Synthomer plc (SYNT) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Half 1 2020 presentation for Synthomer plc. My name is Kaiza, and I will be the coordinator for today's call. [Operator Instructions] Today, we have presenting Calum MacLean, CEO Stephen Bennett, CFO; and Tim Hughes, Head of Investor Relations. Gentlemen, you may begin your presentation.

Good morning, and welcome to the Synthomer Half 1 2020 Results presentation. I'm joined today by Stephen Bennett, CFO; and Tim Hughes, Head of Investor Relations. Today's presentation is titled Diversity and Differentiation Underpins a Robust Half 1 2020. The global COVID-19 pandemic has brought unprecedented times to our industry. Companies have been stress-tested beyond our imagination and thankfully, Synthomer is proving to be both robust and resilient to what is a difficult market environment. If I turn you to Slide 1, this shows you the key takeaways and highlights of half 1 2020, for which I will go into more detail in subsequent slides. First point I'd like to make is around the resilient performance through COVID-19 pandemic. Our global network of 38 manufacturing sites operated safely and effectively during Q2. The second point I'd like to make is around our EBITDA performance. Half 1 2020 EBITDA of GBP 100.2 million is in line with the performance of half 1 2019 of GBP 99.7 million. If you look at this in terms of what's below that number, we see a very robust Heritage Synthomer performance of GBP 92.3 million slightly -- 7% below the 2019 half 1 performance of GBP 99.7 million. This means OMNOVA's Q2 EBITDA was GBP 7.9 million. We have a very strong balance sheet supported by Q2 free cash flow of GBP 104.2 million. Post-acquisition, net debt has now reduced to GBP 575 million, with pro forma leverage steady at 2.5. And I would remind you, that compares to a covenant of 4.25. We successfully issued our first 5-year bond at 3.875% coupon, which eliminates the bridging facility that was due to come out in 2021. We have significant liquidity at around GBP 500 million and a long-term capital structure in place to 2024. OMNOVA integration synergy target has been increased today to GBP 40 million. I'll talk a little bit more about this in a subsequent slide. The strategic review of our European SBR network is now subject to or is ongoing subject to consultation with our works cancels in Oulu, Finland and in Marl, Germany. We have taken a number of proactive actions on cost to preserve cash, including reducing our CapEx in 2020 to GBP 50 million compared to a corresponding number in 2019 of GBP 90 million. We suspended our 2019 final dividend, and we have a number of cost reduction initiatives ongoing around Synthomer, including the associated OMNOVA integration, the consolidation of our SBR assets, some initiatives in Sokolov, in Czechoslovakia, and a non-manpower cost reduction program, which we've called mindset. 2020 guidance has been reinstated, in line with the current consensus. And we expect to pay a final 2020 final dividend. If I now turn you to the next slide to talk about -- just a few words about COVID-19 and the impact of this on Synthomer. We benefited Synthomer very much from diversified end markets and increasing differentiation, which has helped us in the first half of 2020. Synthomer has very much a geographic diversity as well as a chemistry and end markets. You will see from the diagram on the right-hand side of this slide that we are supplying into a number of different markets end markets, which vary from glove dipping, which is our Nitrile latex, and nonwovens going into pampers, nappies and what have you, to the -- which have been unaffected to a degree by COVID-19 down to the areas of the market where we are more impacted, which is in the automotive and oil and gas area. Despite this, our 38 manufacturing sites have continued to operate as chemicals have been denominated as a key industrial assets. And during that time, we have shown the robustness of our supply chains with raw materials coming in and distribution of finished products to all our customers. April and May sales were down across the group, approximately 20%, lower than the comparative period in 2019, but we saw a strong recovery in June, and this has continued into July, which saw sales in line with prior year. Half 1 sales volumes were 2% as a group and OMNOVA contributed plus 9% here to offset Synthomer's reduction of 7%. To put these market segments into context, today, our 2019 revenues saw around 18% of the group revenues going into health care, into gloves, around 11% going into the nonwoven and adhesives and around 31% going into construction and coatings, which showed particularly strong recovery in June and July. We expect to see a return now to more normalized trading and this has continued through July. Although it will vary by sector, but those areas that are outperforming 2019 will compensate for those areas that are underperforming 2019. We expect group to return to a more normalized EBITDA in half 2, hence, the restatement of guidance. If I move you on a slide now to OMNOVA and the progress we've made here, one of the challenges that we faced during the lockdown and during the pandemic has been the virtual integration of OMNOVA. We are, however, pleased to tell you today in the update that we are ahead of schedule on both synergies and timing with respect to integrating the 2 businesses. I don't think I need to remind you that OMNOVA is an excellent strategic fit for Synthomer, very much a consolidation play and a geographic extension of our business into the U.S. and also our first assets in China. The integration is very much ahead of schedule. So the OMNOVA organization has now been cut and curved and put into the Synthomer global operating business units. And on the diagram on the right-hand side, you will see we now continue to operate with Functional Solutions, Performance Elastomers and Industrial Specialties. And as we talk about those sectors during this presentation, we'll talk about them with the new additions of the elements of OMNOVA that have gone into each of those divisions. We've successfully delisted, the management organization is now complete, and I'm pleased to say that we have a very healthy combination of former OMNOVA and former Synthomer employees in the new organization going forward. And a very strong cultural overlap, which provides confidence going forward of delivery of synergies and of running this integrated global business. As part of the process, we've identified other areas for efficiency, and they come through additional headcount reductions, some organizational changes and some procurement overlaps. And as a result of these additional efficiencies, we've now increased our synergy target, which was previously $29.7 million over 3 years to now $40 million over 3 years, and we've increased the run rate at the end of 2020 to $20 million, which was previously indicated at $15 million per annum run rate. I move you on now to the next slide around the strategic review of the European SBR network. I think I remind you that the last 2 sets of results, presentations, we've highlighted the need to address the SBR capacity in a market with low growth and underutilization. Footprint and the positioning of this business show you that Synthomer is today the #1 producer of SBR in Europe. We are supplying these SBR into paper, carpet, foam, footwear and construction markets, and we manufacture on 4 sites: in Germany, Italy, Finland and Austria. The majority of the volume here comes into the paper and carpet segments and that has been somewhat impacted by the pandemic that we've experienced, particularly in Q2 of 2020. The strategic review is very much reaching its conclusions now. And we've announced the intention to enter into consultation in both Oulu in Finland and Marl in Germany to look at SBR capacity. Announcements on the outcome of consultations will be made in the next few months. But I would like to stress strongly that Synthomer remains committed to SBR markets and that we do have the potential to utilize any capacity that we take offline, to make additional nitrile capacity at some stage in the future. On that point, I'd like to hand over to Stephen to take you through the financials.

Thank you, Calum, and good morning, everybody. So turning to Slide 7. EBITDA resilience in line with H1 -- and in line with H1 2019. Before I comment on each of the divisions, a few comments on the overall H1 group results. A positive, resilient set of results given the macro environment we're in. Both Heritage Synthomer and OMNOVA had started the year well with Q1 EBITDA up 6% and 9% on comparatives, respectively. In Q2, the group benefited from its geographic and end market diversity and its product differentiation in these challenging economic environments. Against this backdrop, the group delivered a resilient H1 EBITDA of GBP 100 million, in line with H1 2019 of GBP 100 million with Synthomer Heritage business contributing GBP 92 million and OMNOVA contributing GBP 8 million post its acquisition. Interest costs are up GBP 5.7 million at GBP 10 million, mainly reflecting the higher interest costs associated with the acquisition financing of the OMNOVA debt. I'll provide guidance on the full year interest charge for 2020 and 2021 later in the presentation. In line with guidance, the H1 effective tax rate increased. The effective tax rate is 22%, 8% higher than 2019, mainly reflecting the end of the pioneer status in February 2020 that was flagged to you in the 2019 interims. The impact of the cessation of the preferred Malaysian tax treatment was exacerbated in the current environment with a relatively higher proportion of the group's profits generated by our Malaysian nitrile business. And again, I'll talk later in the presentation about how I see the effective tax rate evolving going forward. Before continuing to talk through the divisional results, consistent with prior presentations, a reminder that's all the financial information that we're talking to in this presentation relates to our underlying earnings, excluding special items. As we've talked about before, excluding special items, provides a more clear picture of the underlying trends in the performance of the group by excluding one-off or irregular items that would otherwise distort these trends. And this is particularly so in this half year, given the very significant one-off items arising as a result of the acquisition and financing transactions. A full list of the special items is set out in the press release. So turning to Slide 8, Functional Solutions. Functional Solutions EBITDA was 19% ahead of H1 2019 at GBP 46.4 million, comprising Heritage Group EBITDA of GBP 37.3 million and OMNOVA's Q2 post-acquisition contribution of a healthy GBP 9.1 million. Overall volumes were up 3% relative to H1 2019, reflecting the additional OMNOVA volumes compensating for the lower volumes in the Heritage business partly as a result of the impact of COVID-19 in Q2. Positively after softer volumes in April and May, as Calum has already touched on, June and July volumes reverted to more normal levels. Unit margins improved in H1 2020, reflecting a higher-margin on OMNOVA product mix and lower raw material prices. Costs were GBP 11 million higher, mainly as a result of the OMNOVA dispersions, asset-based cost and that being offset by project mindset on the COVID-19 cost control initiatives. Turning to Slide 9, Performance Elastomers. Performance Elastomer's EBITDA is 11% lower at about GBP 48 million, comprising the Heritage Synthomer group of GBP 51 million and the OMNOVA Q2 EBITDA loss of just over GBP 3 million. In terms of volumes, our newly commissioned 90,000 tonne JoB 5 reactor in Pasir Gudang helped underpin record NBR volumes up 16% and once again, improving our market share and cementing our position as #2 global NBR producer. In contrast, our SBR volumes, although being in line with the comparative in Q1 were adversely affected in Q2 by the COVID-19 pandemic, with volumes lower in Q2 across a number of end markets, including paper and carpet. Calum has already provided an update on our plans for the SBR network earlier in the presentation. In H1 2020, nitrile unit margins were lower than a strong comparative period, although we're rising on a rising trend through the H1, mainly as a result of falling raw material prices. Although the Heritage SBR unit margins were stable in Q1 2020, again, relative to the comparative period, the impact of COVID-19 on Q2, both on Heritage Synthomer and OMNOVA businesses resulted in overall lower unit margins in the half. Higher costs mainly related to the incremental costs associated with the OMNOVA site cost base, mitigated again by our mindset and COVID-19 cost initiatives. Slide 10, Industrial Specialties. Now excluding the separate reported acrylic monomers business, reported an EBITDA of GBP 14.6 million, some 14% higher than the comparative period, comprising Heritage Synthomer GBP 10 million, and OMNOVA's laminates and films and coated fabrics business of GBP 4.6 million. Divisional volumes up 17% as a result of the acquisition, more than offsetting the adverse impact of COVID-19 on Q2 volumes. Unit margins across the Industrial Specialties business generally held firm across most of the businesses. As with other divisions, costs were higher as a result of OMNOVA cost base, and again offset by management actions. Turning to Slide 11, strong free cash flow generation. The group continues to be highly cash generative, with the free cash flow rising from about GBP 12 million in H1 2019 to GBP 56 million in H1 2020, mainly related to the change in working capital flows across the 2 periods of about GBP 50 million. The favorable inflow in H1 reflects the lower raw material prices in Q2 and also a favorable inflow from OMNOVA's working capital post acquisition. The very significant free cash flow of GBP 104 million generated in Q2. Similarly reflects low raw material prices in Q2 and the favorable inflow from OMNOVA's working capital. And additionally, for lower activity levels in April and May feeding through into working capital. As we've talked before, we continue to see working capital at 10% of sales, albeit in periods of volatile raw material prices is going to be impacted. We remain on target to spend GBP 50 million CapEx in 2020, in line with the guidance we provided earlier this year. And as noted, substantially lower than the pro forma GBP 90 million spend in 2019 by the Heritage companies. In total, the group has approximately -- sorry, Slide 12, significant liquidity and covenant headroom. I'm pleased to report that we issued our first unsecured high-yield bond in June, refinancing EUR 520 million acquisition bridge facility, securing our long-term capital structure and importantly, eliminating the refinancing risk and delivering on the commitment given in the market -- to the market in March this year. Our RCF and term loan bank facilities and the bond are due in 2024 and 2025, respectively, providing the group with assured facilities for the next 4 years. In total, the group has approximately GBP 1.1 billion of facilities and net borrowings of circa GBP 575 million at the end of June, resulting in liquidity of just over GBP 500 million. The group's bank facilities are subject to one debt leverage maintenance covenant of 4.25 and 4x EBITDA in 2020 and 2021, respectively. As at 30th of June, the actual debt leverage was 2.8 or 2.5x and including the pro forma OMNOVA synergies as reported at the time of the issuance of the bond offering memorandum. We have run a number of severe but conceivable forecast scenarios for the group to assure ourselves, the group is a going concern and can confirm that none of the scenarios indicated that group had insufficient liquidity or covenant headroom throughout the next couple of years. Okay. Turning to Slide 13, technical guidance. A few words on technical guidance. Pensions, in terms of pension, deficit recovery program with respect to our U.K. pension scheme, agreed at the time of the 2018 valuation remains unchanged, with the annual deficit recovery payments of approximately GBP 16 million expected in 2020 and 2021. We are currently making deficit recovery payments of approximately $6 million in respect for the OMNOVA U.S. pension scheme and are in the process of reviewing the valuation arrangements. I will update you on this at the end of the year. For completion, both the U.S. and U.K. schemes are closed defined benefit pension schemes. So no future accrual for employees at this point. Interest, I touched on this earlier. Guidance on interest costs in relation to 2020 and 2021 are circa GBP 30 million and GBP 40 million, respectively, reflecting 9 months acquisition interest charge in 2020 and 12-month acquisition interest charge in 2021. The main components related to the GBP 520 million bond, circa GBP 20 million. The RCF term loan and interest rate swap, circa GBP 4 million each and the pensions and IFRS 16 together about GBP 5 million per annum. Tax, in terms of the update on the effective tax rate of the Synthomer group. Effective tax rate is likely to remain at circa 22% for the next few years. I had guided to 22% by 2022 with a stepped increase in the intervening years between 2020 and 2022. Following the end of the pioneer status in February 2020, and trending towards a longer-term tax rate, depending on the geographic tax rates, geographic profit mix of circa 22%. The geographic mix of profits have been impacted by COVID-19 in 2020, with proportionately more profits being generated in Malaysia and hence the update in guidance. Looking at the Slide 14 and amortization of intangible assets, consistent with what we said when we talked to the market about the acquisition earlier this year, a significant intangible asset has been recognized, principally relating to customer less in relation to the acquisition of OMNOVA. And that amounted to about GBP 330 million. This is -- this asset is being amortized over approximately 10 years, resulting in a noncash amortization charge of GBP 30 million per annum. Consistent with current practice, the amortization charge will be classified as a special item and accordingly fall outside underlying performance. FX, translation exposure. Whilst the FX translation impact on H1 has been negligible, we have included our provisional assessment for the enlarged group of what the annual FX translation impact could be for changes in the euro, dollar, Malaysian ringgit and the Chinese renminbi. Combining the translation impact on both the Heritage Synthomer and OMNOVA businesses. Okay. With that, I'm now going to hand you back to Calum, who's going to go through a couple of slides on our investment case and outlook. Thank you, Calum.

Thanks, Stephen. Before summarizing the half 1 position in the outlook, I'd like just to remind you of our investment case, which remains very much on track and has been and remains consistent to what we've been discussing over the last 5 years. This particular slide sort of summarizes that in these number of boxes here. Synthomer are a global differentiated chemical company. We very much are working towards growing the proportion of our specialty chemicals both inorganic and organic investments. We have a strong, robust and resilient demand with 38 manufacturing factories around the world. And a very large number of multinational blue-chip customers. As mentioned, strong organic and inorganic growth drivers, which has been demonstrated clearly from the growth over the last several years, where a equal proportion has been coming from both inorganic and organic drivers. We very much pride ourselves in being a sustainable and responsible operator. We did spend some time on this during the last presentation, and I'm happy to continue to have those discussions on our practices in this area very much. Finally, the attractive financial metrics that come through using this strategy, which we hope we demonstrated today throughout the presentation. If I move you on finally now to the summary and the outlook. Which is our final slide before we move to Q&A. Synthomer have had a very much a resilient performance through COVID-19 pandemic. We had a solid quarter 1 with sequential improvement after a difficult and challenging April and May. June and July has therefore been particularly encouraging. Half 1 volumes overall were up 2% as OMNOVA contributed from the 1st April, and half 1 unit margins across the business are higher on improved mix and greater differentiation. We remain confident of making further progress in 2020. I'd highlight to you that our nitrile demand remains strong, and offsets the impact of some of the more affected areas such as automotive, oil and gas, which may take some time longer to totally recover from the pandemic that we experienced during the first half. We have a strong balance sheet supported by strong free cash flow, as discussed by Stephen during his presentation. And subject to this continued progress, we are confident that half 2 will see sustained returns to normalized group EBITDA levels during 2020, second half of 2020. We've announced today that we have successfully been able to integrate the OMNOVA transaction. That is all working ahead of schedule and ahead of timing. And we would expect that by the end of 2020, we will have a run rate of $20 million of savings, which against the original target of 29.7%, is good progress. We have, importantly, today, reinstated our 2020 guidance, in line with the market consensus, and we expect to pay a 2020 final dividend. I think with that, I will now hand it back to the operator for Q&A. Thank you very much.

[Operator Instructions] Our first question comes from Geoffrey Haire from UBS.

Calum and Steve and Tim, just wanted to ask a couple of questions. First of all, on temporary cost savings through the quarter. Can you give us some idea of how much of those are temporary? And how much of those are permanent going forward? And then also just wanted to ask probably a slightly cheeky question as to what exactly do you see normalized EBITDA being for the group, in large group now?

Geoff, Calum here. Thanks for your questions. Cost savings is an interesting one, right? Because we've got a number of initiatives going now across the Synthomer group. So not only are we integrating OMNOVA and using the opportunity to -- as we combine the 2 organizations to optimize our structures and introduce cost savings across both Heritage groups, but we've also got the cost savings, which are coming out or will come out of any consolidation we do on the SBR assets, and we've likewise got cost savings from things like the initiatives in Sokolov in Czechoslovakia and also this project that I've referred to as project mindset, which is addressing the cost around the organization, which are non-manpower related. All of those initiatives are ongoing, and they are sustainable and will continue to deliver a fixed cost reductions that will not come back. There are, however, as you're quite rightfully right, but relatively modest at this stage. But there are cost savings, which come purely as a result of COVID-19. So it goes without saying that we are not traveling very much at the moment. So our traveling expenses and what have you were down. So -- but they are relatively modest within the overall cost savings of the half 2 that we've seen so far. So I think you should pretty much think that most of the initiatives we've got are sustainable and ongoing. I'll pass to Stephen on the…

So on the first point, in terms of the costs that we've seen come out of the organization in half 1, Geoff, I would say that across the 3, 4 divisions that we've got, we've probably seen GBP 6 million to GBP 7 million of cost savings in the half year. Half of those are mindset cost savings that Calum talked about, so the sustainable step down in the underlying cost of the business. I'd say the other half is probably accrued in Q2 as a result of the lockdown. And therefore, we'll go back to a more normal level of operation when we trade back.

Do you want to come back on the -- yes.

On the normalized EBITDA. We're clearly not in the business we're making forecast, Geoff, and we've talked about where we see the EBITDA being for the current year. Clearly, in addition to that, if you wanted to add something in for the full run rate cost synergies that we see coming through in the next couple of years, that wouldn't be an unreasonable thing to do. And clearly, we hope to see some improvement as a result of the bounce back on the Q2 numbers that have been impacted by COVID-19, but let's see where we get to. So I think in terms of the guidance I give at the moment, the only thing I would point to is the incremental value that we're going to get from synergies and let's see where these sort of initiatives land, and we'll give you an update on that in due course.

And I think, Geoff, the last thing to say on that is that we sort of confirmed with the guidance going forward that we sort of recognize and agree the consensus. And you can -- and the consensus is pretty well-defined numbers. So that's kind of where we are today. Clearly, there is some ups and downs on that based on the way the business performs in the second half, but we're pretty comfortable where we are.

Next, we have a question from Sam Perry from Crédit Suisse.

Calum and Steve. Thanks for providing the detail on the SBR asset review. A couple of questions just on that. Is there any way you can help us to quantify what the likely earnings or cost savings impact of that review could be? And over what sort of time line? And then I guess if you convert one of these plants to NBR, would the strategy still be to ship these volumes to Asia? And would that move you up the cost curve slightly? Or is that not material?

Thank you, Sam. I mean just taking a little step back, really, in terms of the presentation, what I said was that the need for consolidation of the asset base or the capacity of SBR in Europe is pretty clear. We've been talking about that for a while now. So we have 4 assets, none of which are running at greater than really 70% on average today. So to be able to run fewer assets or fewer -- lower capacity on a fewer number of assets is ultimately what the goal is here. But to be absolutely clear, that although we've done a lot of work in terms of understanding that, understanding the market demand going forward and where we're selling. We are now in a period of consultation. And therefore, no decisions have been made. And therefore, I can't really give you a view in terms of what cost savings and even what earnings we will get as a result of this. But the goal ultimately, and we will be able to communicate that post consultation in terms of depending on where we end up. But the goal ultimately is to clearly reduce cost to serve and to load up the assets that remain in the long term in business structure. So time line, again, comes down to what the conclusions are in terms of where we end up. But clearly, our goal is to do this as soon as possible after consultation and final decisions are made. In terms of converting some of that capacity to NBR, so Nitrile latex, first thing I would say is that our Nitrile latex business, demand is strong. We brought on and made significant investment. As you know, we brought on additional capacity at the beginning of 2019. Our volumes, as we've indicated in our press release today for half 1 2020, are up 16% on the same volume in half 1 2019, which effectively meant we were able to fill the capacity that we brought online quite quickly and certainly ahead of schedule because of the extra demand. And that demand remains quite strong in the current environment. You will remember that we've already announced that our next tranche of new capacity is already in the pipeline, and we will bring on another substantial debottleneck of 60,000 tonnes in the second half or the end of the second quarter, beginning of quarter 3 of 2021. And there's no new capacity coming into the market before then. So that is the first number -- piece of capacity that comes online. We've then got some capacity that we can increase in Europe through our existing Italian assets where we still have the ability to spend some modest CapEx to increase there. So that's the short-term new capacity that we will bring online. Should we take out additional capacity of SBR in Europe? We will have the option at some stage, but not without investment to effectively convert some of that to NBR, but it will come after the current planned expansions, and we would look also at other things that we could do in the context as well. In terms of your comment around producing NBR in Europe, you are correct that at the current moment, the vast majority of NBR gloves so the glove manufacturers who are our customers are producing the products in Malaysia, Thailand and in Asia in general. So any production today in Europe would mean shifting materials out to Asia. And that's why our next large debottleneck is indeed out in Asia or out in Malaysia. So that situation clearly is always under review. And I think the current pandemic today has caused people to think a little bit about resilience and a little bit about when you went through that and there was a shortage of PPE and people were very dependent on PPE coming from Asia in terms of, will the future mean that some of the glove manufacturers may well produce -- because most of that capacity moves as gloves today rather than as raw materials, that there will be initiatives, I'm sure, as we go forward to produce gloves outside of Asia and potentially in the U.S. and in Europe. And clearly, we would look to follow that trend, and we'd be well placed as and when that happens. And we will continue to talk with our current customers to see what the options there are there.

If I could just ask 1 follow-up. Just given the sort of drastically different trends in NBR and SBR at the moment, and you're talking about converting your SBR plant. Do you think there's a risk that your SBR competitors do the same? Or do they not have the same level of technical expertise in NBR?

Well, NBR is -- yes, thanks, Sam. NBR has become an extremely -- a high-tech business. And over the recent years, the new products coming out are patented products with very high barriers to entry and converting SBR into NBR is not a simplistic thing to do. It's completely different raw materials. It's a completely different process. And the assets of NBR, although you have the infrastructure there, require significant upgrading to be able to do that. And also, if you were building a brand-new plant today, probably converting older SBR assets is not the optimum way, even though the capital cost may be slightly lower if you have the technology. But so the answer to that question is not really. I think we have some technology and protected ability to do that, and it doesn't go without CapEx, and it will take time as well.

And the next question comes from Sebastian Bray from Berenberg.

Calum, Steve, I would have 3, please. The first is on the performance of the part of OMNOVA that now sits in Performance Elastomers. The logic applied to the European SBR assets is that profitability isn't high enough and utilization needs to be increased, this particular path in the U.S. appears to be loss-making at EBITDA, are there any remedial actions on the table for this? Or does this plant feed into other areas of the OMNOVA business in the U.S.? My second question is on nitrile margins. Where are these at the current point relative to last year? Have they continued sequentially increasing through June, July and August, up year-on-year? My third question is on the styrene monomer investigation of the EU. Is there any update here? And is the decision to split out the [ both ] segments. Fortunately, Czech Republic partly designed to increase transparency around this area? Or are these 2 separate areas?

Thank you, Sebastian. I'll kick off with these, and then maybe Steve might want to add something at the end. The first one, good question, performance elastomers in the U.S. I think when we acquired OMNOVA, we were quite sort of openly talking about how the former management had already decided to exit the paper and the vast majority of the SBR going into paper and carpet markets. And they've closed down a green bay site and they were already on a cost reduction program. So I think the initiative of downsizing and exiting the low-cost margins has already been taken and the cost to do that had been absorbed by OMNOVA before we acquired it. Clearly, paper and carpet, in particular, in April and May were impacted. I talked during my presentation about a broad range of applications, some of which were unimpacted and some of which were impacted quite heavily. Well, carpet would probably fit into the area that was quite heavily impacted hence, the losses that we saw on the residual business in the U.S., but it's also a business that in June, July recovered faster than, say, the automotive and the oil and gas type areas as well. So initiatives in the U.S. already underway already happened effect and most of the SBR that we're producing over there today is higher-margin SBR or will be higher-margin SBR as we exit the tail end of that paper and carpets going into the construction and going into oil and gas and things like that. So that first question really is a good one, but something that's been addressed primarily by the previous management and is just being rolled out as a part of a strategy. Your second question was around nitrile margins. So I think the first thing to point out is that although our volumes were up 16% on nitriles, half 1 on -- half 1 2019 versus half 1 2020. And what you will undoubtedly remember is that half 1 margins in 2019 were actually quite high and that was because markets were quite tight. It was in advance of quite a bit of new capacity coming online from one of our competitors, which came online in the middle of 2019. You're right that, although during the course of half 1 2020, we have seen, and particularly in quarter 2, we have seen some improvement in margins in nitrile margins. So the exit rate of half 1 2020 is certainly higher than the average margins for the half year. And that was mainly driven by declining raw materials. So as raw materials went down, demand was absorbed in the first quarter because there was excess demand at the beginning -- sorry, excess capacity at the beginning of the year. That demand was absorbed as we came into the pandemic, raw materials started to fall, and therefore, the margins increased. As we went into the exit really of half 1. So we would expect a higher margins in the second half of the year compared to the margins that we were receiving in the second half of 2019. So I think your assumptions in that respect are correct. And it's one of the reasons why we feel quite comfortable today being able to confirm guidance and it's one of the reasons why the upside of maybe the nitrile business in the second half of the year and some of those functional materials divisions that we've talked about which demand still remains high, will outweigh or will at least equal the downside that we will continue to get in some of those industrial markets that are taking longer to recover. Hence, the automotive and the oil and gas, which we all know will not be back to 2019 levels in the second half. But again, I'd point to the sort of diversity there for -- of the total portfolio of Synthomer and why we have the confidence that second half should be broadly in line with the second half of 2019. Moving on to your third question, which was kind of 2 questions, really. So I think you have 4 questions, really. So I'll take the third one first, which is the styrene monomer, no update there. So nothing's changed. We're still waiting to engage as it was with the European Commission to start to discuss the matter and when something happens, we'll update you there. Acrylates, so your fourth question, Acrylates is a different business at the end of the day. I think acrylates is a business -- we acquired 1 plant in Czechoslovakia as part of the Hexion acquisition when we bought their Performance Adhesives and we've taken it out for the simple reason that it is a monomer. It's not the direction as a company that we are going. We are going into the more direction of a more differentiated and higher-margin, value-added products. Hence, the OMNOVA acquisition, hence, some of the investments we're making into the higher-margin end. And acrylates is a relatively modest stand-lone plant. The vast majority of which that is produced is used for internal consumption. So it's a pretty simplistic way of looking at that in terms of saying that we run that plant as long as we can make it cheaper than we can buy it. And there are some rather large cost initiatives because you can see that acrylates have been extremely low cost in the last 6 to 9 months, and therefore, prices were extremely low. And we could buy pretty well. So we've got some cost initiatives ongoing on the site, which we announced as well locally and in the press release today, and that will improve the cost economics of that plant. And we'll continue to run it for as long as its economics allows us to do so, but a very, very modest part of what we do. And we just highlighted it out. So it doesn't distort what's a very positive growth profile in our Industrial Specialties division.

Kevin Fogarty from Numis Securities has registered for a question.

Just a couple for me. Sorry, so one for Steve, first of all, just in terms of working capital, clearly, a good inflow during the half. I just wonder as you look towards the second half of the year and a normalized demand environment and I guess what's going on with raw materials currently? What sort of confidence have you got of sort of sustaining that improvement over the second half? And just as a follow-up on nitriles. Clearly, you talked about higher margins in the second half of the year, what role does pricing have in that? And is there any sort of pricing action going on either yourselves or with competitors?

Thanks, Kevin. Yes. So working capital has resulted in an inflow of GBP 10 million in the first half of 2020 relative to an outflow of GBP 40 million last year. So quite a marked turnaround from Q1 to Q2 as well, which largely explains the GBP 100 million inflow that we saw in Q2. But I can distill it down into sort of 3 buckets that we saw in half 1, raw material prices have come down markedly so in the case of styrene and butadiene. And that has resulted in a flow of GBP 30 million in, an inflow of GBP 30 million. Activity levels, notwithstanding, they were lower in April and May, back to normal levels in June. And as we know, higher activity levels relative to the year-end, which is November, December, results in higher working capital. And I would say those to offset each other. So the GBP 30 million inflow on low raw material prices has been offset by $30 million outflow and activity levels. And we saw some of that last year that I referenced earlier in the answer. And also, we have taken cash out of working capital that we inherited with the OMNOVA acquisition to about GBP 10 million. And that's -- so net, net, net, you see the GBP 10 million inflow in the half 1. What do I see in half 2? I mean I think as the world returns to normal, if the world does return to normal in the next 6 months, then you could see raw material prices rising again, and they have seen a little bit of that, probably too early to call it. But if they went back to the same price as we saw at the start of the year that would negate that inflow that we saw in the first half. But similarly, activity levels would drop again at the end of the year. Back to levels that we saw at the end of 2019, all things being equal. So in the second half, perhaps working capital flat with those 2 factors taken into consideration. So full year, possibly no change in working capital that we're reporting today at the half year, but a GBP 10 million inflow, effectively being the cash that we've taken out for the working capital of the OMNOVA business. But again, that would be predicated on raw material prices going back to where they were. If they don't, then clearly, we would expect working capital inflow to be stronger than what I've just said because low raw material prices equals lower working capital. That's what I'm seeing at the moment. Okay. And the second question, Kevin, remind me again, was nitriles, right? Part of the…

Nitriles pricing and the impact of raw materials on raw materials on pricing?

Yes. Kevin, it's Calum here. I'll just sort of give you -- I think nitrile pricing in the market so the price of our nitriles that we are supplying to our glove manufacturers is actually quite low, and it's quite low compared to historic pricing. Because raw material prices are quite low. So although the margins are in reasonable shape, the actual pricing is quite low. So as -- even in some cases, during the case -- during the half 1 of 2020, we've seen some nitrile pricing falling on a monthly basis because raw materials have been going down, and we've been -- we haven't given all of that away, but we've given some of it away depending on the competitive activity. So pricing is not particularly high today in that respect. But as I mentioned earlier on Sebastien's question, margins have somewhat recovered.

We have a follow-up question from Geoff from UBS.

Sorry, I just have one follow-up question. I was intrigued by your Slide 3, where you talk about 60% of the business being resilient. I was just intrigued by the fact you put adhesive and construction and [ sealants ] in there, some of your -- I assume customers that we obviously see reporting, they've talked about keeping inventory levels high because of supply chain concerns through the COVID pandemic. I was wondering, are you -- have any concerns about the fact you may see some reversal of demand that you may have seen through the second quarter because of that in the second half as people destock?

Geoff, it's Calum. I mean never say never at the end of the day. So it's difficult -- I mean what I would say to you is that adhesives and sealants -- adhesives going into things like food packaging, food labeling, parcels, that's been reasonably strong and consistent throughout the COVID pandemic, whereas construction and sealants, construction, paints, coatings, it did take a big dip during April and May, and sales were probably down in excess of 30% in those areas. As we saw the lockdown, stopping construction effectively, and certainly, in some areas of the world, closing down DIY stores, et cetera, et cetera. What we did see then was quite -- but not -- clearly not impacted to the same level as maybe, say, for example, automotive, which literally stopped down almost completely for 3 months. So -- but what we did see in June and July was strong recovery, particularly in that area of construction, coatings, sealants. And that was as the lockdown came -- we came out of lock down and those markets started to open back up again. Now that demand increase has continued, it was good in July, good in -- sorry, good in June, good in July, and it's continued into -- from what we can see into the beginning of August. Now whether that means that there is a buildup in the inventory in the pipeline, is not what we feel today, but never say never. And I think it also depends on what happens in the future coming 5 to 6 months because this is that area in the middle of what we do on the 60%. We talk about that box. But in this middle area of construction and paints and coatings, it was impacted quite quickly, but it recovered quite quickly. The top end of our business wasn't impacted at all or if it was, it was positively. And the bottom end of our business was impacted quickly, but it's much slower to recover. So this area in the middle is a bit on -- the market in the middle, which is going into that sort of mixture of consumer and industrial is the one which is the most volatile with respect to demand and can come in and out quite quickly. So not entirely easy to predict, but at the moment, the demand is there. We don't feel as if it's an inventory build, we feel as if product is moving. But never say never. That's the uncertainty in some of the reasons why some people are unable today to sort of predict what the second half of the year is going to be because that's that still remains to be seen.

Now we have a question from Maggie Schooley from Stifel.

This is a follow-up question on the strategic review somewhat in Europe. Calum, you've talked about some investments or a level of investment if you were to add further nitrile capacity in the SBR network. Can you give us some understanding of what some investment would be in terms of quantum? And then within that, I know there's been some blowing facilities that have opened up in Europe. So time capacity, potential capacity in Europe to investment, just some broad understanding of what levels that would be if and when it came about? And then the second question is slightly premature, but given the very good traction you've been making with OMNOVA and the integration, and where other asset levels fell and also the traction you've been making on your net debt to EBITDA, do you think as we get to more normalized conditions by the end of the year, there may be more of an appetite to look for further M&A?

Thanks, Maggie. Good questions again. So I think on the investment side, what I would say to you is that the -- in the medium, short term, the investments that we will make into nitriles will be the ones which are clearly laid out, and those are the ones which are in Malaysia, which we are in the midst of at this moment in time. And then in Italy, where we have some capacity there, which is a relatively modest investment because there has been investment that has already gone on in the past to partially convert this asset into NBR. And it's already producing quite a bit of NBR today in Italy. And what it will do is continue to convert some of the existing capacities, some of that investment. So that investment in Italy is relatively modest for us. And it may be in the order of magnitude of EUR 10 million to EUR 15 million. In terms of should we decide depending on where the consultation ends with the SBR, should we decide to convert some of that capacity in, then that's probably capacity that wouldn't come online now for a couple of years from where we are today because we have sufficient in the pipeline. And during that time, as I also highlighted, there's a lot of other things going on around resilience. There's other potential, looking at where the lowest cost capacity could come online. So we, by no means, are committing to converting that to NBR. We simply say that if we do take capacity out, we would not fall and we have a broad idea of how much that would cost, which is in line with what we were doing down in Italy. However, it's not a foregone conclusion that, that's where we would put the next capacity. And in fact, we think that, that's something that we need probably within the next 4 to 6 months to be a bit more open about in terms of where the next phase is going to be because, as you know, there's a bit of a run-up to putting capacity on the ground. And the question for us would be, would we want to convert an older SBR reactor which we may want to do or would we want to make a larger scale investment in the future somewhere else. So that is a part of a piece of work that's ongoing, and we should be able to talk to more detail about that, maybe later in the year or early next year in terms of what's the next one. But in the short term, we have some very clear guidance in terms of what we're going to do and what that cost is. Your third part of your -- sorry, your second part of your question was around on -- no, it was around OMNOVA. Yes. So -- and it was specifically around -- Maggie, say that again, around the…

Well, I mean you're making very good traction with the integration of OMNOVA. I know you've always said that you wouldn't look back to the M&A market until you've vetted that down, but it is going quite well. Your debt's well in hand, we can see, particularly what you said on working capital. And there's got to be some attractive assets out there at these levels. Would it be something if you found that normalized conditions maintain itself through the second half that you might be willing to look further in field like OMNOVA if other opportunities came up, would -- could M&A come back on the agenda?

Yes. I mean, look, I think we've been quite open with the investors, and the investors have been quite open with us as well that we are a publicly listed company. We have a very stable cash flow. We've demonstrated quite well that over the pandemic in quarter 2 that we've been pretty robust and pretty resilient. And I think the investors will be quite comfortable with the fact that we've been able to do that. We're pretty diverse in terms of where we sell and what we do. And that means that they -- and we have quite a bit of experience internally in terms of integrating. OMNOVA was, as you say, a pretty glove fit for us in terms of its consolidation, geographic expansion, same products, a lot of effort required though around doing that integration because we're not running it today as a separate entity within Synthomer. It is absolutely already integrated -- split down and integrated into the 3 global business divisions of Synthomer. So a lot of work, a lot of time and a lot of effort going into complete that integration. And although we're ahead of schedule. And although we sort of increase the numbers today, there's still a lot of stuff going on. Second thing I would say is that as a company, we've clearly said that -- and the appetite in a publicly listed company is not to have leverage above 3x, and today, we're sitting at 2.7, 2.8. And if you pro forma it in our synergies, we're probably down at 2.5. And we sort of went in with pro forma synergies to the OMNOVA deal around this 2.5 number, which is where our investors were saying was the comfortable position for Synthomer to be in a publicly listed company. And our goal has been to do the integration of OMNOVA, drive out the synergies, use the free cash flow to pay down debt and reduce our leverage to sub 2x, and that has not changed. So within those limits, the scope for doing any M&A is quite limited in the short term. It doesn't mean that we couldn't look at something within those limits. And there are, as you say, opportunities around, but it's not top of our list today. And I think we have a pretty clear agenda in terms of the integration of OMNOVA. Now I would take you back then to the second last slide I showed, which shows that part of the Synthomer strategy over the last 5 years. Has been to grow inorganically and organically. So the first thing I would say is that there is also money in the business that we'd like to spend on organic growth. And although we've showed the ability to reduce CapEx, you've highlighted nitriles as well in terms of an area where we will want to continue to put new capacity on the ground. So there's CapEx and there's cash needed for that. But also we've highlighted in that strategy and in that investment case that once we do get the leverage down to sub 2x, that we will be actively looking at what the next step is in Synthomer's vision in terms of continuing to grow. And that will undoubtedly, at that time, include getting back into M&A and looking at some of the M&A activity that we can do. But it's a steady as she goes.

[Operator Instructions]

I think if there's no more questions there I'll pull it to a close. Just maybe with a few words from me. Firstly, thank you, everybody, for coming to the call. We -- I noticed we've got a very high attendance today. So thank you all for coming on. It's interesting times, and we are very comfortable where we've landed in a particularly difficult environment. The business has proven to be robust and diverse in terms of both the geography and also the chemistry and the market applications in particular. We're pleased that the EBITDA is flat year-on-year, and excluding acquisitions, is down 7%, which is, clearly, we'd rather move forward. But at the end of the day, in the current environment, that's a pretty good result. And some of the other highlights that we've put on the table today, I think, shows you that there's good progress being made elsewhere in terms of integrating the acquisition, which came online in April, in terms of getting on with some of the consolidation work we need to do within our SBR network. And in terms of some of the actions that we've taken to ensure that we have a long-term capital structure, good liquidity and no issues around our covenants as well. I think the performance in the first half has given us confidence that the second half, we can reinstate the guidance and also indicate quite strongly today that it would be our intention, subject to no major changes to pay a final dividend -- or to pay a dividend in 2020. So on that, I'd just like to thank everyone again, and look forward to speaking to you on our next call. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you very much for joining us. You may disconnect your lines now.