Synthomer plc (SYNT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Synthomer interim results. Calum MacLean, CEO of Synthomer here, and I will start the presentation. I've got Stephen Bennett, CFO, alongside me here; and Tim Hughes, Head of Investor Relations. I'll provide a few -- but turn actually to the agenda slide, Slide #3 in your pack. I'll provide a few highlights before handing over to Steve to go through the more detail behind the numbers, after which I'll come back on strategy and outlook, and then we'll take any of your questions at the end of the presentation. So I'd like to turn, if possible, to Slide #5 in your deck, titled proven strategy delivering record results. Synthomer has delivered threefold increase in EBITDA comparing half 1 2021 with half 1 2020. We have seen a significant improvement in all of our 3 global business divisions, each of which are ahead of the same period last year as well as the first half of 2019. The improved performance is driven by the diverse and resilient nature of the Synthomer business. The acquisition of OMNOVA returns on historical capital investment and an exceptionally strong performance in our Nitriles business, which has experienced strong demand for the hygiene-based products. We continue to see high growth in Nitriles business and have announced our plans to invest in a further 200,000 tonnes of Nitrile capacity in Asia, which will be on stream during 2024. Long lead items for this project have already been placed with the suppliers. Steve will talk about each of the divisional performances later in the presentation. However, worthy of note that results have been delivered despite the raw material inflation and escalating freight costs that we've experienced during the first half of 2021. We've also made excellent progress with OMNOVA integration and are very encouraged both by how that is performing as well as the new opportunities that it's opening for the group. OMNOVA is outperforming the assumptions that we made at the time of the transaction. Synthomer have made meaningful progress to reduce leverage down to 0.8x EBITDA. This reflects strong free cash flow and 77% conversion of the EBITDA, excluding the investments made into working capital. We're very pleased with how quickly we've been able to reduce leverage following the OMNOVA acquisition. And this now puts Synthomer back to a place where we will consider more meaningful inorganic and organic growth opportunities going forward. We're pleased to have launched our Vision 2030 program, outlining 10 ambitious targets that we will implement to drive our ESG agenda. I'll come back to this later in the presentation. 2021 interim dividend has today been confirmed, is in line and consistent with our capital policy, demonstrating the Board's confidence in ongoing trading. We've also reiterated the outlook that we preannounced a couple of weeks ago with the expectation of EBITDA now being in excess of GBP 500 million this year. I move you now to Slide 6, titled strong growth across all divisions and well ahead of half 1 2019. Performance Elastomers has undoubtedly been the standout performer over this period, predominantly driven by Nitriles, but with an encouraging 2021 improvement in our European SBR business, which starts to see the benefits of the restructuring projects that we have implemented. Elsewhere, we've seen good growth in Functional Solutions and Industrial Specialities. Customer demand remains strong in all markets going into Q3 2021. Sustainable growth has been driven during the period by the ongoing strategy of both organic investment and proactive M&A, something the Board are committed to continue going forward. I'll now turn you to Slide 7, titled increasing differentiation and strong recovery momentum from pre-COVID financial year 2019 to last 12 months 2021. Synthomer have grown from a business with EBITDA of GBP 100 million in 2015 to the current run rate of circa GBP 500 million per annum. Underlying unitary margins per tonne of sale -- underlying unitary margins per tonne of sales continue to increase year-on-year as we add more specialized products to the portfolio and continue to invest into innovation. Despite the difficult trading environment that we found ourselves in during 2020, all key metrics of the businesses have continued to improve, clearly demonstrating the resilience and diversified nature of the portfolio. The additional capacity that we've brought on stream has coincided with improved demand in many of our end markets, including coatings, adhesives and consumer care. It's also very rewarding to see the acquisitions that we've made, not least OMNOVA, deliver meaningful returns. Overall, the business has a very strong financial and operational platform and is ready for further growth going forward. Slide #8. ESG is the core of our business -- is at the core of our business. In handing over to Michael later this year, I've defined our 3 major objective as to continue to participate in the specialty M&A markets; deliver a major Nitrile expansion; and thirdly, proactively drive our ESG agenda. ESG has been a significant area of focus for the group, and we've launched a set of leading comprehensive group objectives, giving Synthomer a road map between now and 2030. We've engaged extensively across the organization to ensure that the targets are deliverable, but challenging. Clearly, we will continue to review these year-on-year versus leading market metrics. I won't go through the list of the 10 goals on the right-hand of the slide, but suggest you take time to study them, and you're welcome to come back to us offline. The good news is that we're well-positioned in any benchmark analysis versus our peers and fully intend to continue to drive excellence in this area. Synthomer have recently been awarded the Green Economy Mark award by the London Stock Exchange in exchange of the fact -- in exchange of the fact that over 50% of our revenues come from sustainable solutions. Let me stop at that point and hand over to Stephen to take you through the divisional numbers in a bit more detail. Thank you.

Okay. Good morning, everybody. Thank you, Calum. Turning straight to Slide 10. In our 50th year, H1 2021 has been another record 6 months for the group, with our growth strategy delivering an exceptional group-wide performance, underpinned, as Calum said, by the historical investments in CapEx. That's our NBR CapEx at Pasir Gudang, Malaysia and also our Functional Solutions CapEx in our plants at Worms and Roebuck in the U.S. The M&A activity OMNOVA joining the group on the 1st of April last year, the self-help transformation initiatives at some of our European sites and born out of the resilience of our business, which has become increasingly differentiated and diversified over the recent past. Group EBITDA increased threefold to GBP 322.7 million, over GBP 200 million more than the pre-COVID H1 2020 and indeed, GBP 60 million more than the full year result for 2020. Whilst Performance Elastomers, and, in particular, NBR has generated a significant part of that growth, SBR has also contributed a meaningful increase. And as you can see from the chart on the right, all of the divisions have also seen continued momentum in their respective results. The exceptional performance has been delivered, notwithstanding the marked appreciation in sterling half 1 2020 to half 1 2021, both against the U.S. dollar and the Malaysian ringgit and resulting in a translation impact cost of GBP 16 million or 5% of the reported EBITDA in H1 2021. The tax rate has been maintained at 23.1% relative to last year's 22% for the comparative period and 23.4% for the full year last year, impacted, in particular, by the geographic profit mix, and in particular, by the improved trading performance of our European businesses across all divisions. The improved earnings per share, up about 350%, higher at GBP 0.493, principally reflects the higher profit and the higher underlying tax rate relative to the comparative period. As Calum has already said, we are committed to our capital allocation policy and within it, our dividend policy. And accordingly, the half year dividend of GBP 0.087 has been proposed and recommended by the Board. You will notice that we've expanded the disclosure in the interim statement on the front page to include both underlying and IFRS results side by side. We've also simplified the disclosure of the divisional results in our presentation this morning to protect commercially sensitive data in our businesses, mindful of the impact of the OMNOVA transaction on divisional results and to get better aligned of the Synthomer presentations with other U.K. and European chemical companies. That said, the presentations are consistent in the sense of what we're talking about in the presentations is our underlying financial results, and that is underlying results excluding special items. As we've said before, excluding special items provides a clearer picture of the underlying trends and the performance of the group by excluding one-off irregular items that would otherwise distort the underlying trends. I know when I spoke at the yearend, there was questions around whether we would expect special items to reduce this year. And indeed, they have. The special items in H1 2021 amount to GBP 8 million, and that's relative to the GBP 63.1 million we saw in H1 2020. And clearly, H1 2020 impacted by the OMNOVA transaction occurred on the 1st of April. The charge in H1 2021 relates almost entirely to the noncash amortization of intangibles, GBP 18 million, GBP 15 million of which relates, of course, to the OMNOVA transaction. It also includes further integration costs underpinning the delivery of OMNOVA synergies and also reflects -- that's GBP 4 million, and also reflects a gain on the mark-to-market of our interest rate swap of GBP 4 million. Turning to Slide 11 on Performance Elastomers. Performance Elastomers' EBITDA increased by approximately 370% to GBP 224 million or almost 400% at constant currency. The very significant rise was largely attributed to our NBR business, as we've touched on, which experienced exceptional -- continues to experience exceptional COVID-related demand filling not only our recent JOB 5 capacity expansion, but also the Kluang capacity and our Filago swing capacity. Unit margins further increased in Q1 2021 and have remained stable throughout Q2. As you all have read, we're making good progress on the capacity expansion, JOB 6, 60,000 tonnes on the Pasir Gudang site, which is due to come online Q1 2022. And as we've announced today, we are now processing long lead items for a 200,000-tonne capacity expansion that should be online in 2024. That said, and as I said earlier, it's not just the PE story. It's not just NBR. It's also our trading performance of our SBR business, which has also much improved over the period. With the European SBR rationalization program, the improvement in the OMNOVA SBR contribution and the improved economic environment impacting volumes and unit margins, including paper in a positive way in H1 2020 -- relative to H1 2020. As a result of the upstream asset outages, and Calum touched on this already, we have seen significant raw material price rises during H1 2021. By way of example, styrene was EUR 677 per tonne in June 2020, June 2021, EUR 1,549. Similarly, butadiene, EUR 325 to EUR 940. Similarly, [ ACN ] EUR 928 to EUR 2,453. The business has not only successfully managed to procure all its raw materials in a tight market, but has also been successful ensuring pass-through of these price rises, a testament to the skills and resolve of both the procurement team and the commercial teams operating in our company, and it also reflects the increasingly differentiated product portfolio that we manufacture. Turning to Slide 12, Functional Solutions. EBITDA GBP 70 million, some 51% higher than 2020 or 55% at constant currency. Business has benefited from the accelerated integration of OMNOVA, with run rate synergies approaching the $40 million stretch target at the half year and also saw a marked turnaround in the oil and gas sector, which had a challenging time in 2020. Oil prices and recovering drilling activity is up and rig count has started to rise. All end markets, so construction, coatings, textiles, adhesives, all reported higher volumes, with volumes across the division being up 30% overall, buoyed by rising economic activity, the cross-selling opportunities of the 2 legacy businesses and benefiting from the incremental OMNOVA capacity. And as I mentioned before, the capacity additions brought online in Worms and Roebuck. Unit margins were also higher in part reflecting the favorable mix impact of the generally higher-margin, more differentiated OMNOVA products. Slide 13. Industrial Specialities, EBITDA up 72% at GBP 25.1 million or nearly 80% at constant currency. As with the FS division, benefiting from both a meaningful contribution from the OMNOVA businesses, laminates and films and coated fabrics and also more widespread rise in economic activity, with volumes up across all businesses on the comparative period and almost 50% overall for the division. Unit margins, again, higher in this division, again, benefiting from the higher average unit margin of the OMNOVA contribution, OMNOVA business' contribution. Cash flow. Group generated nearly GBP 90 million of free cash flow, up 60% on H1 2020 and generated almost GBP 0.25 billion of free cash flow, excluding the investment in working capital, which represents almost 80% of EBITDA conversion. Touching on the cash flow, up GBP 33 million on the comparative period, mainly higher EBITDA, GBP 222 million and increased investment in working capital GBP 170 million. We've already talked about the significant rise, and they are very significant rises in raw materials during this period. And coupled with the higher sales activity has resulted in increasing working capital to the group. That said, 2 points to consider. The -- reassuringly working capital as a percentage of sales remains at 10%, which we've always guided to. So that rule of thumb remains true. And as we enter the second half, some of the raw material prices have started to come down. Now if those raw material prices continue to fall as the upstream assets that we're experienced outages come back online, then it wouldn't be unreasonable to expect, but much of that investment in working capital that we've made in the first half comes out in the second half, let's see. CapEx remains broadly aligned with where we were in H1 2020, with well-controlled sustenance CapEx and reflects continued in our NBR capacity both to 60,000 tonnes are coming online in early 2022, and also to the extra 200,000 tonnes long lead item -- long lead items. Cash tax, GBP 18 million, GBP 8 million higher than 2020 comparative, reflecting the cessation of the pioneer status in Malaysia, also, of course, reflecting the higher profitability of the group in H1 2021. Notwithstanding, there were higher payments in H1 2021 relative to the comparative period. We expect there to be further rise in tax payments in H2 2021, and we expect the overall effective cash tax rate to be in line with the effective underlying tax rate set out in the P&L. Turning to Slide 15. A rapid reduction in leverage. The leverage ratio of the group has reduced from 2.5x when we acquired OMNOVA on the 1st of April 2020 to 0.8x reported at the end of June this year, 15 months later. This is relative to our single bank covenant of 4x EBITDA. Over the same time frame -- because it's not just an EBITDA story, over the same time frame, our net debt has reduced from GBP 650 million to GBP 350 million. So over the same 15-month period, we've seen a GBP 300 million reduction in net debt. And the group now has approximately GBP 750 million of liquidity with committed lines through until July 2024. The slide says the group is well-placed to invest in further capacity expansion, including the NBR market, which continues to show exciting underlying growth and in both bolt-on and more transformational acquisitions. Both of these -- based on these robust foundations, the group is well-placed to deploy capital, generate returns and continue to drive the growth and value for our shareholders and other stakeholders going forward. Okay. Last slide from me. Technical guidance, and I'm not going to go through this slavishly. You can take it away. Going to pick up a couple of points. Tax. Following the improved trading performance of the group and in particular, the European profitability across all divisions, as I said earlier, we are now guiding to longer-term underlying effective tax rate of 23% to 25%. At the yearend, I stood up and said, 25% to 26%. So that's a reduction in the effective tax rate and primarily reflects the statutory tax rate in our key taxpaying countries. and also, the changes to the geographic profits mix that I touched on earlier. The second point I'd call out is in relation to pensions. The company continues to work diligently to eliminating the pension scheme liabilities from the balance sheet and accordingly managing the funding risk associated with the group's pension schemes. Mainly as a result of the rising interest rates and the knock-on impact on discount rate assumptions, in relation to our closed defined benefit pension schemes in the U.K. and U.S. and the unfunded scheme in Germany, our overall pension scheme liabilities have reduced by almost GBP 60 million to GBP 160 million. So it's come down by approximately 25% since December '20 through to June 2021. There are no changes to our expected deficit recovery payments in relation to the U.K. and U.S., they remain unchanged to what we've talked about before, being GBP 17 million for the U.K. and $13 million for the U.S. And finally, and as previously said, the U.K. pension scheme is going through its 2021 triennial valuation at the moment, and I expect the trustees to come back to me in the next few months. And once that happens, I'll call it clearly report back to the city on that. Okay. Calum, thank you very much. And I'll hand back to Calum.

Thanks, Stephen. Just a couple more comments from me on a couple of slides before we come to Q&A. So can I turn you to Slide 18? And just for the people on the call, strong performance in NBR market supported by historical investment. The strong performance that we've seen in Nitriles reflects not only the increased demand following the COVID pandemic, but also our ability to service that demand through the historic investment strategy. Whilst we expect the rate of growth to moderate, we still expect to be at least 10% per annum going forward. In due course, new supply will come to the Nitrile market, but at the same time, production economics and process technology is improving all the time. Synthomer's investments in innovation has allowed us to become the industry leader. And going forward, we have a pipeline of new patented products, which will further strengthen our leading market position. SyNovus proprietary technology brings significant benefits from a sustainability and a process perspective. Innovation is important across our business and not least in Asia, where our relatively new innovation center is helping to pioneer the next generation of products in this space. Our confidence in the continued long-term growth prospects for NBR are demonstrated by the decisions we've taken to further increase our capacity. With the expansion project that is currently underway in Malaysia, bringing another 60 kilotonnes on stream in Q1 next year, today's announcement that we will be investing to add another 200 kilotonnes by 2024 also signals our commitment to build upon our market-leading position. If I now turn you to Slide 19, strong financial platform to drive further investment opportunities. M&A has been a cornerstone of the Synthomer story over the last 5 years. And the Board have gone out of their way to emphasize this element of the strategy is not going to change. The chemical industry continues to be an attractive market into which to invest, demonstrated by some of the transactions that we've seen over the last 5 years. Synthomer has proven it has what it takes to do sizable M&A. We have an experienced team when it comes to both executing transactions as well as overseeing their successful integration. During the last 12 months, Synthomer have successfully integrated OMNOVA into the larger group and over-delivered on synergy targets. We feel we now have the team and the toolbox to continue to deliver in this space. The pipeline of opportunities remains attractive for us today, both bolt-on acquisitions and more transformational opportunities. Our balance sheet is strong, and we've got low leverage with significant headroom. Slide 20, which is titled benefit of consistent organic and inorganic investment strategy. As I prepare to hand over to Michael, Synthomer are well-placed as a global differentiated chemical company and moreover, a platform from which to grow. There is a greater emphasis on innovation than at any other time in our history, with over 20% of annual sales coming from products we've launched in the last 5 years. We have leading positions in growth markets, serving a diverse and large base of customers. The capital investments in our asset base and manufacturing improvements we've made have contributed significantly to the current performance. At the same time, the SBR business has been restructured following significant erosion in the paper market and is now showing strong signs of underlying improvement. Clearly, there are changes ahead to the group's leadership with Steve announcing his intention to step down as CFO. I want to thank him for all that he's done at Synthomer, for his tremendous support, and not least the strong finance function that he's established. The new team will inherit a business offering vast amounts of potential, and I look forward to helping with that transition. Finally, if I can move you to Slide 21 on outlook before we come to the Q&A. The strategy that we've worked hard to develop has underpinned our performance in the first half of this year, and will continue to drive growth going forward. We're still seeing strong underlying demand across all our divisions, and that underpins the improved guidance we announced ahead of these results with EBITDA now expected to be in excess of GBP 500 million this year. We're continuing to take advantage of that progress by maintaining good levels of investment in the business where we see opportunities to strengthen our market-leading positions and notably in NBR. The exceptional demand that we've seen for Nitrile latex will continue through this year, but it will moderate at some stage. And as things stand, we expect that to be in the early part of 2022. We have a strong balance sheet, and that gives us good optionality for further inorganic growth as mentioned throughout this presentation. On that note, I'd like to hand it back to Melissa, who's going to lead us through the Q&A. And myself, Steve and Tim will pick those up as they come in. Thank you very much.

[Operator Instructions] Our first question comes from Jarek Pominkiewicz of Jefferies.

And first of all, Steve, good luck in all your future pursuits and well done for what you've achieved with the team to date. I have 2 questions, if I may. The first one, could you please talk us through the -- in Nitrile latex unit margin in the first half of the year as well as your thinking behind your assumption about the normalization in unit margins in early 2022. I guess it's a range of possible scenario is that the margins could follow. In your view, is your assumption regarding normalization, a likely one or just a prudent one given the lack of visibility beyond several months? And my question #2 is on the balance sheet strength. It's very strong at the moment, it's 0.8x EBITDA. I understand that the primary focus is on organic growth and M&A. But we're making the decision as to how to allocate your resources. Are you also considering potentially share buybacks and the projected returns from that at the current share price level?

Thank you very much. I'll start to pick up those, and maybe Steve will add something as we go along. Firstly, on NBR margins. And the first part of your question was the strength of those margins in half 1 of 2021. And the answer to the question remains very consistent with what we've been saying that demand is still showing extremely strong growth, certainly well above the 10% long-term average of this business. And therefore, the business is sold out with respect to the margins that -- sold out with respect to the volumes. The margins have certainly stabilized, but they stabilized at these more premium levels. And at this moment in time, they remain fairly stable. Going forward, it's always difficult to forecast what exactly those margins will do because we have to see the way that the pandemic rolls out. We have to see the way that potentially new capacity comes to market. And then clearly, we have to look at the demand that we're seeing. I think what we've said is that we certainly have very good visibility on volumes. We think that we will continue to be sold out through this period. And that when we bring our 60,000 tonnes of new capacity on at the end of the year, beginning of next year, that that will be committed into the market as well. I think from a pricing and a margin perspective, we certainly have reasonable visibility for the rest of this year in terms of the demand and the likely supply-demand balance and don't see major changes, albeit there may be a bit of softening there. And in the beginning of next year, an element of being prudent, but also an element of -- that's the expectation, the underlying expectation that we'd expect to see that margins come off in quarter 1 of 2022. In terms of the balance sheet strength, absolutely, we are generating a lot of free cash flow now and will continue to do so. And our leverage at 0.8x is probably a good year ahead of where we expected to be at this stage following the acquisition of OMNOVA. I think we've announced obviously the investment into the Nitriles, which over the next 3 years will probably be GBP 150 million capital investment for the project itself. And also, we haven't hidden that we remain to have ambitions in the M&A market. I think that's a strategy of inorganic and organic investment, which has served us well over the last 5 years, which is what's seen has moved this business from GBP 100 million EBITDA to GBP 500 million EBITDA, and still operating with very low leverage. So I think certainly the Board and the executive management team want to continue, and we think there are opportunities today in the M&A market, which is quite bullish. So -- and the Board continued to support, and we are continuing to work on those opportunities. And when Michael comes on board, and even at this moment in time now he's still talking regularly about those things. So we expect to see a seamless transfer and the opportunities to buy other businesses. So share buybacks is not on our agenda at this moment in time.

Our next question comes from Navina Rajan of Morgan Stanley.

Just wanted to get a bit of clarification. I think in the past, you've very helpfully sort of split out the NBR spread impact. And at the previous guidance, it was around GBP 350 million of underlying, GBP 100 million was that one-off impact. Given that trading has been quite robust across all the divisions, how much of that is underlying now in the guidance? And what are you seeing for sort of the NBR spread impact for this year? And then also I guess just for H1 of the GBP 244 million in Performance Elastomers, how much of that would you say is one-off? You've also previously split out OMNOVA in Functional Solutions. So sort of any color on how OMNOVA's done within Functional Solutions earnings would be very helpful. And then just on the 200 kt investment, how is that phased in 2024? Is that going to be in line with sort of previous expansions you've done with NBR? And I guess just looking at the wider market generally, if I sort of even put the 200 kt into numbers based on the higher prolonger post-COVID growth rate, things still look pretty tight in terms of capacity utilization rates. So how much further expansion -- you've alluded to in the presentation, how much further expansion do you think is needed? Are you cautious at all on the new capacity coming in from your competitors?

Navina, there's quite a few questions in there. I tried to scribble them down as we went along, but if I missed one, please remind me at the end.

I will.

I think starting -- and I'm not going to take them in order because they sort of prefer to pick up the OMNOVA one first. I mean the OMNOVA transaction has been a huge success for Synthomer. And we're very, very happy with what we did. We've certainly exceeded our initial investment -- our investment paper, which allowed us to go there. And you remember, we bought a business with broadly speaking, $70-plus million of EBITDA. And we said we were going to add around $30 million of synergies over 3 years. And what we've sort of said is that those $30 million of synergies were delivered and have now been exceeded by the end of year 1. So that was a big over-delivery. And the underlying business, which was $70 million pre-synergy when we acquired it, has certainly recovered now back to where it was when we acquired it. So following the COVID and the -- you remember, we talked about oil and gas in particular. But all of those areas are now recovered. The synergies are over-delivering, and the business is in very good shape. And as I mentioned in the presentation, there are other sort of revenue synergies that are coming to the market that were never included in our synergies. So it was a great example of a consolidation-type deal where you put 2 businesses together. And geographically, they were a good fit. The reason why we haven't hived out OMNOVA and reported on them today is quite simple. And that's from day 1 because this was consolidation deal. We integrated OMNOVA into our 3 global business divisions. So what was OMNOVA and the way it traded before now is spread around, particularly in our Functional Solutions and Industrial Specialities where we've put the laminates and films business. So that's why. And when you start to -- although we do audit these synergies and we do look at the performance, it is very much an integrated business now, and that's the way we want to track it and run it internally. So -- but overall, OMNOVA is in pretty good shape and well-integrated synergies delivered and certainly ahead of the investment case. If you then put that into a -- what is the underlying business, which was your -- certainly your question that we've said today, we'll deliver GBP 500 million EBITDA during 2021. We've talked about some forms of sort of premiums that we've seen this year, particularly from the high demand in the Nitrile sector, but not only the high demand in the Nitrile sector. And I think we haven't really changed from when we spoke earlier in the summer when we put our preliminary numbers out and what we've been saying, that broadly speaking, this business today is around GBP 350 million underlying EBITDA and the sort of upside that we've had on a more -- you should look on a more temporary basis is around GBP 150 million. So that's where it is, but it continues clearly to grow going forward. And of course, we have the strong balance sheet to support that. Your last questions were all around the NBR and the NBR investment. And moreover, I think the supply-demand balance really in terms of where do we see this going? The market is still reasonably tight. We can sell all that we can make. And therefore, we are bringing additional capacity on where as the underlying market continues to grow. We bring 60,000 tonnes on at the end of the year. That's on schedule, on budget. And I think most of the volume has been already committed to our existing customer base as we go forward. The new announcement of 200 kilotonnes, which would come online in 2024, and you talked a little bit about -- or the question included a little bit about, say, should we bring it on faster or maybe bring on more? And how are we looking at that? Well, this will almost certainly be a standalone brownfield plant. And as you know, in NBR, these are mostly batch reactors. So we will bring on 200,000 tonnes, but we'll be establishing a base or an asset base which can subsequently be grown. And it can be grown from 200 up to maybe 400 kilotonnes at some stage in the future as well. So it's quite easy with these things to add them stage by stage. And we think 200 kilotonnes is the right amount to bring online. The timing for us is we're effectively bringing it on as soon as we can. And this is one of the characteristics of NBR at the end of the day, that from the time you press the button to say you're starting to order your long lead items, it will take a good 2 years to be able to have actual capacity on the ground. And that's why your challenge around higher for longer is that even though people are starting to put capacity and make some announcements on the markets today, it takes a matter of time for that to come online. So we think the 200,000 tonnes, it will come online at around the right time. It's the fastest that we can take it on, and we're still finalizing that investment. I think in terms of the supply-demand going forwards, always difficult to predict because you've got multiple variables moving in there. One is the demand. One is the rate at which the products replace natural rubber and PVC. And two is the rate -- and the third one is the rate at which new capacity comes to market, and these are all quite sort of moving pictures. So I think, again, what we will continue to do is update you frequently as we go through our presentations. And at the moment, what we're saying is that we feel reasonably confident that the rest of this year is going to remain strong and that with the new capacity coming online towards the end of the year, there could be some softening in quarter 1.

Great. That's clear.

Thank you, Navina. I hope I got all your questions in there.

Our next question comes from Kevin Fogarty of Numis Securities.

Well done on the numbers. I do have a question around the OMNOVA contribution, but it doesn't sound like that's going to be answered. So I'll shift to really questions on the capital allocation I guess going forward. And the first one on the statement obviously pointing to scope for multiple acquisitions. And yes, reflecting clearly the leverage progress that's been made. I just wondered, I mean, realistically, given the sort of leadership change, do you think you can sort of make progress given that pending kind of leadership change this year in the short term? Or should we think about this as something for the incoming CEO in reality? So I just wondered if that sort of pipeline can be progressed in the meantime? And just secondly, you sort of discounted the option of share buybacks at current level in the previous question. I just wondered if you take the same view towards special dividends this year in the absence of any M&A activity and given the implied sort of balance sheet strength by the yearend?

Kevin, I mean, just on a couple of things there on the OMNOVA contribution. I don't think we're necessarily hiding anything here. I mean, I'm sort of saying that it is a fully integrated business now, and synergies are delivered across that business, and sometimes they're delivered in the cost base of the Functional Solutions or in the Industrial Specialities. Sometimes they're seen on the actual assets that we acquired. So I think at the end of the day, but I think we're giving a very clear message that we're exceeding the investment case, which was the synergies that we had proposed we would get, plus the EBITDA that we inherited is all back and is continuing to grow at GDP-type levels in a Functional Solutions in laminates and films. So demand is strong across that area. And you have to look at that from the markets we're going into, which is particularly into things like consumer care, adhesives and paints. And these are all markets which are doing extremely well. And therefore, the business and the timing of acquiring that business on top of increased opportunities just means that it was a very successful transaction. So then you talk a little bit about -- the second question was around capital allocation and M&A. Worthy of a comment here first on the fact that, yes, we have my replacement, Michael Willome, who is I would genuinely say the company are really lucky to have secured a very high-caliber individual with a huge experience in specialty chemicals and also as an acting CEO. So it's an exciting prospect to bring in such an interesting CEO. And I can tell you that Michael is -- although he starts on the 1st of November, is in constant discussion with myself, and he's very much supportive, and that's why he was appointed to the role of the strategy and the success and continuing that. So I think even at this stage, when we talk about a pipeline of bolt-on or even transformational opportunities, we have a Board that is open to that. And we have a CEO and existing CEO and an incoming CEO, who are also very committed to that, and they're working together to make sure that we progress things in line with the opportunities as they arise. So when that will actually materialize in some sort of transaction, it's kind of driven more by the individual transactions in the market. It's not driven by our ability to do them or the team because the team are ready. I'd also say that, yes, the CEO, CFO -- and Steve won't change out for a year, by the way. So he's potentially -- he's on a year's notice. So that continuity is there. But I'd also say, let's just be very clear that Synthomer have got a good team now behind the people who stand up and make the presentations, who have got a lot of experience in, a), acquiring and doing those transactions and b), integrating them and delivering the synergies. So we think that's one of our strengths. And I referred to the toolbox and an incoming CEO who is equally ambitious to grow the company. So timing, I can't tell you the answer to that question. It will be -- depend on case-by-case, but certainly, the door is open to doing that when those opportunities come along. In terms of share buybacks and special dividends, I think I give that one to Stephen.

Thanks, Calum. Yes, Kevin, so we did talk in the presentation about sustainably below 1x. I mean, we've been here before, the capital policies is quite clear. We are happy to operate between 1x and 2x levered. And we'll go above that if we see an attractive M&A proposition as we do with OMNOVA. But on the flip side, as we go below 1x, then clearly, the capital policies, as you know, consider what you're doing with your capital and whether you pay special dividends or share buybacks or whatever. I think the word to focus on is sustainably below 1x. And what we tried to say in the presentation was we don't think we are sustainably below 1x because we are still very keen to grow the business through the investment in Nitriles, through M&A opportunities that are ever present. And I think while ever that situation persists, then people should not be expecting special dividends and share buybacks. And possibly moreover, as we do -- look to do larger transactions, we're trying to grow the shareholder base, not reduce the shareholder base. So I think if there was a distribution, it would probably be more down the special dividends line than a buyback of shares. I think that's where we are today, never say never, but I think we're well-placed and clearly looking to grow the business and not return capital, as Calum says, to the shareholders at this point.

Thanks, Stephen. Melissa, next question, please.

So our next question comes from Sebastian Bray of Berenberg.

I would have 3, please. The first is on the magnitude of over-earning this year. Stephen, Calum, you've called this out as about GBP 150 million in Nitrile latex. I was wondering if there's anything more to add to that from the other segments. I'm in particular, thinking of the performance in Acrylate Monomers and maybe the fact that we're at peak of cycle in Functional Solutions. Where exactly would you put the figure if you had to include non-Nitrile earnings as well in the one-offs over-earning this year? My second question is on CapEx guidance for the next few years. Given that the last time Synthomer updated the market, we didn't have this 200 kilotonne facility in the future, where do you see the annual CapEx of the group over the next few years? Is it around GBP 100 million per annum? And I'll pause there and come back with #3.

Thanks, Sebastian. Two questions -- your first 2 questions, I'm going to take one and give one to Stephen. So I'll take the first one. I think when we talk about the improved performance or the GBP 350 million and then the GBP 150 million sort of more one-off, the GBP 150 million in our mind includes all the one-offs. So it includes Nitrile latex. The 2 areas really where we've got -- we've had a bit of a, let's call it, an upside that wouldn't necessarily be sustainable are the NBR. And as you quite rightfully highlight, the Acrylate. So the Acrylates have had a very strong year on the back of a lot of force majeures, et cetera, et cetera. So although, we're doing lots of things there to improve the underlying performance, it will come off a bit. But that's included in the GBP 150 million. Certainly, on the Functional Solutions, I think most of the upside we've seen in Functional Solutions in my view is not seasonal. I said we had a reasonably benign 2019. Functional Solutions then had a difficult quarter 2 on the back of the pandemic. And I think what we saw in a strong recovery in the second half and then a sustainable recovery, really, in our view, in the -- in 2021. So demand in that area at the moment remains extremely strong. And the investments we made, as Steve mentioned in his presentation, in Germany and in the U.S., plus the investments we made on OMNOVA has really positioned us to take advantage of that upturn in the market. And I think that, along with the innovation in the portfolio, says that we fully expect that what's going on in Functional Solutions is sustainable. So the answer to that question is the GBP 150 million captures everything, and the GBP 350 million represents a sort of a run rate EBITDA with a normalized Nitrile margin/Acrylate business. Stephen, CapEx guidance?

CapEx -- thanks, Sebastian. So CapEx this year, GBP 80 million, GBP 90 million. What does that reflect? Perhaps GBP 30 million to GBP 40 million underlying SHE and sustenance, GBP 30 million perhaps of growth excluding NBR and the balance being the NBR completion of JOB 6 and the long lead items we've touched on for the 200 kt. So taking that and rolling it forward, if we allow for the GBP 30 million, GBP 40 million that we've guided for on sustenance historically for the larger portfolio, the 36 sites we've now got as underlying year-on-year. And you add on some growth CapEx for the other businesses, excluding NBR, perhaps 2030, let's see. And then you come to the sort of the step out investment, in some ways, akin to a small bolt-on acquisition in terms of capital spend that we're looking at, GBP 150 million, GBP 200 million. You should expect that to be incurred over the next 2 to 3 years. So you could probably start with your GBP 70 million to GBP 80 million and add on, let's say, GBP 60 million a year for the next few years as we bring that asset online 2022, 2023, 2024.

So that's helpful. Just to understand again on this Nitrile latex, it's the 60 kilotonnes next year for the addition, nothing in 2023 and then the start of a deployment of the 200 kilotonnes in 2024, is that fair?

I guess we're thinking probably by mid-2024, Sebastian, yes.

It's not finally finalized yet, Sebastian, because although we've ordered the long lead items, so the timetable is on there. We've got -- we're still finalizing the location, the citing and a few other negotiations around that. And there are a couple of options. So subject to completing those, the best view today is it would be mid-2024. So yes, you're right in saying that we will bring 60,000 tonnes on at the end of this year. We are doing which is in Malaysia, and it's an extension of our site in Pasir Gudang. We will also bring in '22 probably another 40,000 tonnes by a repurposing of some of our assets in Europe, and that's in -- particularly in Italy, which is the area that we will be looking to add NBR capacity to some of our existing reactors. And then, of course, the next tranche of capacity thereafter will be the new capacity we bring on, which currently, as Steve says, mid-2024.

That is helpful. That leads on to the last question that I had, which was on market total size and expected capacity over the next 2 to 3 years. Just could you refresh the memory on what the current size of Nitrile latex market is? And what the total industry capacity addition is that you would be expecting on a 2- to 3-year view?

Broadly speaking, the market has been growing, certainly since the beginning of the pandemic in excess of 20% per annum. And we expect it to continue to grow in double digits even after we come out of the pandemic. So -- and that's consistent with what it's done historically, and it's consistent with all this sort of market views and the glove manufacturers' views. And not only that, Sebastian, but we don't expect to see any dip post the pandemic because the demand is there and it's continuing to increase. In fact, we're seeing quite a lot of activity with respect to resilience. So we're seeing the U.S. and Europe starting to look at, well, can we become self-sufficient in producing some of this, say, personal protective equipment, just in case something else happens because these things were highlighted, of course, in the pandemic that they were quite dependent on the Asian supply for some of these. So there's a lot of things going on at the moment and a lot of moving parts. And if you superimpose on top of that the fact that Nitrile capacity is full today, but there are still new applications coming forward, and there's also still replacement going on with PVC and natural rubber that it's difficult to tie down. So we can very confidently say we think the growth is going to be double-digit plus. But for how long and how strong it remains and how quickly as that new capacity comes on that it will find new applications as well as the growth into existing ones, is always a little bit of -- I wouldn't say it's a best view that we give you at that time. So the overall market today is probably a little under 2 million tonnes of Nitrile latex. That's the end demand. And as I said, the growth rates, double digits and at this moment in time, everyone's sold out. In terms of the capacities that we see come online, I mean, we can probably take this offline better and have the discussion. But there are capacities coming online. Our competitors, LG, our competitors, [ Qumo ] and then ourselves have all announced that over the next 3 to 4 years, we will take on capacities. And then you have some Chinese capacity nominally coming on online over that period as well. But if you've got a 2 million tonne a year market, and it's growing at a minimum of 10% per annum, you need quite a bit of extra capacity. So it's very much a moving picture, and there's lots of variables in there. But -- and we'll keep updating you on that. And what we've said is that, certainly, for the rest of this year, it will remain very balanced. And then let's see where we go from there on. We think our capacity will come online pretty much at an appropriate time. We're not going over-the-top in terms of the fact that we're only bringing on the 200,000 tonnes. But as I said earlier in the presentation, we will have scope on that site, wherever that site is, to bring additional capacity on in different tranches as we go forward. So is there another question?

We have a question from -- yes, we have a question from Rikin Patel of Exane BNP Paribas.

Firstly, just a follow-up on Functional Solutions and the strong performance you've seen there in the first half. If I look back at 2019, in H2, I think that was roughly about a 45% weighting towards the second half in terms of EBITDA. And if I apply that to this year, it implies EBITDA of about $130 million or just above for the full year. Just curious if you think that is maybe a bit conservative given your comments around demand and sustainability of that at the moment and for the rest of the year? And just any comments on the road map for the trajectory into 2022 in Functional Solutions would be helpful as well. And then secondly, on the ESG targets you outlined today, appreciate there's probably a couple of answers to this. But in terms of the target to reduce scope 3 by 10%, if you could just quickly outline some of the key drivers behind that, that would be helpful.

Thank you very much. Let me -- I think this is a combination of all 3 of us on these questions. I'm going to ask Tim to pick up ESG because he leads some of those activities. Steve might comment on a few of the numbers, but just a little bit of an overview, first on Functional Solutions. Functional Solutions very much an area where we spend a lot of money on innovation. We've got a good pipeline of new products coming through. And we have a lot of technical support and sales. So here, we're trying to grow a very much a specialty portfolio, bespoke products, working very closely with the customer. 2019 wasn't -- as I mentioned before, wasn't the best year, but this is a very strong, robust and sustainable business. And when we bought OMNOVA, one of the driving forces behind buying OMNOVA was that they also had a strong Functional Solutions business, albeit it was primarily in the U.S., and we were primarily in Europe, hence, the synergies there. So putting those 2 businesses together, a lot of the synergy that came out of OMNOVA is today reflected in the Functional Solutions business, hence, the uplift as well as the additional EBITDA that's brought to the table. Again, as to the numbers in terms of where we would expect it to be, I'll get Stephen to comment. But as I said to the earlier question really, I think it was Sebastian's question, Functional Solutions, we don't see that as seasonal. We see it as underlying sustainable improvements. Whether we'll quite get to the numbers that you've done, because you also have to remember in comparing like-for-like with these businesses that the scope has changed somewhat as to how big the boxes are and what's in those boxes, but also you have the, what we call the premium, which is more biased towards the Performance Elastomers side of the business.

Okay. Thanks, Calum. So looking at seasonality, I would say that historically, we have talked to 55, 45. Clearly, there's an exceptional year that we're dealing with here. So that wouldn't prevail for 2021, partly because of the Nitriles margins that we've talked about in this presentation. But that 55, 45 has always been on a group-wide basis. And again, it's changed a little bit, as Calum says, with the introduction of OMNOVA. And I would suggest that perhaps for Functional Solutions in particular, it may be slightly higher H1, lower H2 relative to the -- that number I've just quoted. Why? Because some of the stuff going into construction and coatings has perhaps got a bit more seasonality in it than some of our other businesses that dampen it down when you get to the 55, 45 on a group level on a normal year. So I think the number you quoted was -- what did you say it was? Was it GBP 140 million? Did you say GBP 130 million?

Just GBP 130 million, yes.

GBP 130 million, yes, I mean, it's in that post code, but perhaps a little bit lower.

Thanks, Stephen. ESG, Tim, do you want to pick that one up?

Yes, sure. Rikin, you'll have seen that we've just published our sustainability report in the last week. And in that report, we've actually introduced a scope 3 analysis. So we've published our scope through our upstream scope 3 emissions. And we've made a commitment to reduce those upstream emissions by 10% by 2030. So the way we will do that is we've set out a very clear plan of where the majority of our raw materials and their scope 3 emissions. And we're able to, through the improvements in our supply chain and also working with partners in that supply chain, we know that the electrification and the energy improvements our suppliers are making will allow us to see improvements in our scope 3 raw materials. And that, we believe, will determine or will allow us to reduce by 10%. I think it's -- there aren't many companies that have actually stated a scope 3 emissions target. We're one of them clearly. And I think we're confident that whilst that's an ambitious target, it's a very important target, given the size of scope 3 emissions, but one that we can achieve in partnership with our suppliers.

Thanks, Tim. Melissa, I'm going to ask for one more question, then I'm going to sort of round it off with a few summary comments, if that's okay.

Yes, of course, go ahead.

No, is there another question on the line, Melissa?

We don't have any further questions. So I'm just [indiscernible] webcast.

All right. Okay. Well, let me just say a few concluding comments really. I think we've had a very strong first half. I think throughout the presentation, you've seen that across all 3 divisions that we're well ahead of where we were at the same period in '19 and the same period in '20, and demand remains strong. We are very focused on our internal investments and our organic growth. And although, we've talked a lot about Nitriles, there are other smaller projects that we'll be looking at within Functional Solutions and Industrial Specialities as well today. We're quite focused on our cost base. So you can see that we have kept that well under control, particularly during the pandemic, but also today we remain very focused on keeping that in good shape. And then we're also looking at the M&A opportunities that they are around. And I think the question that was asked was, are we open for business today? And the answer is yes, absolutely. There are, of course, the changes coming on with the senior management. So I myself. But I will be around and be supporting Michael, but I would say that we are very fortunate to have secured a very strong leader going forward. So that bodes well for the future and an exciting opportunity for Michael to bring the company forward. So on that note, I'd like to say thank you to everyone for attending today. As always, we are available if there's any questions offline that wants to be raised, and I look forward to speaking to you on the next occasion. Thank you very much.