Speaker 1

mean, you ask CapEx, what's the minimum level of CapEx the business can sustain on? I draw your attention to we reduced our footprint from 43 to just under 30, so 29 as of today. And we just announced a new target to get it down to 25 sites and that substantially reduced the capital intensity of this business. And I think the bare minimum, if we just spend money on safety and systems related CapEx, we could see us running around to your number about 50,000,060 for the full year?

Operator

I think it's really the reduction in footprint that drives this. And CapEx can go down by potentially 20,000,000 but also capital allocation is much easier. You see the progress we are making in AS. We invested in our APO capacity in The U. S, and that needs a little bit of CapEx, but we can do much more meaningful CapEx allocation.

Operator

And, again, with 29 sites instead of 43 sites, you have also much, much less cost. So I think here, there is, besides the costs we mentioned, 25, 30,000,000, $2,025,000,000 plus a CapEx reduction, there is plenty of of work to improve the cash flow and at the end also the EBITDA.

Speaker 4

That's helpful. Thank you. And if I may focus a bit more on the half '2 outlook and trading. So it looks like the business had a quite a decent Q1. Things got tougher in Q2, albeit it was helped by what I imagine, I think, Michael, you said low single digit, let's call it $2,000,000 $3,000,000 partnershiplicensing services in Nitrile.

Speaker 4

Aside from cost savings, is there anything else that would be supportive and help to undo the usual seasonal pattern, potential for any licensing income in H2? Anything else to be aware of?

Operator

Yes. I think the licensing income has definitely potential for the whole year of some probably $8,000,000 to come in, which is 100% margin in a way. I think there are additional opportunities in APO. Like I mentioned, we have now this expansion online in July. That's one of the of the best product groups we have in our company.

Operator

I think here, this we should capitalize on in H2. Then we have a lot of mix situations that we're upgrading the portfolio more specialty. We mentioned some coatings applications are coming online in the second half. So I think with the internal mix, we have quite a few possibilities. I mentioned the Harlow business, which we are running now at 15% EBITDA, the SVP.

Operator

Antioxidants, we run north of of 25% EBITDA. So I think the mix, if we are able to push volumes of those profitable segments, I think there's a lot of additional opportunity in a still continue to be low volume environment. The costs we have mentioned before, but I think there are a lot of, yes, additional internal portfolio management, I would call it, opportunities.

Speaker 4

That's helpful. And last one just on financing and interest costs. So from memory, there was some type of ratchet in the working capital financing costs and or the rest of the portfolio when it came to net debt to EBITDA, I. E, a more levered company would pay a higher interest rate. Is the interest charge for the foreseeable future, even if trading doesn't improve, likely to remain around EUR 60,000,000 cash effective?

Speaker 4

Or could there be changes to that?

Speaker 1

Sebastian, our guidance is around sort of the P and L charge 60,000,000 to $65,000,000 this year. And we also said the cash charge would likely to be about $5,000,000 below. In terms of ratchet, ratchet only applies to currently in our RCF facility. We substantially undrawn the RCF facility as of today.

Speaker 4

That's helpful. Well, thank you for taking my questions.

Operator

Thank you.

Speaker 2

Thank you. Our next question is from Vanessa Jeffries from Jefferies. Please go ahead.

Speaker 5

Good morning. Thanks for taking my questions. Just first on AS, given the significant progress you've made there in the last two years. I I was wondering what margins do you think that, that business should make in a normalized environment and what's the operating leverage then?

Operator

Yes. I think we should come back to what we always when we at the time of the acquisition. I think this could be a $1,000,000,000 business at about 130,000,000 EBITDA. So this could go to 12% to 15% EBITDA. I think we are on a nice trajectory there.

Operator

There's lots of opportunities for additional investments. Reliability, as we have said, we had six sites at the time. We have now one site with problems, that's the hosted site in The US, but also if you get this then done, there are additional opportunities on reliability and cost and especially now also on growth, on market expansion, on pushing the profitable segments. I think there's plenty of headroom to bring this very close to a 15% business at 1,000,000,000 turnover.

Speaker 5

And then just on what will be driving the recovery over the next couple of years seems to be the momentum in Europe. So I was wondering if you're rethinking that strategy to kind of pivot more to The US at all and if you actually think that Europe is a more attractive place to be.

Operator

No. I think fundamentally, The US and Asia is a more attractive pattern going forward for us because we already have almost 50% of sales in in Europe. I believe our fundamental assumption of the strategy three years back is still to grow over proportion in The US and in Asia. And I think the fundamentals for this are still absolutely intact. It's just now that in Europe, actually, we see better conditions than in The US, but I believe that is in the long term, we will continue our strategy to overproportionally invest in especially in The US, but also in Asia.

Operator

I think this will balance up over time. But in a way, we are not unhappy right now that Europe is maybe doing a bit better than The US because we still have a major a major footprint in in Europe. But having said that, we need still to adjust our footprint in Europe. Again, it comes to site rationalization. It comes to certain business rationalization.

Operator

It comes with divestment programs. We are having, I think, to reduce our exposure or focus it a bit more on the really profitable opportunities, I think this will go on. But at the end of the day, the final target, if you look at regions, in my view, the best setup is the famous good old onethree, onethree, onethree over Europe, Asia and The Americas.

Speaker 2

Our next question is from Angelina Glasova from JPMorgan.

Speaker 6

I have three questions, if I may, and I will also ask them one by one. So my first question is a bit of a follow-up on the previous one, only a bit broader. In terms of the midterm outlook for the business, so of course, we understand that the environment is challenging right now, but it will be good if you could remind us of what kind of midterm or mid cycle potential you see for the company overall and maybe for divisions in addition to what you had commented on Adhesive Solutions just now. So what kind of potential do you expect to see and what factors will need to come in place for this to play out?

Operator

I think, again, we don't want to speculate now exactly on month. I believe at one point it will turn and it will turn substantially. Now our strategy foresees a 5% growth, which we by far had in the last year. Now this year in the first half compared to a strong first half of last year, we are slightly below. But I still believe as an assumption for our company in a semi normalized environment is 5% growth is possible.

Operator

I think we stick to our prediction that we can double our EBITDA levels. There's a lot of operating leverage. We see it now in the businesses where we are doing well. There's 30% plus operating leverage from sales dropping down to to EBITDA. And then also you have to see we don't even need so much.

Operator

In our picture, if you have now instead of, let's say, one forty five, one fifty million EBITDA, we have only one seventy, which is basically self help coming from the cost reductions. And then we have through divestments and through the EBITDA, we would have 500,000,000 on on net debt. You have a totally different picture. So my point is that we are not totally rely we are not reliable 100% on the market recovery, which is uncertain, but many, many things are in in our own hands. And that's why also in the first half, we did in a very weak environment, as you see from the whole market, we did do quite some progress.

Operator

What is also interesting is when the market just recovers a little bit, which we have seen in the first half of last year, we had a very, very good performance. Also our CCS division, which is because of energy and partially coatings, had a difficult first half of this year. If you look at CCS last year, a little bit of a market recovery, a little bit of a good situation, especially in the first quarter, and we had 12.3% EBITDA. So you see, it just doesn't take a lot in our case to really move the needle. And that's why I'm confident that we can make the progress already starting in the second half of this year like we promised it in a very difficult environment because there are so many levers on the cost, on the mix, on the growth side as well for our business.

Operator

So we just don't want to speculate when there is a broader market recovery. The broader market recovery, I think, like many people say, there is overcapacity in the market, the whole tariff situation, geopolitical situation. It's just very difficult to predict, but also we don't want to predict. We just we just do our thing. And I think there are plenty of levers to bring us into significantly different territory.

Speaker 6

Understood. This is very clear. Thank you, Michael. Then my next two questions are actually focusing a bit more on measures that are within your control with regards to managing the free cash flow. So firstly, on the newly announced cost savings for EUR 20 to EUR 25,000,000.

Speaker 6

I understand that this is the cost impact. Could you maybe give us some color what kind of net impact after cost inflation we should expect to see from this program? And then also, what kind of maybe onetime cash outflow will be associated with the implementation of this program?

Operator

Yes. Your first point on the cost, I think you can take this pretty much as a net impact. That is calculated. We don't have that is kind of a net number, this 20,000,000 to €25,000,000 additional. There are headcount reductions in, as we have said, so there's about twothree.

Operator

The headcount is fixed cost, and there's a little bit of additional cost measures which are not headcount related.

Speaker 1

And the cost achieved a onetime cost to achieve the saving, we estimate around GBP 8,000,000 to GBP 11,000,000.

Speaker 6

Understood. Thank you very much. And then my last question is around receivables. Could you please remind us the current conditions for receivable financing facilities that you have? What is the sort of the outstanding balance?

Speaker 6

To what extent you will be able to use these instruments in the future, if that is necessary?

Speaker 1

Yes. Look, the receivable the factoring program is EUR 200,000,000 in its totality and current expiry date is January 2027, but it has been extended a few times in the past and we intend to continue to utilize it. And currently, we're utilizing just under GBP 120,000,000 for the half year. It does require demand it does increase or decrease in together with demand situation. So yes, that's the current situation, Vanessa.

Speaker 6

Great. Thank you very much.

Speaker 2

Thank you. Our next question is from Sanjay Pancwani from Citi. Please go ahead.

Speaker 7

Hi. Thank you very much for taking my questions. I think some of the part of my questions you have already answered. But see, the key focus for the market, I think, at this point is on the net debt. Now when I look at the net debt, it has increased somewhere around $40,000,000 or so versus the full year, that's sequentially.

Speaker 7

And if I just take out this William Blythe, then it's probably somewhere around €60,000,000 increase. I understand that you already alluded that some of this may reverse on the working capital, but then also you highlighted some negatives like the tax and stuff like that. So are you able to provide us some sort of bridge, let's say, how much of this 60,000,000 increase in net debt organically can unwind into the H2? That will be very helpful.

Operator

Yes. Thank you for the question. I'll start maybe with a more general point. We know that the key focus in our company is on leverage and on net debt. And that's why we are taking additional now decisive steps on reducing cost.

Operator

We are looking at our divestment program. And what I'm much, much less concerned, if you look at the H1 increase in the cash flow, it's basically net working capital. It's receivables. It's a little bit of swing on payables. And that's why we we know in a way because we have done this many times that in the h two, we will we will reverse it.

Operator

So it's it's really it's receivables and it's payables. Actually, inventory is even a little bit lower than we had in December. But Lily, maybe you can do the bridge.

Speaker 1

Yes. And Sanjeev, thank you for your question. Look, if you look at our 2024 result, H1, H2, we have exactly the same pattern that net working capital outflow in the first half and recover the position in the second half. As Michael also mentioned, we expect the full year 2025 to be broadly free cash flow neutral. And that says, we're expecting free cash flow positive in the second half of this year coming from a couple of factors.

Speaker 1

One is net working capital unwind. If you look at June versus December, we tend to have a higher debt book in June versus December. We continue to work on our inventory and inventory structural reduction program. And we have said our CapEx is has higher spend in the first half of the year. We expect second half to be less than the first half and overall 2025 to be slightly less than 2024 spend.

Speaker 1

And with everything together, we will see a free cash flow broadly neutral position. And underneath that, we do expect to spend money on restructuring program and partly to do with our new program we just announced. And also there is a little bit of capital lease payment as well. So that's the position for the year, Sandip.

Speaker 7

Thank you. That is very helpful and comprehensive. And my next one is on the I think the for the oil drilling, which I think in the coating and construction has been the big drag for the price breaks as well. Is it something was it like an H1 phenomenon, which you have start to see it recovering, that is basically, can this reverse? Or this probably very well may persist in '25?

Speaker 7

Just trying to understand if that is an element where it can reverse.

Operator

Yes. On CCS division, I think the biggest delta what we had in the in the first half is on energy solutions because there was last year, there was not just much more drilling. We are mainly we are not in the production predominantly. We are in the in the drilling space of the oil and gas business. And because of the oil price was low, now at least it's a little bit more more stabilized again, but it was slow.

Operator

That's why there was less drilling. You have some reserve wells, and that's why you don't need to to put them up, the service companies which are our customers. I think we saw a very difficult situation in the first half. In June, already it started to recover. If we look now into July and August, also there are additional orders which we have not seen in the first half really.

Operator

So I believe that this is coming back to a reasonable level, maybe not as pronounced as it was during last year, but I think we see a clear recovery over the last few months in the in the energy solution business. The other one there, we had a delta was the the coatings business. I think the coating season was much delayed. It was much less than last year. It was predominantly only in Southern Europe, in Italy and in Spain.

Operator

So there is the other delta. On the other hand, if you look at CCS division, consumer materials is pretty much stable also because it's a more consumer geared business, So much, much more stable. And construction is actually even up in our case compared to previous year. But because the energy solution is such a dominant situation, that's why we couldn't we couldn't catch up on it. But I believe that CCS division is coming back again.

Operator

I have said we had last year 12.3% EBITDA in the first half, and I think we will be on a good track, especially if energy comes back to to get back to these levels again and then continue with the strategy. There's a lot of very good innovation projects. There are regional accounts in The US and in Asia. I think there's a very, very clear plan and a very credible plan to get the division into growth mode again.

Speaker 7

Thank you. And I think the final was just a bit more nuanced one on this Energy Solutions. Is this mainly Europe focused? Or this like if you could provide some geographical mix, what's the split between the Europe, U. S?

Speaker 7

I mean, so no precise number, but just trying to assess if it is U. S. Geared or Europe geared?

Operator

Yes. The Energy Solutions is basically the big service companies, our customers, and that's a totally global business. So some of it goes into the Northeast, some goes into Saudi Arabia. It's a bit of everywhere, but everything is in the way controlled through our customers, which are the the famous predominantly big three oil service companies.

Speaker 7

Thank you. Very helpful.

Speaker 2

Thank you. We will now take our final question from the phone line today from Stephanie Vincent from Bank of America. Please go ahead.

Speaker 8

Hi, thank you very much. Just I have tons of questions, but I'll keep it pretty brief. So if you are paying down the small amount of $20.25 that you have outstanding plus the RCF that you've drawn to pay those down, I calculate if you have broadly neutral free cash flow, you're going to get down to around 100 let's call it $140,000,000 of cash, if I'm not mistaken. The business is typically run with a minimum of around 6% of sales cash around $120,000,000 So you're getting roughly close to those, levels. I realize that you've expanded the facility under the revolver, but my very top question is what sort of levels of cash are you comfortable holding?

Speaker 8

And then my next question has to do with some of your commentary about returning, I guess, to this kind of $200,000,000 of EBITDA to get to that three times leverage metric. I know that there's some free cash flow assumptions in there too. But if you do get up to those levels, what sort of level of CapEx should we be expecting on the roughly, let's call it, 25,000,000 of facilities? Should we expect that to also move up? And what do you expect as well in terms of your work capital usage if you do go back up to that?

Speaker 8

Like what sort of volatility in absolute levels or as a percentage of sales could we expect on that?

Operator

Yes. I think on the if I take your second question first, on the EUR 200,000,000 CapEx, you don't need anything in addition. I think we have a very nice mix now between sustainability and growth capital. So we can cover this and any upside position is covered because we have less sites. So I think here, 200,000,000 EBITDA is absolutely possible with the CapEx we have now.

Operator

The €80,000,000 or as Sebastian has asked before, that even it can be brought down by 10,000,000 or €20,000,000 if we have additional divestments or other rationalization of our site footprint. Also think in net working capital, generally, have about a 10%, a good 10%. I think that's a ratio which is very sustainable for additional business. It depends a bit which is the nature of the business, but it should be slightly dilutive. So also there, you can go with a slightly lower net working capital percentage than we have now.

Operator

But obviously, there, need a little bit more. But these are not sizable moves. And I wouldn't worry at all if we have the €200,000,000 EBITDA that it's a very good thing for our company.

Speaker 1

I'll take the first question. I would say our liquidity, as we mentioned on the call, at the June after adjusting for the payout of the stub amount of the 2025 bond is just under GBP 300,000,000. And we can run our business with less than GBP 100,000,000. So you can see we still have plenty of liquidity in our pocket. I hope that answers your question.

Speaker 8

That's great. Thank you very much.

Speaker 2

Thank you. As there are no further questions in the phone queue, with this, I'd like to hand the call off back over to for any webcast questions.

Speaker 9

Very good, and good morning, everyone. We have a few left that we haven't already addressed in the verbal questions. So I'll just run through some of those now. Can you please explain the underlying earnings growth assumptions needed to meet the step down in covenants? How much depends on the cost out versus a market recovery?

Operator

Yeah, we have at year end, we still have 5.25, then we go to four point seven five and four point two five. All those covenants can be achieved without any growth. And that's why any growth is upside. We are very cautious on our market development or the assumptions for for next year, probably also going into 2026 because it's just not prudent to believe now in market recoveries where we don't have evidence from. So the simple answer is that we don't need any growth to manage those covenants.

Operator

There's enough on cost reduction programs. What I have mentioned is enough of internal portfolio management on moving the margins up like we have proven over the last actually three years. So there is nothing of growth needed in a way and the growth will come at one point in time and that is upside.

Speaker 9

And then in terms of the existing disposal programs, is there anything you can add on the the timing and proceeds of those?

Operator

Yeah. I think we should not. I think, again, as I have said, we would have liked to have done this some time ago. But again, we don't do not good deals. That's why I think also here we shouldn't speculate now how much it goes.

Operator

I think there's a lot of focus on the divestment programs, also on the potentially additional divestment programs only, again, if it has a very sizable impact on leverage and net debt. So I wouldn't now speculate. It always needs two. And in these markets, even also divestments are not easy. So I think we just go on.

Operator

I can confirm these active projects. We are talking to people. We are negotiating, but I wouldn't say now when exactly we do have a conclusion.

Speaker 9

Then a couple of relatively quick questions probably for Lilly. Do you anticipate fully repaying the GBP 70,000,000 outstanding on the RCF in the second half?

Speaker 1

Yes, by and large so.

Speaker 9

And could you comment on the guidance for one off and exceptional items for 2025, the difference between the EBITDA and the EBITDA, including special items as it were?

Speaker 1

Yes. Our special items, if you look at, there are non cash items, there are cash items. The non cash items are largely amortization of acquired intangibles. So I'll put that aside. From a cash element perspective within special items, first half, we spend about GBP 9,000,000.

Speaker 1

I would expect the full year to be the high teens and 20% level.

Speaker 9

Good. And then slightly clarification question, I guess, on the cost savings programs. So initially, were targeting GBP 25,000,000 to 30,000,000 for 2025, today reported 17 in the first half as well as a further program of twenty to twenty five in the CCS division and in SG and A costs. Can you please indicate the total savings left to go from both these programs in the next six months and going forward?

Speaker 1

Yes. To cover the next six months, look, next six months, we're expecting, to Michael's point, around 9,000,000 to come through. This is the new program we talk about. And clearly, we still have the old program left. We delivered CHF 17,000,000, I think, run rate.

Speaker 1

We're still expecting about CHF 15,000,000 there. But overall, if you recall, last couple of times we talk about a 40,000,000 to 50,000,000 program in the next year or so, and we're still thinking we get there. We have achieved a lot and we still have new program we developed and we're about to deliver. So we're on target for the 50,000,000.

Speaker 9

Very good. And then last question I have here. Understand that overstocking in the glove market was COVID driven. How do you expect the limited shelf life to impact overstocking timing wise? Won't they have to be scrapped eventually?

Speaker 9

I guess more broadly, it's probably worth talking about the restocking and cycling And NBR,

Operator

I think, in general, the the overstocking or the shelf life from COVID is not an issue anymore. I think this has been depleted. The shelf life are some people, they say three years. Some people, they say five years, but I think that's not an issue anymore. The MBR situation more broadly, and that's why there was a note of one of our large customers, one of the big players in Malaysia, and he expects now in the second half of this year increasing volumes.

Operator

I think here we see the same because there was a lot of pre buying, especially in The US from Chinese gloves at the end of last year, which lasted well into the first half. I would say in the second half and also going forward in 2026, there's a nice potential for volume recovery. I think the margins will remain under pressure. They might increase when supply demand balance is a bit more out, but they will increase. But I don't expect I expect the growth of the business coming mainly from the volumes rather than rather than from increasing margin because the market is still there is still an overcapacity situation.

Operator

I think shelf life and so is not there or any COVID related issues are not an issue anymore.

Speaker 9

And then just a couple of final ones. Can you comment on expectations for the receivables financing through the 2025, 2026?

Speaker 1

Yes. We continue to utilize our receivable financing facility, and this is a non recourse facility. And this is our customers' credit versus our own credit. So it's actually cost competitive. From that perspective, we intend to continue to utilize it as much as possible this year and also next year.

Speaker 9

And then finally, are you open to looking at acquisition opportunities opportunistically? Is there anything that you're thinking about at this point?

Operator

Yeah. I mean, in general, the answer is is in the way, the obvious answer is no. With our balance sheet, you shouldn't look into acquisition opportunities. But even here, if there are small opportunities which just simply do make sense and which are actually beneficial to our leverage, I think even then, we should have a look at if there is the opportunity. And let's not forget, a lot of companies these days are in difficult situations.

Operator

That's why there are deals possible, which potentially we would we would have a look at. But, again, only if it is for the leverage a positive situation and it has an immediate accretive impact on our business. I think these are the two conditions. Definitely nothing, anything larger that would be, of course, excluded.

Speaker 9

Very good. That's all we have.

Operator

Thank you very much.

Speaker 8

Thank you.

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