Synthomer plc (SYNT) Earnings Call Transcript & Summary

Good morning, and a warm welcome to everyone in the room and to all of you joining us today online. As usual, I'm here with Lily Liu, our CFO; and Faisal Tabbah, who joined us as the Head of Investor Relations at the end of the year is also with us today. For lots of reasons, 2022 was quite a year for Synthomer. So today, as we are reviewing our financial performance, we want to spend some time reminding you about the new strategy we have started to deliver on and how it underpins our confidence for the future. Our agenda this morning will be familiar to all of you, starting with an introduction from me, followed by Lily, running through the financials before I then come back to update our strategic priorities and outlook for 2023. When I stood up at the start of 2022, I reported a robust without doubt, an exceptional year for Synthomer. In 2021, sales had increased by an extraordinary 47% and EBITDA had doubled to GBP 522 million, reflecting the high demand for NBR based medical glass driven by the pandemic. Our expectations at the start of the year were for trading conditions to normalize, and we were under no illusions that the COVID impact would reverse. However, what we hadn't anticipated was just how pronounced the destocking in our NBR business would be nor the eroding macroeconomic and geopolitical conditions with its severe impact on energy costs and the supply chain that we have seen as the year has progressed. Encouragingly, excluding Performance Elastomers, all parts of the business made good progress during the first half of the year, leading to a period of robust trading overall. And in the second half of the year, when volumes started to weaken significantly, we saw margins and pricing hold up well in our specialty businesses. This is a positive indication for the future and general demand and volumes return to more normal levels again. Free cash flow was also strong, increasing to GBP 131 million in H2, supported by significant cost and net working capital reductions. Unfortunately, the deteriorating economic environment affected most parts of our business in the second half of the year. During the fourth quarter, its impact was especially acute in our Adhesives Technologies business, further compounded by supply chain issues constraining access to raw materials, site reliability issues and escalating energy costs in Europe. These factors, combined with the revised view on capacity to the time of the acquisition mean that we are behind plan, resulting in a goodwill impairment of GBP 134 million. Despite this setback, we are well advanced with addressing various operational issues and believe strongly in the future prospects of this business due to its leading positions in attractive end markets, critical mass, balanced customer structure and global exposure. I will come to this later on. Amid the challenges we have seen in 2022, we have taken decisive action during the year to ensure that Synthomer can navigate the period of lower growth and deliver consistent progress in the future. We implemented a new strategy to make us more end market and customer focused with innovation and sustainability at the center. We have identified those areas that we don't have sufficient scale to drive sustainable growth, and we will exit these noncore businesses over time. As a first and fast step in this process, we announced the disposal of our film and laminates business in December, which raised a healthy $267 million of net proceeds. We have also strengthened our financial platform by completing a refinancing with our banks that provides sufficient headroom to support our business plan going forward. We agreed a new $480 million RCF in place, providing additional liquidity should we need it. And we've made good progress to reduce working capital and costs. We are rigorously focused on efficiencies, and we remain on track to deliver cash savings of between GBP 150 million and GBP 200 million by the end of 2023. Finally, we have reprioritized where we allocate capital, ensuring that it is directed to those areas where opportunity is the greatest. So despite all the challenges, I am pleased with the strong strategic progress that we have made during the year. We are evolving our business to become more specialty-weighted aligned with attractive GDP growth markets that are supported by megatrends. We have a global footprint, not least an expanded presence in the U.S. with significant depth and diversity in our portfolio. I'm confident that the actions we have taken to-date, combined with the self-help measures that we are continuing to implement will enable us to manage a weaker demand environment and position us for strong profitable growth when market conditions start to improve, which we expect to start happening in the second half of this year. The medium-term opportunities for this business continue to be very compelling, not least from the normalization in NBR. I will come back to talk more about that shortly, but let me stop here and hand over to Lily.

And many thanks, Michael, and good morning, everyone. When I stood up present our interim results in August, I said that on joining Synthomer, I had struck by 2 things in particular: Firstly, the scale of transformation in recent years; and secondly, the sheer impact of medical glove destocking. Now today, I will add one more, the number and pace of positive changes, both strategic and operational that have been implanted across the business despite all the headwinds we faced during 2022. I'm thankful to our people. Now in this section, I'll walk you through how the group has performed, excluding our now divested laminates and film business. I'll be doing that based on our old divisional structure before turning on to balance sheet and cash flow actions. Now turning on to the slide. The group revenue was up by 9.7% on constant currency for the continuing business with a like-for-like volume decline of 17%. The AT acquisition, which we completed on 1st of April last year, added 18.3% to group revenue. Year-on-year, we saw a 50% decline on EBITDA from GBP 498 million in 2021 to GBP 249 million for the continuing business. Including the Laminates, Films and Coated Fabrics business, which was successfully divested on 28 February, 23, overall group EBITDA for '22 was GBP 265 million, in line with our post-close update in January. This disposal is a proof of our new strategy in motion and clearly helped towards improving our net debt position. Our interest cost was higher, reflecting the acquisition debt and also the rising interest rate environment. Our effective tax rate was 22.5%, in line with our guidance. As Michael mentioned a moment ago, special items this year includes GBP 134 million noncash Adhesive Technology impairment, making the valuation on our balance sheet more conservative in line with micro and company-specific challenges experienced in that division. Underlying earnings per share declined to 20.6p from exceptional 75.2p in 2021. And our year-end net debt just over GBP 1 billion with a leverage of 3.7x. The $262 million disposal proceeds were used to pay this down further. Now moving on to the next slide. At a very high level, our 2022 result from continuing operations is a reflection of significant decline in our PE business due to the medical glove destocking, which reduced our EBITDA by GBP 272 million shown as point 2 on the chart. And beyond PE, 2022 was very much a game of 2 halves, especially for our speciality businesses. As demonstrated as block 3 on the chart, EBITDA from Functional Solutions, Industrial Specialities and Acrylate Monomers were all ahead of 2021 at the half year point. But a significant macro slowdown that accelerated during second half affected them all, which is shown on Block 4. Notwithstanding this, we were pleased that they were able to partially mitigate the effect of lower end use demand through successful pricing actions, including robust raw material cost pass-through. The acquired AT business contributed 9 months of the year, which is demonstrated as block 5. However, its earnings was also significantly affected by the macro environment in the fourth quarter, compounded by its own operational challenges, which I'll comment in. Overall, continuing EBITDA for the year was split 65-35 between first and second half, and Q3 was stronger than Q4. Let's move on to division by division. Functional Solutions is a resilient business. In '22, we delivered a robust performance with revenue 8.5% higher than 21% on constant currency. And EBITDA for the year was GBP 128 million, 9.4% down from 2021 with a margin of 12.8%. The Energy Solutions business in the portfolio performed especially strong in the year. Now throughout the year, Functional Solutions managed successful price actions and passed on cost inflation to customers. This impact plus the mix improvement from exiting tolling volume, so price/mix benefit reaching 18% for the year. Sustainability and innovation continue to be major drivers for the growth of this business. Moving on to Industrial Specialities. The business continued to deliver both top line and bottom line growth versus 2021. Our ongoing focus on pricing and margin management as well as the highly specialist nature of our product, helped to drive continued growth in that part of the business. Revenue were up 18.7% on constant currency, with EBITDA increase by about 36.8% to GBP 31.8 million. And again, we have managed partial inflation with our ability to put through price increases, a testament to the niche high-value market position that we occupy and no exposure to attractive end market. The sale of our Laminates, Films, and Coated Fabrics business completed on 28 February '23. It had a total revenue of GBP 201 million and an EBITDA of GBP 15.9 million and represented about half of the noncore asset that we identified at CMD and 4 operating sites. Now moving on to Adhesives. AT had a good start in Q2, contributing GBP 18.3 million of EBITDA for that quarter. We're firmly on track to deliver the increased cost synergies that we talked about at the CMD last year. In Q3, we saw a robust performance, but Q4 was impacted by a number of factors combined, which reduced earnings considerably. Adhesive volume held up against macro headwinds longer than all our other businesses, but that started to turn as Q4 went [indiscernible]. This was coupled with supplier plant shutdown impacting feedstock and the number of shutdowns of our own operations due to the extreme weather in the U.S. in that quarter. We were also challenged by less-than-expected plant capacity from what we had assumed at the time we acquired the business. Taken together with the macro impact, the division delivered a total revenue of GBP 391 million and EBITDA of GBP 39.5 million, a margin of 10.1% in 2022, which was below our expectations. Having reviewed all of the above factors, namely macro, site reliability, supply chain issues and below expectation board capacity, we have concluded that it is appropriate to take GBP 134 million noncash impairment, which writes off substantially all of the acquisition goodwill. Mike will come on to talk about the actions we're taking in the new Adhesive Solutions division to address the supply and site reliability issues and how we plan to capture the strategic opportunities that we see in this business. Now moving on to Performance Elastomers. EBITDA in this business declined by 84% to GBP 49.1 million. The reduction versus 2021 was 2/3 from margin and 1/3 from volume. There was also a significant reduction versus the pre-COVID 2019 year when we earned GBP 96 million, which highlight the magnitude of demand reduction from destocking that we have to manage in our business. In response, we suspended our capacity investment and focus on cost savings and process improvement programs. At the current level, capacity utilization is around 35% to 40%, resulted into breakeven position for H2 '22 and also Q1 '23. We continue to believe that any meaningful market recovery is not likely to happen before the end of '23. Our NBR business, namely paper, carpet, compounds and foam were also impacted by the macro slowdown in H2. Cost savings from site rationalization partially offset the impact. Last but not least, our AM business, the extreme supply and demand imbalance that we have seen since 2021 and from which we have benefited from continue to normalize. However, the business still posted strong revenue of GBP 98 million and the EBITDA of GBP 22 million, with an EBITDA margin of 22.2%. The unit margin in that business continue to normalize due to raw material and energy cost inflation. And we have also seen more supply coming from outside of Europe. This concludes our divisional review. Let me now move on to cash flow and balance sheet. At the CMD last year, we set ourselves a target to deliver GBP 150 million to GBP 200 million cash savings by the end of 2023 from 4 areas: cost savings, working capital reduction, CapEx reduction and dividend suspension, and we list them on the left side of the chart. In H2 '22, we reduced our headcount by about 100 from our divisional restructuring and other cost measures. This would give us a run rate saving around GBP 10 million under further cost measures come in '23. As '22 was a story of 2 halves that I explained a moment ago, we're also showing free cash flow by H1 and H2 on the slide, which I'll talk you through now. While we posted a full year free cash flow of GBP 69 million, I'm pleased to report that we generated GBP 131 million free cash flow in the second half with an accelerated trend during the half despite a much more challenging macro and business environment. Our working capital reduced by GBP 147 million in the second half, of which GBP 83 million was from the factoring program. The rest is from rigorous management on inventory and other cash items as well as moderating volumes. Our inventory reduced by 16% for second half from both price and volume. Our CapEx spend for the whole year was GBP 90 million, down considerably from the plan at the start of the year when we envisaged it to be closer to GBP 150 million. And now EUR 60 million cash spend reduction, we expect '23 to be in the range of GBP 75 million to GBP 85 million spend. I would draw your attention to that. Our current CapEx to depreciation level is around 1x. While we prioritize cash savings to strengthen our balance sheet, we'll also need to invest in our business at a ratio at or above 1.1x to deliver growth. I expect full year '23 interest to be around GBP 65 million to GBP 70 million for P&L and cash interest charge to be slightly lower. To complete this slide, I would highlight again that we commit to restore our regular dividend to our shareholders once leverage return to appropriate levels. We recognize that the strengthened balance sheet is a prerequisite for the delivery of our strategy. Whilst our net debt leverage ratio have risen significantly due to the acquisition debt, the impact from medical glove destocking and macro slowdown, we have a clear commitment to reduce leverage to our 1 to 2x target range in the medium term. We have taken decisive steps in strengthening our balance sheet as trading conditions deteriorated in the second half. In October '22, you will remember we arranged a GBP 450 million U.K. export finance facility. In December, we signed a 2-year committed EUR 200 million receivable financing facility to help us manage cash position at a competitive rate, benefiting from our Board and Bluechip customer base. In February, we completed the sale of the laminate films business to Surteco and the proceeds were used to pay down debt. And we have recently signed a new $480 million RCF facility with our core relationship banks. This RCF is planned to be lightly drawn or undrawn. In light of the uncertainty that we've seen and for prudence purpose, as part of the new RCF, we widened our covenant to 6x, 5x and 4.25x for the 3 testing period next and 3.5x thereafter. Our U.K. facility was amended to the same levels. We also paid down the 2 term loans totaling $560 million would expire in 2024. Now following the new facility and the term loan reduction, our pro forma liquidity is around GBP 500 million, including receivable financing. We continue to review our financing arrangement, including the bond to ensure they align to our strategy and the scale of business going forward. We remain very focused on strengthening our balance sheet through the year, supported by the work we're doing to achieve between GBP 150 million to GBP 200 million cash savings by the end of '23. Overall, we experienced a perfect storm in 2022. And in '23, we expect to see beginning of the recovery, particularly from the second half as our self-help actions take effect and market conditions begin to improve as Michael will talk about it in more detail and then talk about '24 and beyond. Thank you so much. And with that, I'll pass it back over to Michael.

Thank you very much, Lily. At our Capital Market Day in October, I presented our plan to take Synthomer forward. This was framed around 3 areas: focus, strengthen and grow. Let me recap quickly on some of the key aspects, starting with focus. As you know, Synthomer has expanded significantly over the last 5 years, largely through acquisition. This has given us some exciting leadership positions and a strong basis from which to grow our market share. Within coatings, construction and adhesives end markets, we are focused on higher-margin, higher-growth specialty areas, supported by structural mega trends. We also expect to see significant upside from health and protection when NBR destocking comes to an end. As I mentioned at the start, we will exit those areas that are either more cyclical or where we don't have sufficient scale to drive sufficient growth. This portfolio rationalization won't happen overnight. These are fundamentally good businesses, so we will not exit them below a proper valuation, but by doing so, Synthomer will become a less complex, more efficient business that is closer to its customers and more embedded at an earlier stage of the product development cycle. We will also have better geographical balance with a portfolio that is more specialty weighted, giving us more resilient margins and greater pricing power. The disposal of our film and laminates business was a significant first step out in this -- forward in this transition. And between the divestment of its 4 sites and 2 closures in Finland and Malaysia, we have reduced our number of sites already from 43 to 37 this year, taking us closer to the target of less than 30. Next what we need to strengthen. I mentioned earlier that innovation and sustainability needs to be at the heart of what we do. Regulation is driving demand for cleaner, more environmentally-friendly solutions and renewable raw materials. Whilst we are well positioned to meet that demand today, we will continue to focus on innovation to capture more of it. Furthermore, reducing the impact that our operations have on the planet is a critical objective which I'll come back to. We will also optimize our network to enhance operational excellence. And finally, we will continue to focus on returning group leverage to between 1 and 2x. And then there is growth to come back. Just as our evolution over the last 5 years has created opportunities to streamline our portfolio, we also see a huge opportunity to realize significant value from being a larger scale, more focused business. We are driven by a clear set of strategic objectives, which includes delivering an attractive return on invested capital, consistent growth, increasing margins and a strong cash flow. So in conclusion, we remain very focused on our 5 strategic pillars. Those are to drive organic growth, supported by rigorous and consistent portfolio management, operational and commercial excellence and a differentiated approach on how and where we allocate capital. And we will ensure we will continue to focus on improving diversity and inclusion across the business. Let me now run through each of our new 3 divisions in a little more detail and give you a clear sense of both our near- and medium-term priorities. Within Coatings and Construction Solutions, we have strong positions in attractive end markets such as intumescent coatings, insulation and waterproofing that are relatively resilient and growing at GDP+. This is where increased regulation underpins demand for water-based polymers, which combined with continued urbanization, supports our growth outlook. Our leadership positions in Europe are opening up more opportunities with customers in Asia and the U.S. where markets are much more fragmented. We have a healthy innovation pipeline that is focused on areas such as sustainability and energy efficiency. The twin benefits of geographic expansion and further innovation support our outlook for positive growth in this division over the coming years. Near term, the weaker macro environment impacted demand during the second half of 2022, and this has continued into the current year in line with global industry trends. As economic conditions improve, we expect demand to return supported by the work on innovation and cost leadership we are doing now in downturn. Whilst visibility is relatively limited, we are anticipating the economy to improve in the second half, which will support our progress for the year as a whole. Our key midterm priorities are to drive organic growth by expanding existing relationships with customers in Europe into the U.S. and Asia. We will also build -- continue to build our innovation pipeline to support future growth. And we are continuing to program of our site improvements to enhance our efficiency and increase productivity. We talked to you extensively about Adhesives in October. Having now owned this business for almost a year, we are confident that the opportunities for future growth remain compelling. It enjoys #1 and 2 positions in key niche markets across the U.S. and Europe, serving a portfolio of over 300 customers, well balanced between global key accounts and regional champions. As we continue to integrate this division with the broader Synthomer business, we are building a meaningful pipeline of revenue synergies, mirrored in our new division structure that caters for the Adhesives end market in a focused way. And here, we also have an exciting innovation pipeline, which will enable us to respond to the growing requirement for sustainable and renewable products. Integrating this division has inevitably been a major priority and a lot of progress has been made, highlighted by our progress in capturing $25 million to $30 million of synergies and bringing the Transition Service Agreement with Eastman to an end in November 2022. However, as said, reduced market demand, operational issues and the ballooning energy costs in Europe resulted in a much weaker Q4 performance, which we expect to continue in the first half, whilst we deliver our internal operational countermeasures and prepare ourselves to economic conditions to improve. These issues have highlighted the need for some reported remedial action, which we are on with. We are reprioritizing CapEx to debottleneck assets for high-margin solutions and enhanced plant and supply chain reliability. We are also taking steps to broaden our access to raw materials. As Lily mentioned, we have made good progress to reduce working capital to typical group levels. And we have continued to make changes to the team inherited from Eastman, particularly in operations and procurement whilst implementing our own standards of operational excellence. We have also embarked on the program to significantly reduce costs at our 2 key sites in Europe and the U.S. as well as the shared site with Eastman in Longview, Texas. The main focus for our AS division this year is to increase operation and supply chain reliability and return it back to previously expected profitability levels. There's relatively little new to say about health and protection. Exceptionally high demand in 2021, essentially delivered in 1 year what we would normally expect to see in 3. You can see that clearly reflected in our performance. However, it is important to stress that the growth fundamentals for this business remain firmly intact. Synthomer has a leadership position in a GBP 3 billion glove market, which is growing at 6% plus per annum. Demand for hygiene has grown post the pandemic, particularly in emerging markets. Whilst NBR is more cyclical in nature, it remains a good business for Synthomer. Our guidance for NBR destocking to prevail until the end of '23 is unchanged, and we have materially reduced capacity and cost as a result. When demand starts to return, we expect this part of the business to recover very quickly, benefiting from a lower cost base and our leading market position. Whilst we believe that margins and volumes in the industry have reached the bottom, we still don't see a clear path to recovery yet. Our Performance Materials businesses include areas such as NBR or -- SBR sorry, or compounds for the papa carpet markets or inorganic chemistry. These are smaller, more cyclical markets for Synthomer that are not core to our strategy. As you would expect, they too have been impacted by the weak macro, again, indicating a first -- a weak first half but stronger second. The main focus for our HPPM division this year is on rigorous cost control and capacity management plus strategic measures for the noncore units. We have continued to make good progress during the year, ensuring that we have high standards of operation and manufacturing excellence across the group. This has seen us upgrading legacy parts of the business as well as recently acquired assets, creating significant improvements to efficiency and output. For example, at our site in Worms, Germany, we have invested in debottlenecking helping to reduce the amount of or the amount of downtime overall. At Jefferson Hills, Pennsylvania, our actions are helping to enhance site reliability, increasing manufacturing output. At Mogadore facility in Ohio, we have successfully unlocked product mix benefits. And at Kluang, in Malaysia, we have been able to recognize improvements both in process innovation and capacity management. Turning to innovation and sustainability. I mentioned at the start that they sit at the heart of everything what we do. The volume of products launched within the last 5 years are protected by a patent represented 20% of total group sales in line with our group target. And the proportion of products that provide our customers with sustainability benefits was 50% highlighting the growing opportunity that we have in this area. Our efforts are recognized by all the leading rating agencies listed along the bottom of the slide, notably a AA rating from MSCI, which was awarded to Synthomer in October of last year. I'm also pleased with the progress that we have made to reduce our Scope 1 and 2 carbon emissions with a 36% improvement over the 2019 baseline. We want to go further and have increased our target to 47% by 2030. The same applies to the proportion of female leaders that we have in the business. Whilst we have made strong progress by increasing this to 25% from only 9% in 2019, we want to do more and have set ourselves a target of 40% by 2030. In terms of outlook, as I have touched on already, the trends that we saw in the fourth quarter of 2022 have continued through the first quarter of 2023 with subdued levels of demand. As we look to the rest of the year, visibility is limited. And of course, we are mindful of the significant geopolitical and macroeconomic uncertainties that persist. We also expect destocking in NBR to continue during 2023, as we have previously indicated. As things stand, we anticipate our performance to be weighted to the second half of the year as the benefits of our operational and cost actions materialize further and market conditions begin to approve, a view that is shared by our industry peers. Beyond 2023, I'm confident that Synthomer is well positioned for profitable growth. This will be supported by a recovery in health and protection as the destocking ends and the demand environment normalizes. As a reminder, the Performance Elastomers was generating pre-pandemic EBITDA of GBP 96 million. There will also be upside from operational improvements within adhesives and the recovery in demand. Again, worth bearing in mind that the legacy Adhesives business was generating about GBP 70 million of full year EBITDA before the Q4 downturn, which compares to the 9 months 2022 number of GBP 39.5 million and before taking synergies into account. The macroeconomic impact of the business has been significant. And as that starts to recover, this will support good earnings growth across this year's AS and Health & Protection, our 3 largest businesses. So in summary, it has been a challenging year for Synthomer. Whilst we benefited from a robust first half, excluding Health and Protection, demand slowed in line with the macro environment during the third and fourth quarters. We are pleased with how margins and pricing held up in the more specialty areas of the business, and cash generation was very strong in the final several months of 2022. We have responded with decisive actions to safeguard our business and position it for future growth and the demand environment improves. We have shored up our financial platform with new agreements with UKEF and with our major banks. We are executing our new strategy with the disposal of film and laminates, helping to reduce complexity in our portfolio, whilst increase our focus on higher-growth markets. The proceeds will support our objective to return leverage to between 1 and 2x. And we have made the business more efficient and are firmly on track to our target of GBP 150 million to GBP 200 million of cash savings by the end of this year. I remain very confident in Synthomer's ability to meet the medium-term objectives that we set out in October with a target to achieve mid-single-digit growth and EBITDA margins of 15%. There's a lot to do, but we have a clear plan and the path to get there. Let me stop here now and Lily and I would be very happy to take your questions.

I had a few questions regarding your capital structure. So is the new revolver secured or unsecured?

Unsecured.

Okay. So that's in line with the previous term debt. You paid...

Not term debt, previous RCF.

Okay. And then you paid back all your term loans with the disposable proceeds. How much cash do you have as of February?

Just over GBP 100 million in the business. I would draw your attention to the GBP 500 million we -- I just mentioned. That is the liquidity position, including headrooms from the RCF, our own debt -- sorry, our own cash.

Okay. So of that GBP 500 million, you've got GBP 100 million of cash on balance sheet.

Yes.

Yes.

And then what's the other GBP 400 million?

It's the headrooms from the undrawn debt.

So from the factoring facility, is that right?

The RCF, $480 million is the RCF.

No, the RCF and also included the...

Okay. The RCF is $480 million, right? So 400-ish of sterling. So that leaves you basically -- so the maturity of that is May 2025, right?

Correct.

So it's parked in front of the unsecured bond. So you'd like to do a wholesale refinancing all that sometime down the road. It comes current in May 2024. So you'd probably want it done before then. So you've got a runway of, call it, 1.5 years.

That's right.

Yes. That's about right. Yes.

Fair enough. And then why didn't you consider maybe doing like a secured piece of kind of revolving debt?

We have considered all the options, as you would imagine us doing when we decided to go down the unsecured RCF look. We are [indiscernible] business and we do see the current challenging environment is temporary, as we mentioned in the presentation, and we do believe underlying that we have strong businesses and all banks give us that level of support and support us with the unsecured debt.

Okay. Fair enough. And then can I just ask you a question regarding your free cash flow guidance for this year. So what do you expect to spend in CapEx? How much of that would be maintenance? Interest, you already spoke about, you said GBP 65 million to GBP 70 million, cash a little bit lower. What do you think about cash taxes, potential working capital release? What are your pension top-ups and potentially your cash restructuring charges as well?

I can start with the CapEx, maybe CapEx should be about EUR 80 million, something like this for this year, a little bit less, but more or less in line of last year. And probably about half of it is maintenance and half of it would be growth.

Yes. So if I take the other items one by one, you asked about cash tax and interest. I think cash tax somewhere around the GBP 15 million, GBP 20 million level for this year. And interest, I just mentioned, GBP 65 million to GBP 70 million, that's P&L and cash element will be smaller than the GBP 65 million to GBP 70 million. You asked about special items and cash spent there. In our appendix, I think we have given some technical guidance, which is Slide 27, and there we said, there's GBP 38 million-ish that we need to pay for the EU fine that is planned for Q3 this year. And it's about around GBP 20 million of opening balance sheet adjustment with the AT acquisition, and there's some sort of previously announced restructuring site closure activities that we expect to spend sort of high teens this year. So that covers your special items. In terms of pension, and we expect pension to be substantially lower than the current year pension sort of contribution. So I think current year or previous year is GBP 20-odd million, and you should assume that is going to be substantially reduced from that level. And we talk about -- Michael talked about CapEx, I think that's everything on your list. Clearly, you have to factor the disposal proceed.

I had one more, about working capital.

Of course, working capital, look, there is -- so EUR 200 million receivable financing will utilize about EUR 83 million in 2022, and we expect to utilize substantially all of that facility in this year. On top of it working capital, of course, it depends on the activity level as well. So if activity level goes up substantially in the second half of the year, that is a good problem for us to have. But we are expecting to continue to optimize our working capital position, especially in the AT businesses.

I think this GBP 150 million to GBP 200 million cash savings, that's pretty much achieved without additional net working capital. I think it's important to note that we don't want to -- as Lily says, if the activity in the second half, like the industry expects is going up again, we will need some additional net working capital. So that's what we would need. But we have shown this year, if things are going down, we were ready to manage it, and we generated in the last 4 months, more than GBP 200 million of cash. So I think we are ready to react if things happen. And I would be very happy to invest a bit in net working capital.

Charlie Webb here from Morgan Stanley. Maybe a couple of questions. So obviously, I completely understand the view around NBR latex to take a cautious stance. But some of your customers are starting to talk a slightly more cautiously optimistic tune around where demand might go. Are you seeing any of those -- having any of those conversations with the Malaysian glove manufacturers that is sequentially constructive or is it still very much wait and see at this stage? Yes, first question.

Yes, I'll take this first one. We have extensive discussions with our customers and all kinds of industry players in Malaysia. I just -- at one point, 1 year ago, I still said that recovery is kind of around the corner of NBR. And in May of last year, I decided to kind of take the emergency break because it just didn't come. And I think we should take a cautious approach, and that's why we restate our statement that it will not come back before the end of '23. But if you want to have an optimistic look, there are a few sites that it looks a bit better than probably 6 months ago. We are seeing, as I mentioned in my speech before, I really believe that margins and volumes have reached the bottom. That's now confirmed since many months. And if you look the logic of the supply chain because as said, we are at 35% to 40% capacity utilization. And as you know, from [indiscernible] results and other public company results, they are making losses right now. Now that is not sustainable. So I truly believe that we have reached the bottom. I can see on our customers in the U.S. There are a few shoots coming up, but I think it is too early to call that we see the recovery. But if you ask me my view compared to 6 months ago, yes, it is slightly more positive.

And then maybe second question, just on Adhesive Technologies. You obviously mentioned plant issues, supply chain issues that hindered your Q4 performance. Maybe you can just elaborate a little bit what those are, how quickly you expect to resolve them? And maybe how much they weighed on the result in the second half for that division?

Yes. Yes. I think I'll start with the last point. I mean if you look -- if you make the gap now between the, let's say, GBP 70 million, what we delivered now. So it's somewhere between GBP 15 million and GBP 20 million over the year, that is the gap that we are facing. Now you put this also in relation with the gap we are facing on NBR, which is GBP 272 million, not just to put things in perspective where are really the big things. Why do we take this impairment? I think there are really 4 reasons. #1 is the public world, it's a different one than when we evaluated this business 2 years ago. There are different financing costs. There are different growth rates. There's different conditions. So I think it's a more prudent world, and that's why also the amount that we are taking off now is more or less the goodwill that the business has carried. So that's the more general comment. Then more specific 3 reasons; #1, my capacity is missing, Eastman had a big project in Middelburg in Holland, and they did invest capital into this, but technically, it just doesn't fully materialize. Now this we have to work on, these are very technical issues. That was a debottlenecking of a profitable business line, but it just doesn't materialize really. And that was basically before our time, but we don't get the benefits. So that was included in the business plan, but it doesn't really kick in, reason #1. Reason #2 is product mix. The mix is a different mix, what we want now than was probably in the business plan. So that is a little change there. And the reason #3 is probably really in the -- there was a slightly more optimist view on the capacity than what we have now about this business. So I think these are the 3 reasons of operational side. What do we do about it? We have our operational excellence programs. I mentioned before in Jefferson, the big sites of Jefferson and Middelburg. Our operational excellence teams are there. We have some -- as I also mentioned, we have changed a bit on the personnel, how we changed the approach. I think we have a more specialty view on the business than probably Eastman had at the time. I think that's why we are pushing more the profitable areas like the APOs, the rosins, the PMR product line. So I think the mix will go more in our favor. And to your last point about the timing, I believe these are really operational issues. And sometimes, I don't want to bore you with this, but sometimes you talk about pumps not working. We talk about certain measurement devices not working. And that came from the past of Eastman. These things are reasonably easy to resolve. So I would believe that on all those operational issues, we would make basically months by month, we will progress. And usually another question now would be how much does it cost? And I would think it will be probably about GBP 10 million to GBP 15 million just as kind of incremental improvement. That's an amount that the business can absorb because it's still -- yes, that's a -- it's a reasonable amount. But that is some CapEx that will be needed to debottleneck the profitable areas.

Sorry, just in terms of the kind of Q3 into Q4 development, what was the [indiscernible] for that?

It was slightly low. Q4 was -- it was really Q2, Q3, Q4. And Q4 was very little profitability at the end. So if you take the GBP 18.3 million, Lily has mentioned in Q2, and then you can take it basically down and was barely profitable in Q4, which has also impacted, as we said, by our internal, by all those capacity supply chain, raw material access issues, but also by the demand, which was weak in Q4. More questions yet, Chetan?

Chetan from JPMorgan. Just following back on the Adhesives Technologies' question. I mean, given all these operational issues, lower capacity, can't you hold back from paying that GBP 20 million that you need to pay to Eastman for finalization adjustment. Is that possible? Because clearly, Q4 seems like just around breakeven. We thought this business was GBP 70 million or something in terms of EBITDA.

That's right. That's right. I mean, we started all those issues. To be honest, I think it will be very difficult to get back to Eastman. The contracts are not made for this. So it will be difficult as the answer. I think we have to take it in our own hands, which we have done, and I'm also very confident that we are going to fix those things. And not in 2 years' time, as I said before, months by months. I think we have to help ourselves and Eastman will not [indiscernible]. But Eastman, I think we have a very constructive dialogue with this when I was talking to the CEO of Eastman last week, I told him that we do have a few issues. I told them that we are in the same boat of this because in Longview, Texas, we are -- it's a shared site. So I think we have mutual interest to improve the situation. Jefferson, Middelburg, they're ours, so we have to help ourselves. But in Longview, Texas also in regards to the raw material access, I mean, yes, we are really in the same boat. And I think he clearly understood, and I'm very confident that we will find solutions.

The second question is usually in your construction and paints sort of business, Q2 would be like the peak quarter of the year, this season. Are you seeing any activity which indicate that seasonal pickup yet or is it still relatively low?

I think we will still see a seasonal pickup because the paint season is coming. I think the seasonal -- the seasonality is still there, but I just think it's like we have said before, it's just a lower level than it has been before. I think you can really copy all our customers, all our peers, we all see the same levels. If you look on a regional basis, I believe that unlike maybe 4, 5, 6 weeks ago, I believe that Europe is coming up. We see positive signs in Europe, whilst in the U.S., probably they are a little bit behind us. They were holding on much longer and I think the U.S. is more in a weaker position now. But overall, basically, Q4 is Q1, but we do expect in Q2, I think the seasonality is not gone at all, but it is on a slightly lower level.

Okay. And last question was all the key moving parts you discussed about the free cash flow. But what is missing is what is the earnings number that we should be going with? Because clearly, that makes a big difference to where we end up in terms of leverage. So I mean, given your comment around Q1, if I'm correct, maybe the second half, continuing operations, EBITDA should be, what, like GBP 85 million. So how are you thinking about that into first half and second half in terms of recovery from that number.

I think to be on a reasonably logic and also prudent, conservative model because I think some participants in the industry, they are a little bit too optimist out forward because you have to see proof point. And I think it's very difficult in our industry to say now that in July, August, September, things will massively improve. I think it's better to help ourselves, reduce your cost base, do all the homework and when it improves, then you are there and then you make real money. So I think we should take a little bit prudent approach. And if you take Q4, then you can go Q4 going forward, so you take basically 4x Q4 and then certainly, there's little upside coming from a little industry recovery. We're also factoring and coming also from our self-help measures. I think that's about the mathematic and logic I would approach.

It's Maggie Schooley from Stifel. You spoke briefly about the noncore portfolio and further divestments taking a while. I appreciate that they will take a while. But if you could just give us an update on various actions you're taking on SBR or what you're thinking on the remaining portfolio just we have some understanding of timing and if we should expect anything in this year?

I would say there are about 3 phases, 3 stages for this. And having said that, it takes long, but I think with our films and laminates, we are pretty fast, pretty very fast. So I think that was the first one. That was a sizable one because GBP 267 million they moved the needle. So that was the first one, I would call it wave 1. Then comes wave 2, and these are projects where we are currently working on. These are smaller ones. And if you want the number, that's probably proceeds of some GBP 70 million, GBP 80 million, probably this side of neighborhood. These are still reasonably easily to separate, these are businesses and I mentioned them in the speech. These are businesses which can be separated. They are single site, so we could again reduce complexity, and we could still get some proceeds helping the strategy and helping the balance sheet as well. So here, I will talk about months, yes, until we have a conclusion one way or the other, because again, we will not give businesses away because also these businesses are very good businesses with very good people in very good factories. So yes, but count into the second half of the year, but that is work in progress. And then the last bit, the phase 3, these are the more complex ones, like we said at the Capital Market Day and SBR is the biggest one there because they have some implications within the factories. There you have to do this famous disentanglement. Also on this disentanglement project, mainly in Europe, we are working on with full speed, but that you don't lose value and you don't kind of drag down, you have to separate these issues. And these are very operational and -- it's very hard work, and you have to move then things from plant to plant. So we are working on this, but this will take a little bit lower. But I can confirm to you that we are online. Everything is consistent with what we have said. We are working on this, mainly SPR disentanglement, and that would then be another big one. Also here, you have to think maybe there's divestment is a solution, but you can also think about joint venturing, depends on a bit of the partner. Taking some upside going out over time. I think these are all models we have in our mind, but right now, we are working on the operational issues of disentanglement. No more questions? Yes, [indiscernible]

So when I add up all those free cash flow items, your hurdle is kind of GBP 250 million to not burn cash pre-factoring. Is that right?

What do you mean by that?

The EBITDA you need to generate in order not to burn cash this year is GBP 250 million.

Yes.

And then in the back pocket, you've got GBP 117 million or so potential factoring proceeds?

On top of the GBP 80 million to...

[indiscernible] So really GBP 250 million. So what was the LQA for the fourth quarter that you were alluding to before? You’re your EBITDA in the fourth quarter times 4. If the market's bombed out, it doesn't recover in the second half of the year, dry stocking or whatever. So what's that EBITDA LTM? If I took the fourth quarter times 4.

You mean last Q4...

Yes or Q4 and Q1 times 2, roll it over, how much is that?

So if you do Q4 times 4...

GBP 35 million to GBP 40 million times 4.

Times 4. And then you have to -- you need to allow for self-help actions that generate benefit, and we have already generated -- have already got 100 heads sort of leaving the business, left the business, there's more to come.

So under your budget with the factoring proceeds, it's pretty unlikely you're going to burn cash. I don't want to put words in your mouth, but I'm just saying like in a very -- like a very pessimistic view if you just throttle along at the current...

I think that is really the planning and that's almost pessimistic scenario. But I think I prefer in these days, you come from this side. And we will still be able to generate cash.

So even if it's a horrible world, you're still kind of [indiscernible]

That is our planning.

And the rest is upside if you get a...

And the rest is upside.

And in a horrible world, look, we will be looking at working capital extremely carefully, and we have demonstrated we can do that. To Michael's earlier point, the last 4 months of the year of '22, we generated about GBP 200 million from the work capital.

It's more than GBP 200 million. So I think even in this scenario, which we take as a -- we plan on this one. I think in this world, you have to plan on this one, and there would still be cash generation, plus then the headroom that Lily has described. So I think it's in a way almost comfortable position.

We've got no questions on the website or on the telephone lines, so we can wrap up.

Well if that's the truth -- and maybe one more in the room, somebody? Nothing else. Well, then I wish you all a nice day, and see you in August. Thank you very much.

Thank you so much.