Synthomer plc (SYNT) Earnings Call Transcript & Summary

Good morning, and welcome to Synthomer plc preliminary results. As normal, I'm joined today by Steve Bennett, the company's CFO; and Tim Hughes, Head of Investor Relations. In terms of today's agenda, the presentation will take its usual form, starting with a few highlights from me and then I'll hand over to Steve to go through the results in more detail. I'll then come back to go through a few key aspects of our strategy before closing on outlook. We'll be then very happy to take any questions thereafter. If I start on Slide #4, which talks about the differentiated and diversified business that Synthomer have today. Against the backdrop of what has clearly been a challenging year for our industry, Synthomer has benefited from the differentiation and diversity of its product portfolio to deliver a significant step change in our business performance. With OMNOVA now fully integrated into Synthomer's 3 core global business units, the group EBITDA has increased 46% to GBP 259 million, reflecting strong growth despite the challenging underlying environment. Synthomer heritage business activity increased EBITDA by 27%, up to GBP 226 million during 2020. This reflects a positive return on capital invested over recent years, strong control on fixed costs and our resilient business model, which proved to be very robust despite the COVID pandemic. Free cash flow performance of GBP 167 million was particularly strong and has enabled Synthomer to drive down leverage to 1.8x EBITDA, further strengthening our balance sheet and opening up the options to participate once again on the M&A market in 2021. The OMNOVA acquisition completed in April 2020 has been a major focus during the second half of 2020. Our original goal of delivering $30 million of synergies per annum run rate by the end of year 3 has been delivered after 9 months' operation despite having to do much of this virtually. The integration and cost-reduction target has now been adjusted to $40 million by the end of 2022, which clearly underpins a very successful deal initially acquired with $70 million of EBITDA. We've continued to drive innovation in the business with 22% of sales coming from new products launched in the last 5 years. We've also made strong progress with our ESG initiatives, an area where we're continuing to increase our focus. We've concluded our strategic review in the European SBR network, with consultations with employees at our plants in Oulu and Marl now at an end. Our plan to reduce capacity and headcount whilst fully loading our remaining assets will be delivered through the course of 2021 and '22. Finally, we intend to pay a dividend of 8.6p, in line with our capital policy, demonstrating our confidence for the year ahead, which I'll come back to later in the presentation. Slide 5, titled resilient business model underpins growth. In a challenging environment, the Synthomer business model has proved to be both robust and resilient. This can be put down to the speciality nature of the product portfolio and the diverse markets into which we sell. Our global water-based chemistry with local manufacturing capabilities operated continuously throughout the pandemic and end markets rapidly recovered post-Q2 2020. Sales into health and hygiene, consumer products and our engineering services businesses proved to be least impacted by the pandemic, whereas sales into automotive and oil and gas will not fully recover until later in 2021. To this extent, the acquisition of OMNOVA has helped to improve both our geographic and product differentiation whilst delivering the aforementioned synergies. Importantly, Synthomer continue to have multiple ongoing initiatives which will drive growth in coming years. Initial 2021 trading has been strong across the whole portfolio, with particularly high demand in our health, hygiene, consumer products and home refurbishment markets. We have multiple cost reductions, site transformations and ongoing synergy programs in process as well as recovering markets in areas such as oil and gas. Outside of normal trading, we have further capacity online in our Nitriles business, a building momentum in our environmental and sustainability agenda and hopefully, at some stage, a return to M&A market. With that, I'd like to hand over to Steve to cover the financial results.

Thanks, Calum. Okay. Thanks, Calum. Good morning, everybody. Just as an introductory comment, you might be interested to know that Synthomer was listed on the London Stock Exchange in October 1971, and we are therefore in Synthomer's 50th year as a listed company. Quite a year for many reasons, but to be reporting a record set of results in the 50th year, in the current challenging environment is a testament, as Calum said, to the group's inherent resilience, borne out of its product differentiation and diversification. These attributes further strengthened with the acquisition of OMNOVA. So turning to Slide 7. Strong EBITDA growth across all core divisions. Synthomer's 2020 results have been defined by 2 things: the onset of COVID earlier on this year and the acquisition of OMNOVA on the 1st of April 2020, the largest acquisition in the group's history. At the half year, I said that legacy businesses had traded well in Q1, with the businesses up by 6% and 9%, respectively, for Synthomer and OMNOVA. Q2 was clearly more challenging as the impact of COVID-19 took hold, but the group had fared better than most and delivered a robust H1 EBITDA performance, up GBP 100 million, which is broadly aligned with GBP 100 million we delivered in 2019 with the legacy businesses contributing GBP 92 million for Synthomer and GBP 8 million from OMNOVA being the first quarter that it was consolidated inside our results. In H2, we have seen assured, progressive recovery, and I'm pleased to report that at the end of the year, we've delivered an EBITDA of GBP 259 million. The legacy Synthomer business delivered about GBP 226 million of that, up by 27% on the prior year and actually delivered GBP 136 million in the second half, almost 75% ahead of the comparative period for 2019, and importantly, higher like-for-like EBITDA profitability across all core divisions. The legacy OMNOVA business delivered GBP 33 million of EBITDA in the 9 months post-acquisition. And notwithstanding the challenges that the oil and gas business had as it felt the full force of COVID-19, the remaining businesses have traded well across all sectors. Increasing momentum that we've seen in H2 2020 has continued into Q1 2021. Calum has already referenced the increase in the OMNOVA synergy target from $30 million to $40 million and the speed of that delivery with $30 million now being delivery by December 2020. The upgrade results in an improvement in the transaction economics. Delivering $40 million of cost synergies in relation to a $70 million EBITDA business that we acquired transforms the headline transaction multiple to less than 7.5x. And that's before we include revenue synergies. Okay. Interest costs were GBP 30 million, in line with the guidance we provided at the interim results. And the effective tax rate was 23%, a little higher than we outlined at the interims of 2020 at 22% but reflecting a rising and shifting the mix of profits in H2 2020. And of course, the step change from 2019, reflecting the cessation of the Malaysian tax pioneer status that came to an end as we announced to the market some time ago in February 2020. Underlying earnings per share, 28.9p, up 14% on 2019, reflecting higher earnings, higher tax rates, and the higher number -- higher weighted average number of shares in issue, following the rights issue in July 2019. Consistent with our commitment given at the time of our October trading statement, when we reinstated our dividend policy, we are proposing a final dividend of 8.6p, bringing the total dividend for the year to 11.6p and in line with our capital policy that the dividend is 2.5x covered by the underlying earnings per share. Okay. Before I talk about the divisional numbers, normal comments on the presentation of the numbers I'm going to share with you. These numbers are based on underlying earnings and therefore, exclude special items. We believe that excluding special items gives the reader a fair reflection of the underlying trends in the business. And excludes -- therefore excludes the one-off or nonrecurring items that would otherwise distort these trends. Special items in 2020 are GBP 125 million, approximately 50% cash, 50% noncash, mainly amortization of intangibles, GBP 30 million, now including the intangible relating to OMNOVA. I'll come back to that. Acquisition costs, GBP 15 million relating principally to the OMNOVA adviser fees. Restructuring and site closure costs, GBP 40 million, 50% of that relating to the OMNOVA integration, so 50% of it relating to the delivery of the synergies that we've talked to, and 50% relating to the rationalization of our European SBR network that Calum touched on a few minutes ago. Noncash impairment charges related to the impairment of the European assets in relation to Oulu and Marl and 50% relating to the acrylate monomers business that was particularly badly affected by COVID-19. And turning to the next slide, Slide 8. PE, another record year for Nitrile latex. Performance Elastomer's EBITDA in the year was GBP 142 million, some 48% higher than 2019. The result was underpinned by strong Nitrile latex gross margin contribution coming from volumes as we filled the Job 5 capacity very early in the year and unit margin growth, partly as a result of falling raw material prices with the onset of COVID, partly due to underlying market growth and then of course, partly due to the exceptional market growth brought about by the COVID-19 pandemic. Our SBR business was also impacted by COVID-19 and whilst our overall volumes benefited from the introduction of the OMNOVA volumes, unit margins were lower as a result of the lower demand. We now have an agreement, as Calum touched on, with the employee representatives in Germany to progress with the rationalization of our Marl site. And therefore, this, combined with the already announced closure of the Oulu site, should see improvement in the trading performance of our SBR business as we move forward into 2021 and into 2022. Costs were higher on the back of 9 months of OMNOVA costs, higher bonuses and, of course, mitigated by the mindset savings and the cost-avoidance response we took early in 2020 in relation to COVID-19. Okay. OMNOVA delivers stronger global platform. This is our financial -- Functional Solutions slide. Functional Solutions EBITDA up 37% at GBP 96 million in 2020. Functional Solutions, as you know, was the biggest beneficiary of the OMNOVA transaction and therefore received most of the -- or a substantial part of the OMNOVA earnings. And accordingly, the rise that I've reported here primarily relates to the OMNOVA contribution but not solely. That said, the higher EBITDA also reflects growth in the legacy Synthomer businesses and trading strongly in half 2 and overcoming the COVID-19 challenges that we saw as a headwind in Q2 2020. Whilst OMNOVA's oil and gas business was significantly impacted, as I've touched on, the oil and gas prices are now rising, and drilling activity is resuming, and we see early signs of recovery as we move through Q1 2021. And we are hopeful that this business will return to more normal levels of trading profit -- trading activity and accordingly, profitability as we head through 2021 and into 2022. Industrial Specialities slide here. Industrial Specialities is now approximately 2x the size that it was 12 months ago. The division has reported an EBITDA of GBP 41 million, 73% higher than the comparative period, clearly reflecting 9 months of OMNOVA in that, underpinned by that contribution from OMNOVA, the Laminates & Films and coated fabrics businesses that traded particularly well in half 2 2020. Similarly, whilst legacy Synthomer business was reported down year-on-year in HI, this was reversed in H2 with the divisional results finishing strongly. And H2 EBITDA, therefore, reported higher than the comparative period in 2019. As with the other divisions, costs are up as a result of the introduction of the OMNOVA cost base and mitigated by our mindset and COVID-19 cost avoidance initiatives. Okay. Slide 11. The group has generated significant cash in the year, with a marked increase in free cash flow primarily reflecting the EBITDA growth. Free cash flow was up GBP 75 million at GBP 168 million, and EBITDA was up by GBP 80 million to the GBP 259 million we have already touched on. Other items in the cash flow, as you can imagine, in the year that we've had have remained under tight control. Working capital returned to more normal levels at the end of 2020 relative to where we were in the summer, where we saw the lower raw material prices and lower sales activity contributing to working capital inflow. Raw material prices have increased towards the back end of the year and have continued to climb in Q1, impacted by asset outages in the U.S. That said, the indicative rule of thumb stands and that rule of thumb is that our working capital is approximately 10% of sales on an average basis through the year. CapEx was closely controlled in Q1 2020 as a direct and proactive response to the challenges of COVID-19. And we've finished the year at just over GBP 50 million, in line with the guidance. That said, we did continue to invest in our Nitrile latex expansion capacity. We continue to invest in our Asian Innovation Centre. We continue to invest in our pathway program, and we delivered on our key sustenance and SHE projects. Cash tax was GBP 31 million, some GBP 20 million higher than 2019, partly reflecting GBP 5 million of payments in 2019 and the cessation of the Malaysian tax pioneer status which we've touched on already. Slide 12, clear focus on deleveraging and liquidity. As Calum has already said, leverage ratio was 1.8x at December 2020, a significant step down to where we were on the 1st of April 2020, when we completed the acquisition of OMNOVA, when we're at 2.5x, and clearly, there was a lot of focus on cash flow and deleveraging during the course of 2020. Strong cash generation that we've touched on contributed to approximately a GBP 200 million reduction in the net debt over the 9-month period from the 1st of April when the group's net debt was GBP 658 million, and that now is more in the order of GBP 450 million. Also, EBITDA has seen good growth in H2, as we've already touched on. The leverage now is back inside our target range 1 to 2x and continuing to fall within our leverage covenant of 4.25x at the end of 2020 and 4x throughout 2021. Following the successful issuance of the bond in June 2020, the group now has approximately GBP 1.1 million -- GBP 1.1 billion of committed unsecured facilities through to mid-2024/2025, eliminating the acquisition bridge refinancing risk and providing a sure -- an assured capital structure for at least the next 3 years and circa GBP 600 million of liquidity of the group today. Slide 13 in sort of ways summarizes the last couple of slides, so I'm not going to go through it slavishly. But it talks to cash flows, deleveraging and liquidity but pulls it together to support our case that the group is now primed and ready for further investment opportunities, both in terms of growth CapEx, including our Nitrile latex expansion projects and M&A transactions, which Calum will touch on. I'm now not going to talk through all the points, but the high-level messages are clear. Our balance sheet is in a good place. Our leverage is at 1.8x, back inside the target range and will reduce -- clearly reduce further with our strong cash flow generation in 2021 and we're also already seeing that. We have a significant committed liquidity of circa GBP 600 million through to 2024. And again, this liquidity will rise as we go through 2021. We have a conservative and well-understood capital policy in terms of leverage, returns and dividends. This capital policy has remained unchanged for the last 6 years and it's something that Calum and I are both committed to ensuring that the group continues to operate within. Based on those robust foundations, the group is well-placed to deploy further capital. It is well-placed to generate further returns, and it is well-placed to generate continued growth and value for our shareholders and our stakeholders alike. I've got a couple of slides on technical guidance. I'm not going to go through all the points on the slides. FX. FX wasn't significant in terms of translation effect in 2020. It's a little bit more significant as we move into 2021, partly because of the strengthening in sterling that we're seeing post the Brexit agreement. And that in particular has impact, as you can see from the slide, the FX rate, sterling against the dollar and Malaysian ringgit. So what you've got there is updated guidance which you can use for your models as you run through into 2021. Interest, not much to say there other than it's going to be lower than your guidance given at the half year, where we said it's probably going to be about GBP 40 million. Why? Cash flow is good and some of our interest is denominated in dollars, and therefore, the favorable or the strengthening of sterling against the dollar means that the cost will be low. So we're reducing that guidance by about GBP 5 million to GBP 35 million. Tax is the last one I'm going to touch on. Tax, we saw the ETR, the effective tax rate, rise to 23% in 2020 and therefore, what we see going forward is an increase in that tax rate to 25%, 26%. Why? Because in the tax rate where -- in the countries where we are paying tax, namely, Germany, Italy and Malaysia, the tax rates in those territories are 33%, 28%, and 24%, respectively. And therefore, the tax rate will rise during the course of 2021. So I'm not going to talk about this. Perhaps a comment on pensions. Pensions, we're in a reasonable place. The schemes are closed to both new entrants and future accrual. But there is a triannual valuation coming in the 2020 -- in 2021 for the U.K. scheme. And we'll provide feedback on that later on in the year. Okay. I'm now going to hand back to Calum for a few slides on resilient, sustainable growth and the outlook. Thank you.

Thank you, Stephen. Just a few slides now on a sustainable growth. Synthomer's shown a strong growth story over the last 6 years. And I'd like to pick up on just a few points as to what's been behind that and what we hope to do as we go forward. If I turn you now to Slide 17, which really focuses on innovation. So specialIty chemicals comes hand-in-hand with innovation. One of the areas that has most benefited from the acquisition of OMNOVA has been innovation. Prior to April 2020, our competing organizations were highly focused on core competencies with a strong regional bias. The combined innovation organization has brought together a single global organization, additional resources and complementary technology. The integration and alignment of the 2 organizations has been one of the most complicated challenges over the past 12 months during which time, the role of CTO has been elevated to the full Executive Committee here at Synthomer. The pipeline of new products coming to market has continued at an impressive rate with 22% of sales now coming from products launched in the last 5 years, a continued improvement on where we were back in 2014. We invested a further GBP 20 million in R&D in 2020 to ensure that this rate of innovation can continue going forward. And the new combined group launched 38 new products and filed 22 new patents during 2002. Finally, like to highlight to you that we have opened our new state-the-art Asian Innovation Centre in Malaysia. Slide 18 talks about the Synthomer integration toolkit, which is effectively the process and the practices that we use when we integrate acquisitions. And I'll specifically talk here about the OMNOVA acquisition, which clearly we completed in April of 2020. The integration of OMNOVA into the 3 Synthomer global business units has been the highlight of 2020. We benefited from the ability to get to know the OMNOVA organization prior to lockdown and before completion. During this time, fortunately, we were able to travel to the U.S.A, which subsequently helped us in completing the virtual integration post-April 2020. I'm now pleased to say that the OMNOVA company structure that we acquired in April no longer exists but is fully integrated into the heritage Synthomer business and operates as one coherent company. On acquisition, we indicated OMNOVA would deliver $30 million synergy run rate by the end of 2022. But we've achieved this target ahead of schedule by the end of this year -- or by the end of last year, 2020. We've revised and upgraded synergy forecast to $40 million run rate by the end of 2022, and these remain, as Stephen mentioned, primarily cost synergies. Additional revenue synergies are also targeted in coming years, but we've not set a specific target for these at this time. The integration process itself for using what we like to call the toolkit has involved a dedicated resource with monitoring and tracking functions. I'm not going to go into the detail, but in summary, is presented here in the Slide #18. The teams have worked extremely well together with everyone who has remained post-integration and really consider themselves all Synthomer employees today. Savings have been identified in both heritage companies. And the resultant management teams are a healthy combination of former OMNOVA and Synthomer heritage employees. Importantly, the toolkit and the experience of integrating the 2 businesses bodes well for future transactions where Synthomer are well placed. Slide 19 talks a little bit about, and I'd like to bring out a few points on ESG, which is very much at the core of our business. This is a very busy slide, and I'll let you read the detail at your leisure, but I would make a few points as summary. ESG in increasingly more important to the global chemicals industry and is now seen as a license to operate going forward. Synthomer, albeit well-placed, needs to take a proactive approach to stay ahead versus our peers and do the right thing. From the slide, you can see the continued progress on our 6-pillar framework. Our 3 core priorities are improving our activities to reduce our carbon footprint, diversity and inclusion and supply chain assurance. From an environmental perspective, our portfolio of sustainable water-based polymer solutions means that we are well positioned to benefit from the ongoing trend of the market moving away from using volatile organic carbon-containing solvent-based products. We have made good progress this year with an 8% reduction in our scope 1 and 2 carbon emissions. That reflects steps we've taken to switch to renewable electricity across the business and the ambition to drive down emissions globally as we work towards net zero by 2050. Health and safety has always been a major priority. And following the recent reviews and SHE assessments that we've undertaken as part of the OMNOVA transaction, we have implemented new standards and targets throughout the organization. Our current SHE recordable case rate for Synthomer heritage businesses remains at world class levels. Our sustainable procurement policy has been published to drive supply chain assurance and the use of alternative raw materials and this is a major focus in coming years for Synthomer. We have refreshed our approach to employee engagement to reflect the larger, more global nature of the business. And a key objective is to strengthen our employees' brand to attract and retain the best talent in our industry. We've likewise refreshed our core values and company purpose. Finally, from a governance perspective, we are fully compliant with the 2018 governance code and have a clearly communicated code of conduct. 1/3 of our Board is female. And we have new gender and diversity targets in place to further improve our diversity across the business. Slide #20, titled strong record of progress. And in the graph, I'm showing numbers between 2015 and 2021 company consensus. Through a combination of internal investment and external M&A, Synthomer has made good progress over recent years in establishing itself as a global market-leading speciality chemicals company. 2020 has been a challenging year when the business has been stress-tested and proven to be both resilient and differentiated. The graphs show the progress that has been made. EBITDA increased by circa 3x over the period 2015 to 2021 consensus, which assumes a full year of OMNOVA results. Volumes have consistently grown year-on-year through a combination of organic and inorganic investments whilst unit gross margins on a per metric tonne basis have been stable or increasing throughout the period of 2015 to 2021 despite volatile raw materials. This is indeed a key deliverable for a stable speciality chemicals company and not to be confused with what are sometimes more volatile percentage EBITDA margins as reported. Synthomer continues to deliver strong free cash flow year-on-year, and this has enabled the company to pay down debt in 2020 post the OMNOVA acquisition and deliver a leverage today of circa 1.8x EBITDA. As you're aware, I will step down as CEO by the end of 2021 but leave the company in a strong position and with a great platform for further growth. Finally, Slide 21, moving on to a bit of a summary but also an outlook. The group delivered a strong performance in 2020, and this is a testament to our geographic diversity and portfolio of differentiated products. Our balanced inorganic and organic growth strategy has served us well and enabled us to safely navigate the COVID pandemic. We are confident that the group will perform well in 2021. We'll have a full year of OMNOVA for the first time and expect to drive further benefits from that acquisition. We've seen strong momentum in all 3 divisions of the business in 2020, and that will continue, especially as we continue to benefit from investment in additional capacity. The pandemic has been -- has driven strong demand in Nitrile latex, which is likely to lead to strong one-off profitability in 2021 before we then return to more normalized levels thereafter. In conclusion, Synthomer is well positioned for the future, and we look forward to continuing our proven strategy of sustainable growth. And with that, I'd like to hand over to a -- to questions from the audience, and thank you for your time.

[Operator Instructions] We have a question in from Charlie Webb from Morgan Stanley.

And first off, Calum, good luck in all your future pursuits and well done in what you and the team have achieved in -- through a very challenging circumstance as last year. It's certainly some impressive numbers there. Maybe just kicking thins off, just on coatings. Coatings obviously had a very strong year in -- well, second half, I should say, in FY '20 with obviously demand -- or pent-up demand coming through from the stay-at-home trend, et cetera. Just any sense on what you see for the coatings end market as we look into FY '21. Is that continuing? Or would you expect some normalization there? And then just touching on the balance sheet. Obviously, you noted, now we're back down to 1.8x and thinking about potential further investment opportunities, inorganic. How does that fit in with the transition in the CEO role? So just understanding, is this something we should kind of wait for the new CEO to get a seat on the table before he can decide what the strategy is, what the opportunities look like? Or do you believe that Synthomer can carry on and do deals in the interim as you carry on the role until such time that someone else is there to take over?

Thank you, Charlie, and thank you for your comments at the beginning as well. So let's see what the future holds on that one. Firstly, on your coatings question, I mean, you summarized it quite well yourself, is that we had a strong quarter 1 in coatings in 2020. We had quite a low sales and reductions by 30% volume-wise in quarter 2. And then it came back strong in the second half, particularly from June, July onwards. That strength continued throughout the rest of 2020. And partially, as you say, people doing more work at home whilst they are a -- had the opportunity to do that. What we've seen so far, trading into 2 months of 2021, is a continuing strong trend on demand in coatings. And that level of sales is today, at least back, if not higher than what we saw pre-COVID in the 90 -- in 2019 levels. Our forecast as we go forward into 2021 are that, at the moment, it doesn't seem to be changing, but at some stage, it clearly will normalize a little bit more later -- probably later in 2021. In terms of the balance sheet and the 1.8x EBITDA, we're clearly really pleased to have got leverage back down to 1.8x, which is probably a good year ahead of the schedule that we'd originally estimated, partly to do with the integration of OMNOVA but partly to do with the strong trading that we've experienced during 2020 and continue to see in 2021. So leverage at 1.8x is in a good place and of course, it will clearly continue to come down as we go through 2021. I think the Board has been very, very clear that the strategy that we've applied to Synthomer over the last 6 years is something that we want to continue. And yes, there is a recruitment and a search process ongoing at the moment to find my replacement. But in the meantime, we are continuing as normal. As you well know, there's quite a strong M&A market at the moment so it is opportunistic to be there, and we wouldn't want to miss that opportunity. So we are actively, at the moment, still looking at both bolt-on transactions, which are quite easily done to some degree because they're led by the individual businesses, so they're led by the business divisions and the business presidents because of their consolidation and the synergy opportunities that they bring. But we're also continuing to look at 1 or 2 adjacent sort of transactions that may be possible. And I think whilst we look at those and in parallel are bringing in the change of the management, I think the timing is pretty good. So we certainly haven't downed pens at this stage.

We have a question from Alex Stewart from Barclays.

I had my line just break up, I've had some trouble, so tell me if you can't hear me. Just 2 questions on Nitriles. The GBP 60 million cost in your EBITDA bridge, can you give us some sense of how that breaks down into each constituent part? I think the OMNOVA contribution to performance for that is pretty small. So I guess most of that is the bonus So if you could just talk of how the bonus structure works and perhaps what that means to fiscal '21. And then secondly, sticking with the theme, can you tell us possibly whether nitrile margins in the first quarter have moved up relative to Q4 and Q3 last year, whether they're on an upward trajectory or whether they are pattering at a high level would be really useful.

Thanks, Alex. I mean I'll take the first piece and ask Stephen to talk a little bit about the bridge in his chart. But just to give the -- everyone on the call a sort of view of where Nitriles went over the last 12 months and where it currently is today, we started and we came into the year in 2020 having brought on new capacity in 2019. So we had quite a lot of, let's say, or we had significant free capacity that we were able to fill quite quickly on the back of the increased demand as a result of COVID. So a lot of the improvement in the nitrile performance or in Performance Elastomers division has come as a result of self-help. So it's come as a result of us spending significant capital putting capacity on the ground and then being in a position to respond to that accelerated demand that we saw in 2020. You'll remember also in 2019, there was some other new capacity came to the market, mainly from our Korean competitors as well. So we started the year in 2020 with margins which were lower on the cycle, as it was, in terms of where we would be and that's because supply/demand balance was clearly in favor of a -- there was more capacity there than there was demand. That quickly changed, as everybody knows, as a result of COVID. And we ended the year -- we had a sort of gradual increase of prices in a falling raw material environment and an improving demand situation. We had a gradual increase of margins, which meant we exited 2020 with quite reasonably high margins, and I'll come back to that in a moment. So far in quarter 1, and we're 2 months in there, we did exit at, as I mentioned, reasonably high margins, and those margins are certainly stable to where they were at the end of last year. In terms of just the outlook statement that we gave, and just to clarify that, therefore, what's 2021. And I think I would like to clarify it in that the results that we saw in 2020, so the GBP 259 million, it did see some upside on average there in the nitrile margins but that sort of canceled out the downside we saw in other businesses, particularly in things like automotive, oil and gas, et cetera. So the GBP 259 million EBITDA of 2020 was fairly indicative of the Synthomer business as it is today, excluding the COVID impact. The company consensus, which is compiled separately of GBP 320 million-plus EBITDA is likewise fairly indicative of where this business will be trading in 2021. And I say that with a view to saying that there will be some improvements and I say that with the backdrop of including nitrile margins as normalized margins. However, we've also said -- or the Chair has also said quite rightfully in the outlook statement that there may be on top of that GBP 327 million, a one-off premium or a one-off pandemic premium for the course of 2021, and that's what we highlighted in the outlook statement. Stephen, do you want to pick up the second?

Yes, so thank you, Alex. The cost of brick in the Performance Elastomers chart does, as you say, cover 2 things really. It covers the incremental costs of the businesses we acquired with OMNOVA. So just to put that in context, what is that? It's their legacy paper and carpet business, it's their antioxidants business and it's elastomeric modifiers business, as it says there. Number of sites and the cost base, both fixed and variable cost in relation to that business is in that cost brick. And then it also covers the legacy Synthomer movement in costs, which, as it says on the chart, covers the bonus. The bonus in 2020 is higher than it was in 2019. As you can imagine, with the results going forward and having a strong performance. And the bonus has been charged in the Performance Elastomers business because that's what underpinned the stronger performance in 2020. I'm not going to give a number, but it's a significant proportion of that brick.

And can I kind of expand on that, sorry? Is there anything you can tell us about how the bonus structure works in that division? Is there a formulary assessment of higher profitability going to the employees? Or is it down to the discretion of senior management at the time?

Alex, it's Calum here. I'll sort of -- rather than get too deep into that, I'm sure you can have a chat off-line with Tim. But the summary of it is that the bonuses that we pay in our chemicals business are not particularly high bonuses compared to other bonuses, as it was. And they are what I call affordability bonuses. So they are bonuses that are: a, discretionary from a management perspective but b, they are paid in a year where we perform well and we perform above our budgets. And if we don't perform in line with our budgets, then we don't pay a bonus other than a safety, health and environmental bonus. So that's the way you should look at it. If you want to get into more -- so if you take, for example, what Stephen said is that 2019, there was not a material bonus paid. And in 2020, there was a bigger bonus paid because, clearly, we've exceeded budget so that's the variables that exist. But I suggest we can take that offline as well if you want to understand it a bit more in terms of how the bonus is actually operating.

We have a question in from Sebastian Bray from Berenberg.

I would have 3, please. The first is on the outlook for Nitrile latex on multiyear view. Why would one necessarily assume a reversion from exceptional margin levels in the year 2022? My understanding is that the first major capacity due to hit this market comes in around 2023, if not a little later. Is this because you actually assume Nitrile latex demand will be on the decline in 2022? What is the reason for this? The second one is on CapEx. If the company pulls the trigger on additional nitrile expansion, be it in Malaysia or Europe, and potentially puts some measures in place at pro forma cost, what is the maximum level that you would envisage for 2021? And the third question quickly, any updates on the European investigation with reliance -- with regards to styrene acrylic monomer procurement? Will we know when this ends? Or does it just -- nothing happen if no finding is made?

Okay. Sebastian, thank you very much. So I'll try and pick those up and maybe get Stephen to say a few things on CapEx as well in terms of where he sees the -- I'll start it and then let Stephen pick up the balance. So firstly, on the nitrile view. What we're saying today is we have exited with the 2020 point with good margins. We've said that a normalized margin relates to our sort of current consensus of GBP 326 million. That's normalized average over the cycle, relates to our consensus of about GBP 326 million, and that's what a sustainable business would be. But we've also highlighted that during 2021, it won't be normalized margins. The margins will be slight -- will be higher than normalized margins. And therefore, we've said, without quantifying that, that up and above the GBP 326 million, there will be a one-off premium. So your question really is how long will that one-off premium last because we are saying today that the visibility that we have is -- what we're saying is it certainly will last for 2021. Will it go into 2022? I think the best way to answer that question is probably at the half year where we see just how quickly the world has come out of the pandemic. I mean we've had, during 2020, growth rates of over 20% in the Nitrile latex market. And we expect that postpandemic to come back down to more normalized rates, growth rates, which will be still, in our view, between the 8% to 10%, which is what you've traditionally seen for the last 10 years. And we don't see that changing, but it certainly will come off the peak that we saw in 2020. So we have to wait and see just how quickly that does come off and come back to those normalized rates. But even when it does, we'll still see significant growth on a market, which you know is around 1.8 million tonnes today. On the other side of the supply chain, and clearly, you're right as well in saying that there are a number of announced capacities and putting a new asset of Nitrile latex onto the ground can take 2 to 3 years before that comes in line. So there have been a number of announcements, including some announcements in China. And depending on which piece of analysis you take, we will see when that capacity comes online and when we, therefore, go back to a more normalized nitrile margins. So we're not saying it's going to end at the end of 2021, but we're saying that, at this stage, that's where we have the confidence to talk about it, and we will talk more about it in the middle of the year. In terms of nitrile expansion, I mean, I'll let Stephen talk a little bit about CapEx and what's in our plan. But we have 60,000 tonnes of additional capacity coming in online towards the end of this year. It was quarter 4, early quarter 4, but we've sort of forecasting now towards the end of the year because of the sort of delays that we've had as a result of COVID and some of the lockdowns and things. But it's still very much on plan to come on at the end of the year. And we will benefit from that in 2021 -- sorry, 2022, the extra volumes. Sufficient to say, we are looking at where our next line of capacity will come from. And that will either be building a new plant, either in Asia, and the obvious place to do that would be Malaysia because that's where most of the customers continue to be and where they continue to grow. But we're also looking at the U.S. and Europe in terms of supporting some glove manufacturing that might come on in those regions. So there's multiple projects we're looking at. We've not approved any of those, so there will not be material spend on that during 2021. But maybe I'll ask Stephen to just talk about 2021 CapEx a little bit and maybe what we did in 2020 as well, Steve. And then I'll come back to the European styrene.

Okay. So -- thank you, Calum. So 2020, we ended up spending GBP 53 million, broadly in line with the number we set out to the markets back in Q1, when we'd taken proactive actions to make sure we're optimizing the group's liquidity and cash balances in an uncertain time. We told the market at that time that probably our underlying SHE and sustenance CapEx is GBP 30 million and change. And therefore, the difference between the GBP 30 million and the GBP 53 million is those items I outlined in my presentation around the investment in Nitrile latex, 60 kte coming on at the end of this year, around the investment in pathway, around the investment in the Asian Innovation Centre. Those things, what do we see going forward into 2021? Well, my base loading of SHE and sustenance is still about GBP 30 million. And we're probably looking at GBP 80 million or GBP 80 million-and-so for 2021 with a significant proportion of the growth part of that going into Nitrile latex, probably GBP 20 million, GBP 25 million being the completion of the JOB 6 capacity. And then there's a placeholder in there for us starting to look at where the next site investment will be that Calum's touched on. I think that's fairly modest. In the greater scheme of things, clearly we are focusing on where do we go next with Nitrile latex. And if there is a substantial step change in 2021, then maybe the CapEx will rise, but it's going into that area of the business that has seen us do very well over the last few years, and we're committed to support the customers, to support the market and to continue to grow our business in that way. So let's wait and see.

Yes. Thanks, Stephen. I mean just to add to that a little bit. So if GBP 80 million is -- Steve's broadly has forecast for 2021, GBP 30 million of that GBP 80 million is the sustenance. Everything else above that is discretionary. And as we showed in 2020, we can turn that on or off depending on the performance of the business and the availability of resources. On your last question, Sebastian, no further news, so the styrene investigation clearly is still going on. But these things take time. And as soon as we hear anything, we will get back to you, but the situation hasn't changed from where it was the last time we spoke.

We have a question in from Jolyon Wellington of Peel Hunt.

I just wanted to ask, just stepping away from nitrile, just for a second. Just on the other businesses, what kind of underlying volume growth you sort of saw in the second half of 2020? And what do you sort of expect going forward? And then just on the dividend, interesting to see that was raised Just wondering what your thoughts are on the dividend, just taking into account obviously the strong cash flows but then obviously, the super-normal profits in FY '21. Just wondering what your thoughts are about how the dividend will evolve over the next sort of couple of years.

Okay. I'll give the dividend question to Steve, and I'll just take the other one. So you're asking really about excluding nitriles. So let's talk really a little bit just about Functional Solutions and Industrial Specialities. So during the course of 2020, both of these businesses in quarter 1 had strong quarters and they were ahead of the corresponding period in 2019. They both were depressed in quarter 2 when we went on to the lockdown and sales, broadly speaking, were down about 30% for that quarter. And then they had a strong uplift in the second half of the year. So they came back to what I would call normalized levels. So it's a bit of a mix behind that story. So things like -- Charlie asked about coatings, which had a very strong second half, but likewise, we had a poorer second half in automotive and also in oil and gas. But net-net-net, they came out at the end of the year, broadly 2020 in line with 2019. So it showed that we picked up the sales that we lost. Going forward, and I would say -- and the same goes for the Industrial Speciality products, which have got a bit of an automotive exposure in there so they had that dip in quarter 2 and came out quite strongly in quarter 3. Initial trading in 2021 for both Functional Solutions and Industrial Specialities is good. So it's on -- with the exception of probably oil and gas, which is still behind. They're on line -- the rest of the businesses and the markets that we're selling into are on line or above with what we saw pre-COVID. As a general rule of thumb, these businesses are GDP, GDP+ 1 growth businesses. Now there's always a bit of movement around that depending on what we're doing in innovation, what we're doing in R&D and what our relative position is within the markets. But the underlying markets are growing at GDP, GDP+ 1 order of magnitude. And that's what we'd expect to see on average across those businesses. Now on top of that, I said there are other things, so clearly things like the OMNOVA integration, where we've talked about sort of revenue synergies and we've talked about opportunities to sell the OMNOVA products through the Synthomer sales team and vice versa and then move products around on the sites and things. There are other things going on that might see the underlying growth of that business to be a bit better than that. But that's not to do with the market. It's to do with the self-help things we bring post the merger of the 2 businesses. Stephen, do you want to pick on dividend?

So dividends, as we said in the presentation, we were pleased to reinstate the dividend in the trading statement in October. We are committed to complying with our capital policy. We see it as a commitment to the shareholders that they get what they're expecting. And the dividend policy has been clear, and it's been applied. It's the one we inherited when we came to business 6 years ago, which is that we pay 40% of the underlying earnings per share out of dividends per share. And ergo, it's 2.5x covered. That's what we've applied in 2020. That's what's underpinning the 8.6p. If you take the 8.6p and the 3p we paid in November, the 11.6p is 40% of the 28.9p a share. What do we see going forward? I've sort of said it really, we've set out what our dividend policy is, and that's what we'd expect to apply. So if we end up with some very strong profits in 2021, then we would expect to apply that dividend policy to it. And so it goes forward. So everybody understands where they stand and we can expect from the company. No change in that at this point.

Can I just ask just on that? But so you would most probably look to pay a higher dividend in 2021 and then it could probably get moved back a little bit in 2022, you'd be happy to sort of see a dividend move back a little bit in 2022 as well.

I think if you look back at history, when we've been in that situation before, that's what we have done. That's what we have done. So let's see where 2021 falls out rather than prejudge it. But that's what could happen, yes.

We have another question on the line from Geoff Harris of UBC.

It's Geoff Haire from UBS. Just 2 quick questions. First of all, working capital, obviously you've done a lot of good work in getting inflows in both '19 and '20. Given obviously, the continued recovery in volumes, do you think you're going to have positive working capital in '21? And then just coming back on the normalization or the super profit you might see in 2021, I was wondering how much the -- could you help us sort of be able to size what -- or how we should think about what that level of profitability could be above the sort GBP 330 million that you're saying is a normalized profit for the group at the moment?

Geoff, I'll let Steve gather his thoughts a little bit on the working capital, and I'll pick up the normalized profits and what have you. I was a bit surprised there to see you'd not only changed your company but changed your second name as well. But that's -- lockdown does funny things to us, right? So yes, so we haven't deliberately -- and as you can imagine, not only do we not, but we've been counseled quite strongly not to make forecasts and put numbers around that. I'm sure you can speak to Tim outside of the call. What we've actually said, and you summarized it extremely well there, is that the GBP 327 million or whatever it is as a consensus, which is compiled was not a forecast by us, but it was something that we recognize as being put together in a diligent way as a forecast -- trying to forecast what the underlying EBITDA of this business will be. And we sort of recognize the work that's gone into that, and that is reflective of what the management see happening here, which also, by the way, is a great upgrade in terms of, again, going up from the GBP 259 million to the GBP 320 million, GBP 330 million. But what we've also said, and again, you summarized it well, is that during 2021 and going back to Sebastian's comment as well that that's where we will go today, and then we'll update you as we go further in, that there will be a one-off increase on that during 2021, so quite a one-off pandemic effect. We haven't quantified it, but we have said that it could be material. And that's about as far as we've gone. And again, I would just try and go into a little bit more detail of that with Tim offline, Geoff, if that's okay. Stephen, do you want to pick up working capital?

So working capital, yes, we have seen an inflow of GBP 20 million this year, GBP 20 million last year, as you rightly say, Geoff. I think I would revert back to my rule of thumb, which is working capital is about 10% of sales. What does that mean? Two things impact our sales revenue number. It's the activity levels and the underlying prices. And whilst raw material prices fell in the first 6 months of last year, so unusually, we had an inflow at the half year of working capital, about GBP 10 million from memory. It started to come back towards the end of the year, towards where it started the year but not -- perhaps not quite. And hence, we saw a GBP 20 million inflow over the full year. I think I said in my presentation in that raw material prices were rising at the back end of the year. They've continued to rise in Q1. Some of the storm challenges out in the U.S., of course, some [ FMs ] and therefore, materials' in shorter supply than it was. Assuming that, that clears by the end of the year and as raw material price are back at where they were at the start of this year, then no material movement in working capital. I would be -- counsel you perhaps not to put another GBP 20 million inflow for working capital. It's a bit of a random walk. But I think if raw materials rise or indeed fall, then that will have a -- vary the number we report in that -- in the working capital movement, and that is outside of my control. But the mantra of 10% of sales is still a good one. That's what we see.

We have a question from Chetan Udeshi.

Chetan here from JPMorgan. Just a couple of questions from my side. First, there is a like ongoing theme at the moment on raw material prices going up across the board and what it means for remote downstream speciality chem-oriented businesses. Now outside of nitrile, can you talk about how is raw material pricing more or less -- sorry, the raw material price evolution for other businesses at Synthomer? And how successful have you been to so far in terms of raising prices to compensate the higher raw material prices there? And second question was just -- it feels like the nitrile market has been tight for almost 6 months now. And I'm a bit surprised that we've not heard more concrete investment proposals from Synthomer in terms of expanding the capacity. Is this got to do with the view that you guys expect at some point in second half, it will most likely normalize to some extent and you want to see how that normalization happens before you commit to new capacity expansion? Or as you said, it's more about us waiting for customers deciding where they want to invest their new capacity in terms of region, Europe, U.S. or Malaysia and probably you'd piggyback on that decision, to some extent? I'm just trying to understand the timing around nitrile expansion in the future.

Thanks, Chetan. What I love about these sessions are that all the analysts always tell us the answer and then ask us the question. So -- and they all pretty well understand the business. So I'll try and repeat back some of the stuff that you've said really and just confirm where we are. But on raw materials, I think you're absolutely right, Chetan. You picked that up that raw materials are starting now to move upwards. And that comes on the back of, a, they're from a low position; and b, that the sort of demand is increasing. So the supply-demand balance is getting tighter. And also at this moment in time, particularly with what's going on in the Gulf Coast and also what's going on in Europe, there's quite a few tightnesses which have been inflicted on the industry as a result of other events, right? So we are seeing increases of raw material prices. I would just go back and remind the audience, although Chetan, totally understand you know this, but a lot of our products, we are buying the raw materials on a monthly basis. And we are buying them at either a contract price or a spot price. And then we are selling them all on a monthly basis as well. So we sell our finished products on a monthly basis as well. So we are able to pass -- and that means we are in front of our customers and either there is a formulaic price, which means it's automatically adjusted for prices, and that might be, broadly speaking, 40%, 50% of the business or alternatively, there's an opportunity to sit down with a customer and negotiate a new price. And one of the reasons why you would do that is the movement in raw materials. So I think the biggest proof of the pudding in terms of can we do these things because it's an ongoing dynamic in the market at the moment, and yes, we are chasing the raw materials up and putting price increases through, but if you go to one of the slides I showed you in my presentation where it shows you the 5-year history of our margins and that our margins on a margin-per-tonne basis on average of our whole portfolio and you can see that they are either constant or increasing. And during that period of time, there's been some periods of pretty volatile raw materials. And what we've demonstrated is that this business has the ability to pass those on and give them away, by the way, as and when those raw material prices move, and the fact that our contracts are back-to-back, the fact that we don't do long-term fixed pricing means that, that opportunity's there. I mean there is always a bit of a time lag, a 1-month time lag and you're always under a little bit of pressure to do that, but I can say that the business is pretty focused today in terms of ensuring that they retain their margins. On your second question around nitriles, I mean the first thing I would say is that we have and continue to put a lot of money into nitriles, and we do have a major expansion coming online in quarter 4, which is the 60,000 tonnes, which sort of takes our total capacity to around 460,000 tonnes then. We have a market share within this Nitrile latex business of the mid-20s and we would like to retain that market share. And if the business is growing between double digits today, it means we need to continue to bring more capacity to the table, to be able to grow with the market and to do that sensibly in line with way that the market demands. So really, the answer to your question is we are -- and we haven't announced anything, you're absolutely right, but we are intending to make another investment beyond the 60,000 tonnes. The actual location of that, I said earlier on, is more than likely going to be in Asia because that's where the vast majority of the gloves will continue to be produced. But we may put some modest capacity down in the U.S. and, as you know, we already have capacity in Europe that if we get glove manufacturers in Europe, we can just divert the product from there into the European producers. So we're not holding back. It's not on the basis of where the market is going and what's going on. But if you make a major investment into Nitriles, there are so many important factors in that in terms of size, in terms of scale, in terms of location, in terms of integration to raw materials, in terms of integration to infrastructure and the technology that you're using there. So all these things are being worked on. And we hope that during the course of 2021 that we will make an announcement in terms of where our next major investment will be and at what cost. So please don't doubt the fact that we're fully committed to growing our business in line with the market. If there's no more questions online, are there any on...

No further questions. There are no further questions.

Any more questions online? Can I ask?

We have one question, Kevin Fogarty from Numis Securities. Sorry, Kevin, I've had to drop your line as the audio is feeding back to us.

Okay. So Kevin, apologies for that. I know you spoke to Tim earlier today anyway, and I'm sure you can follow-up with Tim, if we can't get you back on. So if there are no more questions, I'll just wrap up now and give you a few summary points, really. So clearly, a good 2020 with GBP 259 million which is very indicative, even on a sustainable basis is where this business was post the acquisition of OMNOVA and in 2020. So we've talked about the continued integration of OMNOVA and how that's going. We've talked about new innovation with products coming through. We've talked about driving our leverage down. And we've talked about an outlook that says from a sustainable basis, the GBP 320 million, GBP 330 million is a good number for 2021 in terms of where this business is. And we deliberately give a little bit more insight to that because it is quite uncertain when you're trying to look at it. But we've also talked about a one-off benefit that we may well get in 2021 itself. So overall, the summary is the business is in good place. It's trading well. I think with the exception of the oil and gas, which is relatively modest, it's all trading up and above -- on or above the pre-COVID levels. On the oil and gas side of it, we expect to recover during 2021 as that activity increases. So can I -- on that, say, thanks to everyone for attending. And we look forward to following up with you in the coming days, and look forward to the next discussions at the half year. Thank you.