Synthomer plc (SYNT) Earnings Call Transcript & Summary

Good morning, and welcome to our 2024 Full-Year Results Presentation. I'm glad to see you here at The Royal Society of Chemistry in London, with many others joining online. As usual, I'm here with Lily Liu, our CFO; and Faisal Tabbah, Head of Investor Relations and we look forward to answering your questions at the end. I will provide an overview of our performance and the robust progress we made in 2024, despite slow demand in most of our end markets. Lily will then walk through the numbers in more detail before I come back to present our continued progress and how we are making Synthomer a much stronger, more resilient and more focused specialty chemicals business. Then at the end, we will discuss what we are anticipating for 2025 and beyond. Starting with our performance. Against the backdrop of a period of suppressed demand in the chemicals sector that lasts now since 3 years, we have delivered full-year results with robust growth in revenue, EBITDA, EBIT and improved underlying EPS, all in line with expectations. Overall volumes increased by significant 8.4% despite generally slow end-market demand. All 3 divisions showed growing volumes. We gained market share particularly in AS division, and we are pleased to report today an increase in our revenue of 5%. Our EBITDA increased by 9%, around GBP 10 million, mostly reflecting our self-help, reliability and cost actions as well as our strategic reorientation, with margins also ahead year-on-year. And we did this after absorbing the additional operating investments we have made in our people and our assets in the year. As we mentioned in our January update, we were pleased with the strong exit margins coming out of 2024, particularly in our specialty businesses. We maintained our stable financial position to support the delivery of our strategy, following a successful bond refinancing in 2024. Our next major debt maturity is in 2027, giving us a robust platform for continued earnings recovery. As we anticipated, net debt was higher at year-end than at the start, mainly due to non-recurring outflows such as the EU fine, a deferred pension payment and lower use of our factoring facilities than the prior year. It is important to note that our net debt is still 40% or GBP 400 million lower than at the end of 2022 and GBP 600 million lower than at its peak during the second half of that year. We are confident that we will make further progress reducing our leverage during 2025 and onwards, even if there is no significant market improvement and without counting on any divestment proceeds, which should come through. Our confidence comes in part from the further earnings progress we are expecting in 2025, driven by our cost and reliability, self-help and strategic delivery in terms of a higher margin product mix. Except for NBR, we are counting on very little in terms of market recovery in our plans for now, but our operating leverage to improved volumes is substantial. So when we do begin to see a recovery, we will benefit significantly. Turning to strategy. Our transformation towards higher margin, more resilient specialty solutions is gaining momentum. Our strategic KPIs are heading in the right direction, with a particular highlight being the simplification of our manufacturing footprint from 43 sites and we launched a strategy to 31 today. This reduces costs and allows for a more focused capital allocation. We furthered our non-core divestment program, with the compounds business sold in 2024, and 3 other formal processes are making active progress. We also began a technology partnership in the U.S., which leverages our intellectual property and expertise in medical glove ingredients to benefit from changes underway in this important market at 0 capital cost for ourselves. In January, we formally opened our China Innovation Center in Shanghai to support the customers in the region, alongside several carefully selected innovation and manufacturing investments in the U.S. as another growth region for us. Customer-centric innovation gives us a competitive advantage. And this year, we also sustained our consistent record of new and protected products, making up at least 20% of our sales volume over the long term and we continue to innovate to create more sustainable products. We are in a unique position to partner with our upstream suppliers and downstream customers to make more bio-based and circular products possible and more than 2/3 of the new products we launched in 2024 had enhanced sustainability benefits as desired by our clients. I'm also pleased to see that our stakeholders are beginning to recognize the changes we are making, for instance, with a clear improvement in our customer net promoter score. In addition, our employee engagement score at the end of 2024 was significantly better than 2021 when the world of chemicals was still booming and the Synthomer bonus situation for employees was at its peak. A lot of transformational and operational work still lies in front of us, but the recipe is working. I will hand over now to Lily.

Many thanks, Michael, and good morning all. I'm pleased with the in-line financial result we have delivered despite the continued challenging market conditions across the industry and I also look forward to taking you through our continued financial progress, put us in a good position to reduce leverage further in 2025 and beyond. Next slide, please. Now start with the financial summary. Group revenues for continuing business were 5.1% higher on constant currency basis, just under GBP 2 billion. This reflects 8.4% volume growth, driven principally by Adhesive Solutions regaining market share and Health & Protection business recovering from historical low positions seen last year. Our more resilient CCS division, which is already around 3/4 specialty, continued to trade robustly. We saw a lower price mix of 3.3%, mainly reflecting the pass-through of lower raw material input prices versus 2023. Foreign exchange has a negative 2.7% impact on our revenue for the year. Overall, we were encouraged by an improved gross profit contribution of 150 bps from operating leverage and our result also benefited from GBP 26 million of self-help actions across the group. However, as we indicated at the start of the year, we knew we would also be absorbing higher operating cost, partly due to wage inflation and increased bonus accruals relatively to prior years, which impact all divisions and also the corporate line. Notwithstanding this, we were able to deliver group continuing EBITDA of GBP 147 million, a 9.2% increase versus comparable period on constant currency basis. Our EBITDA margin was 7.4%, a 30 bps improvement from prior year. EBIT of GBP 50.4 million grew by 55% in constant currency, driven by the combination of higher EBITDA and lower depreciation and amortization cost, reflecting the significant reduction of number of sites as Michael mentioned and lower CapEx spend in the last few years. The interest charge was lower in 2024 by around 8%, reflecting the successful debt reduction from rights issue and also from our divestment programs and partly offset by higher coupon in our new EUR 350 million bond. We expect the net P&L financing cost to be around GBP 60 million to GBP 65 million in 2025, more towards the lower end of that range. Our cash interest costs continue to be lower than P&L charge at around GBP 55 million. Discontinued operations being the compounds business contributed an EBITDA of GBP 2.6 million, [ after ] its divestment in April 2024. Now, we continue to guide our underlying effective tax rate for the group around 25%. But for 2024, our underlying effective tax rate is 43% on a GBP 9.6 million loss before tax. This ETR is outside of normal range due to geographical mix of our P&L of profit and loss and prior year adjustment. The total group continued and discontinued had underlying loss per share of 2.5p, very substantially improved from the 35p loss in 2023. Special items were broadly similar to prior year for continuing operations and comprised mostly acquired intangible, amortization, restructuring and site closure costs in the period. As always, we have included a schedule for special items in the appendix. Our net debt at the end of 2024 was higher than at the end of 2023, which I will take you through in more detail in a moment. But at 4.6x, our leverage was well within our covenant requirements and we have plenty of undrawn committed liquidity for our business. Next slide, please. Now turning on to each of our divisions starting with CCS. Revenues were GBP 791 million, down 1% in constant currency from 2023, mainly as a result of pass-through of raw material price reduction versus prior year. Volume was up by 2.4%. In terms of activity levels, our coatings activities were robust. Consumer materials were stable, while energy solutions saw a slowdown in growth in the second half. The most challenging end market was construction, which although was poor all year, at least began to improve slightly in Q4. Encouragingly, while reduced raw material costs were reflected in our pricing, the gross margin was expanded by about 70 bps, reflecting the more specialty nature of the portfolio. Total division EBITDA reported at GBP 86 million, a reduction of 12% on constant currency, with EBITDA margin of 10.9%, a reduction of 130 bps. This result was a combination of factors. The market induced weak performance in our construction business, a slower progress in high-margin energy solutions business, and as the largest division by number of sites and people, CCS bought a substantial higher share of higher wage and bonus-related costs I mentioned earlier. The reduction of divisional EBITDA also reflected the investment in innovation and our effort to expand our market presence in the U.S., Middle East and Asia, leveraging our leading European positions in many product areas. Next slide, please. We're very pleased with the step change in our AS division. Its financial performance was excellent, with 57% EBITDA growth in constant currency year-on-year. Now, revenues increased by 4% in constant currency, bolstered by 9% volume growth. Our specialty product portfolio, circa 60% of divisional revenues, continues to be robust with good pricing and margin management. Our base products have higher volume growth as our improved reliability and cost competitiveness enabled us to regain some of the market shares previously lost to competitors. The substantial growth of EBITDA was driven largely by our performance improvement program, which realized around GBP 21 million of savings in 2024. And we expect additional benefit around GBP 10 million mainly in 2025. Overall EBITDA margin of 8.1% was a 270 bps improvement. Very encouraging progress given we have also absorbed higher operating costs described earlier. Our project to secure hydrocarbon supply in Europe was successfully commissioned in Q3 2024 and volume ramp-up close to capacity now. And finally, Health & Protection and Performance Materials. Revenues were up 15.6% in constant currency, benefiting from a 14.1% volume growth, with a 1.5% higher pricing and mix from unit margin improvement on higher raw material price pass-through in H&P. Within Health & Protection, NBR volumes grew by 24% from the historical low point of 2023, although that only takes them back to 80% of the 2019 level. The benefit of self-help capacity reduction from mothballing of our Kluang plant was offset by unit margins, which remain substantially lower than the pre-pandemic levels. Our plant utilization currently is around 80%, but the industry as a whole remain at lower levels, putting pressure on further margin expansion. We expect to see some positive impact from the U.S. tariff on Chinese glove imports over time. Although in the short term, our Malaysian customers are reporting that there was a bit of pre-buying at lower prices before the tariff started in January 2025. We received mid-single-digit millions in U.S. dollar technology license income, as Michael mentioned, from our U.S. partners as we're supporting their effort in building a new NBR plant onshore. The Performance Materials side of the division grew volume by 6.9%, but continue to experience ongoing pricing pressure. Overall, our effort to enhance capacity utilization and efficiently -- and efficiency meant that even after higher wage and bonus accruals that I described somewhere elsewhere, the division EBITDA margin improved by 110 bps in 2024 compared with 2023, with EBITDA increased by 40% in constant currency. We made good progress in non-core part of the division. To date, we have disposed the laminate films in 2023, divested compounds business and closed the U.S. paper and carpet business. And we have other active divestment programs ongoing, as Michael mentioned a moment ago. Now, moving on to cash flow. As I mentioned, our year-end net debt was GBP 597 million, higher than the prior year of GBP 500 million, mainly because of pension payment of GBP 20 million, including deferred deficit reduction contribution to the U.K. scheme, a GBP 23 million reduction in use of receivable financing and the GBP 39 million of EU fine. The net debt of GBP 600 million was half of the peak level of GBP 1.2 billion during 2022. The reported free cash flow for the year was an outflow of GBP 54 million. However, adjusting for the reduction of factoring usage and the one-time pension contribution, the underlying free cash flow was broadly neutral. Our 2024 working capital was flat to 2023 position, excluding the impact of factoring. We reversed the H1 working capital build in H2. We continue to focus on our inventory and debt, while balancing the growth requirement of our businesses. A very disciplined net capital spend of GBP 83 million, in line with our guidance. Other than safety and maintenance spend, we selectively invested in some strategically important areas such as our APO line, a new innovation center in China and new production capability in the U.S. and Middle East for CCS division. We continue to allocate our capital rigorously, supporting our specialty and regional growth strategy, more capital into U.S., Middle East and Asia and more capital into specialty part of the business for growth and for returns. We expect absolute CapEx spend in 2025 to be similar to the last couple of years. Interest payment potentially decreased slightly. We expect cash tax to be more in line with P&L tax than this year. And following the payment of deferred pension contribution in 2024, the 2025 pension cash cost will be broadly similar or lower than 2023. Of course, we will also not have the GBP 39 million EU settlement for the 2018 styrene investigation to pay in 2025 neither. All of these factors, coupled with our expectation of further EBITDA progress in 2025, means that even if macroeconomic conditions do not improve materially, we would still expect to be free cash flow positive in 2025, with deleveraging taking place relatively to the 2024 level. The level of factoring usage, of course, also continue to have an impact on this. Now moving on to balance sheet. I'm pleased with the progress we have made in strengthening the balance sheet from peak net debt of GBP 1.2 billion during the second half of 2022, now GBP 600 million. As we talked about at the interims, we successfully issued our new bond in April, which means that together with various financing activities completed in the last couple of years, we have extended our debt maturities substantially, with the next major financing requirement by 2027. And we're now in a much more robust foundation, supporting the ongoing delivery of our strategy. Leverage was 4.6x net debt to EBITDA at the year-end, higher than the 2023 year-end by 0.4x, but well within our covenant requirement. We have committed undrawn liquidity of more than GBP 470 million at the year-end, with additional support from the unused portion of our factoring program. We expect to pay down the GBP 150 million -- EUR 150 million stub amount in July 2025 from our own fund. Our liquidity will reduce accordingly. Let me reiterate our capital allocation priorities. While we intend to continue to invest in carefully selected organic opportunities aligned to our specialty strategy in growing regions, our key priority is to reduce our leverage towards the 1x to 2x medium-term target through a combination of increased EBITDA, continued cash focus and generation, supplemented with further non-core divestment proceeds. The Board has confirmed that dividends will remain suspended at least until our leverage is below 3x. In summary, I'm really pleased with the strategic, operational and financial progress we made, in line with expectations this year. We continue to focus on self-help actions, while balancing this with selective investment guided by our strategy. And I'm confident that we have a clear path to deleveraging in 2025 now and that the non-recurring outflows I mentioned are done with. Let me stop here and hand back to Michael to update you on strategic initiatives and outlook. Michael?

Thank you, Lily. Most of you will be familiar with this slide, which sets out the 5 pillars and 3 key enablers, which we have driven our strategy since 2022. Also, we always challenge ourselves. We believe this strategy is serving us well and remains a crucial guide for all of our decisions. Moreover, we are beginning to see the benefits of consistently implementing the strategy across the business. Starting with Pillar 1, we delivered robust organic growth of 5.1% in 2024 against the constraint of slow demand in our end markets. This was driven primarily by our focus on cost efficiency, innovation and reliability for our customers, leading to market share gains in the chosen target and end markets by product and geography. As part of our ongoing portfolio management, we furthered our non-core divestment program, Pillar 2. We divested our compounds business during the year, consolidated manufacturing sites and several similar projects are making active progress. We continue to produce globally in order to be close to our customers, but we now do so more efficiently, and this frees up capital, time and energy to redeploy into our target growth areas, a good example of Pillar 4 in action. For example, we have invested in our coatings manufacturing capability in the USA, increasing the flexibility to supply customers with a wider range of products. We invested in the Middle East to increase production volumes there, too. We also allocate innovation resources more rigorously to where we see the greatest future benefits. We remain focused on ensuring operational and commercial excellence in how we run our business, Pillar 3, including, for example, our transformation program in AS division or our procurement program with benefits of GBP 40 million to GBP 50 million in 2025 and 2026. We have increased our Synthomer Excellence capability and learned a lot from our first 2 projects using advanced data analytics in polymer innovation and to optimize manufacturing throughput at one of our busiest sites. We are also investing in our people, Pillar 5, with continued growth in our graduate program and other actions to develop the diverse range of talent and experience we need. This slide will also be familiar, illustrating the direction of our strategic evolution in 3 key dimensions. You see that we are growing the specialty weighting of our portfolio with higher margin, more resilient specialty products now accounting for 55% of revenues. In 2024, the U.S. and Asia together accounted for the majority of our revenues. Europe continues to be our historic core region and the United Kingdom, our corporate home. But we are successfully repositioning Synthomer to be a more balanced business geographically. And while we continue to operate with the vast majority of our production activity in the region for the region, close to our customers, we have carried out work of simplifying our business. Since 2022, we have streamlined our footprint from 43 sites to 31 through a combination of divestments and rationalization and expect further developments on both tracks going forward. Let me briefly take you through each of the divisions to demonstrate how these various aspects of the strategy are playing out. CCS is currently our most specialty weighted division. During the year, we continued to leverage our leading market positions in niche European markets into other markets globally. Through a more end market aligned approach with key account management and value selling, we are targeting opportunities to grow our market share, particularly in the USA and in the Middle East. We successfully commissioned an investment, which enhances our coatings capacity in the Middle East. We are also increasing our focus on growing our customer base in China, capitalizing on our new innovation center in Shanghai. In line with accelerating our portfolio transformation, we have reviewed and begun to overhaul our approach to innovation with a view to becoming more end customer focused and especially faster to market with new products. All our growth plans are integrated with our asset optimization and excellence projects and other cost and capacity management activities. We have recently invested to improve the manufacturing flexibility of a number of our major facilities in the U.S. and Asia, giving us the optionality to manufacture a number of products in those regions that were previously only made in Europe. We believe digitalization and the use of artificial intelligence will be increasingly important in optimizing our production activities. And during the year, we used digital analytics tools for a pilot project to enhance throughput at our capacity-constrained site in Le Havre, France. And finally, our Fitchburg, Massachusetts facility successfully transferred products to other sites and ceased production ahead of schedule, with the site subsequently sold after year-end. In recent years, our main focus at our Adhesive Solutions business has been on fixing a range of reliability issues and making the division more cost efficient. And while there is more to do, we have significant headway in these critical areas during the year. Lily has already commented on the step change in financial performance in this division, which is highly encouraging. Our dedicated performance improvement program has focused on systematically transforming the business by reducing costs and improving end-to-end operations from supplier network improvement to production site efficiency and delivery logistics, enabling substantially better service for our customers. Having delivered GBP 26 million in cumulative benefits over the past 2 years, we are now expanding the program to target GBP 35-plus million in cumulative benefits by the end of 2026. In line with our differentiated strategy in our base product areas, we continue to focus any investment on enhancing cost leadership and reliability, such as our project to strengthen the supply chain for hydrocarbon resin production in Europe, which began to ship during Q3 2024 as planned and is already close to capacity. Continued performance improvement remains a key objective in 2025, but we are increasingly focusing on the longer-term growth of the division. We see clear opportunities to build on our leading position in a range of specialty adhesive applications in attractive end markets with our long-lasting blue-chip customer relationships. The depth and nature of our technical dialogue and joint projects with many customers evolved considerably during the year, particularly in relation to innovation and sustainability. This includes replacing solvent pressure-sensitive adhesives in specialty tapes, new APO types for improved performance in packaging and hygiene applications, our first sales of a Forest Stewardship Council certified resin to one of our tire customers. Most of our investment for future growth also aims to build on the strength of our specialty portfolio, such as our investment to increase APO capacity at our Texas facility, which is expected to come on stream in Q2 of this year. HPPM in contrast to CCS and AS is primarily a base chemicals business, and we, therefore, manage it and allocate resources, including capital to it very differently. Here, the prime focus is on cost competitiveness with the majority of innovation focused on process innovation to support our customers. In our core Health & Protection business, this approach was demonstrated in the year through our formation of a significant 0 capital and profitable technology partnership for the U.S. domestic medical gloves market, which is evolving rapidly in part due to government procurement policies to support growth of U.S.-made PPE. We are now receiving technology licensing fee payments, which are the first stage of a multi-year partnership that leverages our Health & Protection IP, technology and manufacturing expertise. We also continue to actively explore other potential partnership opportunities for this business with little or no capital investment. Process innovation is key to helping customers lower their energy costs. And in early 2025, we established a pioneering value chain partnership with Neste and PCS to manufacture bio-based nitrile latex for the glove industry. Moving on to the non-core portfolio. At the end of April 2024, we completed the divestment of our latex compounding business operations. Three other non-core portfolio rationalization processes continue to progress, including the divestment of our SBR for paper, carpet and foam in Europe. As I have alluded to already, ensuring excellence across all aspects of our operations has been a major focus over the last few years. I have previously touched on our procurement saving program. This is now increasingly well established, and we have done a huge amount of work to improve the way we purchase the long tail of hundreds of raw materials as well as our indirect spend. Our Excellence program is delivering improvements both in manufacturing and in commercial operations. Initially, this program was having to push its way into helping local operations, but I'm pleased to say that as it becomes more embedded, our business units now want to pull SynEx in to help them solve problems. On the commercial side, we are building on our more systematic approach to value selling as well as investing in our new sales force, CRM and opportunity management capabilities. Finally, we are proud of our safety record, and we continue to steadily improve the sites that we have acquired in recent years. I have mentioned a number of specific innovation and sustainability projects elsewhere and throughout this presentation, so I won't dwell on this page other than to restate that our approach is and always will be customer or even end consumer led. Turning now to our expectations for 2025. Trading so far has been in line with our expectations, which assumed a muted start to the year compared with the relatively strong first quarter in 2024, which included significant restocking and benefits from the Red Sea disruption. When we look at 2025 as a whole, we expect to deliver further earnings progress compared with 2024. In this, we are targeting a further GBP 25 million to GBP 30 million in expected benefits from delivering our self-help and strategic plans with less cost headwind than in 2024. The strong exit margins we had out of 2024 support our confidence as does the volume improvement in Health & Protection we saw last year. We expect the volume recovery in this market to continue, but otherwise, we are prudently assuming limited end-market demand improvement in 2025 at this stage. On these earnings assumptions and applying the cash flow line item comments Lily made earlier, we would expect to deliver positive free cash flow and deleveraging in 2025 without assuming any divestment proceeds or material market recovery. To finish, I want to confirm that our self-help actions plus operating leverage to volume recovery, plus our strategy execution have the potential to double recent EBITDA levels. First, further cost and efficiency self-help actions have a potential of GBP 40 million to GBP 50 million. Second, all 3 of our divisions delivered volume growth in 2024 and in doing so, demonstrated the operational leverage potential, resulting in a 150 basis points higher gross profit margin for the group. All still have substantial runway to recover to pre-pandemic levels of demand in their markets, and they all have sufficient manufacturing capacity to meet the demand when it comes. We estimate around GBP 90 million in EBITDA potential in a recovered end-market environment. The third bucket for increased EBITDA is delivering our specialty strategy, reallocating our resources towards a business portfolio of higher-margin specialty solutions in growth markets. So in summary, while our markets continue to be slow, our response has allowed us to grow revenues, increase earnings at all levels, progress our strategy and improve employee engagement. On this, we are building our momentum in 2025. Now, Lily and I are happy to take your questions.

So the plan for questions is we'll start in the room, then we'll go to the telephones and then there's a few questions coming in through the website. So if we just wait for a moment while the microphones come. Should we start with Vanessa down here?

Vanessa Jeffriess from Jefferies. Just wondering if you could help us out a little bit with your volume expectations by region and if there's any sectors where you expect maybe year-on-year declines instead of just slow growth.

For 2025, I think, first, you have to start on the businesses. So NBR business, here, we see some high single-digit potential to improve. For all the other volumes, and that's what I said, we go very cautious. And I would say in all our plants, we have 1% to 2% volume growth all over the rest. I think in Europe, we see some upturns, especially there or some upside, especially the construction industry. We have to see now how this goes. But there, we see some positive signs. In Asia, also growing. The Middle East is slightly growing. What I think is the big wildcard, as we all know, is in the U.S. What happens in the U.S. now? Will there be recessions in the U.S.? Will there be a turn to the upwards? So, I think everything is a bit erratic these days. So, I think this has to be seen. But overall, I would say 1% to 2% over the whole portfolio, very, very prudent at this point. So all the rest of the growth, while we want to progress comes on the increased margins, which are very high, as we just said now, and the portfolio shifts toward the higher-margin specialties. And NBR as an exception, there, we see more growth.

And then just on the remaining reliability issues in Adhesive Solutions.

Yes.

Exactly how much work is it to fix those and should it be done this year?

We have done, I would say, 70%, 75% we have done. And that is very nicely reflected in our results, which almost doubled the EBITDA. There are still issues to be done. There are huge sites. They are continuous sites, which makes it all a bit more complicated, but we are very much on the right track and I'm very positive. Investment is very little. It's some single-digit millions. That's like last year, we had probably about GBP 10 million on one-time costs for all the reliability issues. So it's a similar dimension, but we are making really nice progress. So, I believe that I don't think they will go fully away, but I think another 2025, we can do another step of progress. But we are close. We are getting close. Jonathan?

It's Jonathan from Morgan Stanley. I've got a question for Michael on your medium-term sort of GBP 300 million target. When is medium-term now sits in your view, given the cycle keeps pushing back? And do you think the GBP 300 million is still a realistic target to think about in the medium term? And then my second question is on your free cash flow bridge for 2025. Could you give us a little bit of color on the building blocks for the positive free cash flow guidance for '25, please?

Yes. I'll take the first one then. I think if you look at the 3 buckets, midterm for us is always 3 years to 5 years. So when you look at the buckets, if you go bucket 1, GBP 40 million to GBP 50 million. I think we have clearly proven over the last 2 years to 3 years that we are able to increase efficiency to take cost out. So, I think this is pretty much -- we take this for granted in a way. Then you go to the third bucket. I think here also, we have proven that we can change our portfolio. Our margins are going up since 2.5 years, almost 3 years. Each time the gross profit margins are increasing. I think also here, there's quite a certainty, which makes us very confident that we get there. Then there is the middle bucket, and that's the GBP 90 million, as we say right now. And this is subject to a market recovery. But also there, you can be ready or not ready when the market recovery comes. And our cost reductions, combined with our margin improvements show very clearly that we do have operating leverage. And then you then make the calculations and you have an operating leverage of some 30%. So, I think this is very realistic to achieve. But as I said, the first bucket, the third bucket is entirely in our hands, and I would say the second bucket is half in our hands, but we need some market recovery at one point. I think that's about the building blocks to get there.

Jonathan, your question about 2025 free cash flow, we guide it's going to be positive. And look, if you look back 2024, adjusting for some one-time items, we were sort of broadly neutral there as well. I think the one important factor is those non-recurring items will not occur in 2025, and that's important to note. If you look at CapEx, we guided similar levels. If you look at the interest, I think we'll be -- we're guiding slightly less interest, slightly lower interest in 2025 compared to 2024. And then if you look at working capital, we always have opportunities GBP 10 million, GBP 20 million improvement in our working capital. And by the way, we were sort of working capital neutral in 2024 and we expect some improvement there. And the other factor is tax, and we do have tax receivables that we're expecting to receive in 2025. So if you add all the things together with what Michael talked about for how we see 2025 earnings progression, you would get to a positive free cash flow for 2025. Thank you for the question.

If you only take the 3 items we mentioned, the non-recurring items, the pension, the 3 of them last year, you almost bridge the GBP 100 million. So then EBITDA interest and net working capital comes on top because these 3 will not come back. Sebastian?

Sebastian Bray of Berenberg Bank. I have 3 questions, please. The first is, Michael, for the Adhesive Solutions segment, how do you think about the balance of tariffs versus the threat of U.S. recession? My understanding is that about 50% of this business' sales are made in North America. Have tariffs had any positive impact on the achievable margin so far in this segment? Are we seeing weakening demand? I think Henkel had a somewhat iffy release today, and we've also had H.B. Fuller earlier in the year saying that potentially is weaker demand. My second question is on nitrile latex unit margins. Are these down sequentially at the start of the year. There have been some comments from glove manufacturers that have been more bearish. And my third one is on CapEx and progress made since end '24 on divestments. How low could CapEx go in an environment where demand deteriorates? And if I were to guess the total sales of the businesses that are currently up for sale alluded to in the release, is it about GBP 300 million with 10% EBITDA margins?

Thank you. I have to keep good track of that, 4 questions. So the AS situation, we do have a lot of production in the U.S., but I think generally for the whole company, we have about 90% in the region for the region. So, we are analyzing all potential tariff impacts. I think sometimes it could be positive in the U.S., especially for AS division that other people would have to import. We don't have to import. You have some negative aspects of the 10% that we are shipping through the oceans. But at the end of the day, this will be single-digit impacts of whatever direction. So, this we have all mapped out. I think the 90% in the region for the region is very important. Also for AS division, we do have a joint venture in China. We have a big factory in Middelburg, in the Netherlands. So, this pretty much covers the situation in the regions. We have together with our partner, Dow, what we mentioned before, the raw material situation in Germany, so we can supply the hydrocarbon chain out of Europe. So I think here, we are pretty much self-sufficient. If you look generally at the demand for AS division, it is like in all the other divisions. The more consumer, the better. The more industrial, the worst in a way. Now, Adhesives division caters a lot for tapes and labels, packaging. So, this is actually going quite well. Hygiene is actually going quite well. On the lower side, you have the tires because that goes into automotive industry, which we all know is a bit more complicated for now. So, I think AS is quite more on the consumer side. So, we see the demand trends there are quite reasonable. I wouldn't say much more. But if I look at -- compared to the second half of last year, it's definitely not worse. Increasingly for us, in particular, we can gain some market share. We have -- you mentioned Henkel as one of our top customers, very, very close cooperation there on sustainability and innovation. That's a very, very close partnership we have there. And that is also the advantage on the commodity side because when you have -- especially from China, with all the huge overcapacity we have there, these are the arguments for our customers that we can keep our pricing levels and that we can keep our margins. So, I think here, we are quite in a good shape and the work that we have started 3 years ago to engage in these discussions on sustainable innovation with our key account customers, I think, is clearly paying off. And that's also -- besides the reliability we mentioned before, it's also a big asset for us to increase the share. Then your second question on NBR. I think I should start at the very end. The medical glove market is still growing 6% to 8%. I think that is a fact and this everybody can see. So that's -- it's still a healthy end market. Now the industry on NBR is still long. There's still overcapacity, and this goes, of course, against the margins. So, I would say we are quite positive, and we showed last year 18% growth, and we also plan, to your earlier question, for this year, we planned some quite nice volume growth there. I don't expect the margins to improve dramatically over the next 6 months to 9 months because, again, there's an overcapacity situation. What for sure helps us and the Malaysian chain, as I call it, is that right now, as we speak, the U.S. has a 70% tariff on Chinese gloves. So logically, there was some pre-buying, which we saw last year, and that's why in January and February, there was a bit less demand. So, that's pretty logical. I think at the end, it will play out. There is the Malaysian chain. There will be the Chinese, the Chinese that do additional actions because with 70% tariffs, they cannot live in the U.S. So, they start to make investments in Indonesia. They go to Cambodia even, but we are very close also to the Chinese makers. So, I think for us, we can benefit on both sides. I really believe that -- yes, as I said, the volumes for the whole industry, I think they should be okay for this year and the margins will remain not on a level as we probably would have wished for and definitely not on the level as it was pre-COVID. Then your question on CapEx. We have a reinvestment rate with GBP 83 million of about 90% compared to depreciation. I think that's a level which is not bad and which you can sustain for several years. Also, I would like to say, and that's a bit to your next question on the divestments. We have made divestments which frees up a lot of capital you can invest in less sites. If you take -- we had -- at the time, we had 43 sites, now we have 31. So if you take the GBP 84 million, you have almost GBP 1 million more CapEx for each site to invest now. And that's what we talk about rigorous capital allocation. So, I think this will help us a lot over the future. If we get now another 1, 2, 3 divestments done, this compounds, of course, quite significantly on top. It's also interesting that the one also we name, in particular, the paper, carpet, foam business in Europe, these are very heavy assets. And there is some CapEx required. So for us, again, the shift, the reallocation of CapEx is quite well. As we guided for this year, we think that, again, we can be in the neighborhood GBP 84 million, GBP 85 million on CapEx. I think that is very much doable. Again, it's not 0.6 reinvestment rate, it's 0.9. I think that is very much doable, especially that you can allocate more into growth, more into the U.S. and Asia and less into sustenance and safety, which we have to do what we always have to do, but you can have a much more meaningful capital allocation. And then your last question, which is, of course, very much on our mind, the divestments, to be honest, we wanted to do 1 or 2, we wanted to do last year. Now we couldn't do it and why we couldn't do it? Because we always told you we will not do fire sale. We don't need to do fire sale. Our balance sheet is okay enough for this. We don't need the cash. We have liquidity. So no fire sale, number one. And also, we don't want to sell businesses, which 2 years down the road, it hunts you because the contracts have indemnities and guarantees that you don't like. So, we choose the lesser evil. We are negotiating, I would say, 2 out of the 3 processes are in advanced stage, and I hope that you will hear from us there in Q2 again. And that, of course, will have a massive impact on capital reallocation, on complexity reduction for our business. That's where we stand. Again, I have again to make the disclaimer. I'm honest, we wanted to do 2 deals last year. We didn't. But I really hope that in Q2, you hear from us. 3 active formal processes running. So, this is not a bit of bilateral chat. These are real projects. Thank you, Sebastian.

While we pass on, we had a question from the web that also asked, is there anything else you can say in terms of potential proceeds for the divestments as a whole in round terms?

Yes. If you take all the 3 together, if -- the situation as we see it is now maybe GBP 100 million plus, GBP 100 million plus, all the 3 together. But again, that has to be negotiated. It has to be finalized. I think if you want to key in a number, take GBP 100 million plus.

Kevin Fogarty from Deutsche Numis here. Two questions, if I could, please. Just one on AS, which seem to deliver sort of better-than-expected performance, I think, in the year. And it's really on the shift towards the kind of specialty nature of that business now. I think historically, you've talked about CCS as being around 75% specialty. Where are we in AS in terms of kind of the potential to go to? And I guess the sort of -- you've touched on a few of the initiatives, I guess, underway there. Is this a series of kind of incremental improvements we should expect? Or are there any kind of big levers, I guess, to pull? And the other is on the receivables financing strategy. So the decision to kind of wind that down over time. I just wondered if we could have a bit of a timeframe on how long that might take and I guess the implications that has for kind of working capital in the business over the next couple of years. That would be great.

Yes. Thank you, Kevin. I also start the first one. I think on AS division, we are now at about 60% specialty. We took over the division. It was about 40% specialty. Now it's about 60%. And a lot of the improvements in AS, they come from 2 sides. On the hydrocarbon side, on the commodity -- on the base chemical side, they come simply from cost-out, organize the logistics, have this new venture for European hydrocarbon raw material situation. It's process innovation. So usually, we worked on costs and reliability for our customers. I think here, as I said before, we can still do further steps. We are now, again, making money on hydrocarbons. I think that's important. Even though it's a very competitive situation. Again, the Chinese are importing into Europe to a lesser degree into the U.S., but it is a profitable business again. So it's fixed. But the difference -- the differentiator we can do on the specialty side, which again is 60%. And here, there's huge demand. And I know that sustainability maybe doesn't have the -- I don't know, the prominence it had 2 years ago. But I can tell you our customers, and these are blue-chip big customers, they absolutely require this. And I think that is a big opportunity for us. Now the trend of further improvements in AS division, I believe a lot also depends on the volumes, but I think the fundamentals we really got right. It's a mix of reliability, costs and future development of the business. I think here, we are very much on the right track. And for this year, I would expect another step change into the positive direction. And we treat it as a base business kind of as a base. We have no intention to disconnect it, or to sell it or so because there's a lot intertwined. A lot of our customers, they actually prefer us to have the whole range of everything. So, I think here, it's to improve our cost efficiency, reliability. And on the specialty side, there's a lot of potential. And I mentioned tapes and labels, packaging, sustainability innovation. These are keywords of very interesting projects we are having. And I think, yes, that gears us up for the next step in AS.

Thank you, Kevin, for your question. So, I would reiterate our priority is to get our leverage within the range of 1x to 2x. That's top priority for us. And we view a factoring facility as a tactical tool for us, and that's how we treat it. However, inside of the company, we view it as debt item. And it is a financing arrangement for us. We manage it that way. It is cost competitiveness. It's cost competitive because it is our blue-chip customers' credit rating versus our own at the moment. I think once we get leverage into a reasonable range, then we start unwinding the factoring program down. But I wouldn't give you a time line now because we need to see the progression first.

If we have no questions in the room, should we go to the telephone lines?

[Operator Instructions] And we have a question from Sanjay Bhagwani from Citi.

I've got 3 questions as well. My first one is on price mix. I think on the volumes, you already alluded to its more or less 1% to 2% growth for the group level. And on the price mix, are you able to point us to if there's another year of maybe negative price/mix driven by the raw mat declines? And mostly, will this negative pass-through is purely just a raw material decline. So net impact on the EBITDA, is it more or less neutral? Or there are some nuances to that? That is my first question. And I'll just follow up with the next one after this, if that is okay.

Yes. On the price/mix, I mentioned, we take into account very little, as I mentioned, the 1% or 2% volume growth. Now last year, we also had very little assumption. I came up with 8.4% volume growth. Okay, that includes the NBR part. So I think we are very prudent, very conservative there. So there is hopefully, especially, if you go towards more the second and third quarter of the year, there might be some upside. On the price side, we increased our margins since 3 years. So that means our pricing power is quite good. That means our pass-on of price increases are quite good and of price decreases, it allows us to increase our margins. What we see right now in the markets, and that's unfortunately not demand driven, but it is market dynamics that the raw material prices are going slightly up. Now for us, slightly up is usually a good thing. It takes 2 months or 3 months because 40% of our prices are formula pricing. So, then you always when it goes up, you have a little delay of 2 months to 3 months and obviously, when it goes down the other side. Fundamentally, we don't believe big volatility in raw materials for this year because the markets -- if the demand stays on this level, we believe that there is a slight upward trend, and it will hold on at this level then. I'm very confident and again, shown in our margins in 3 years that we can pass on this slight price increase and actually at the end, it's a benefit for us.

That's very, very helpful. So the follow-up. Second question is on the guidance. Maybe a bit more clarification on that. So the -- so overall, when I look at the EBITDA for '24, GBP 147 million. Now the GBP 25 million to GBP 30 million improvement, does it mean that the EBITDA you are targeting for '25 is simply an edge like take '24 EBITDA at GBP 25 million to GBP 30 million? Or are there any other offsetting factors there? So, what I understood from the raw materials or price/mix more or less neutral, volumes may be slightly positive and you're also being prudent there. So, are there any other offsetting factors here, which we should keep in mind?

Yes. First, I would like to say that last year, it came out pretty much as we said from the beginning with the headwinds and the tailwinds. So the difference for this year, we said GBP 25 million to GBP 30 million on cost savings, on efficiency improvements. You probably take another GBP 10 million on the very mild market recovery on growth simply, which is very low number. And then the tailwinds, you have much less than last year. Call it maybe GBP 10 million, GBP 15 million of -- no, sorry, of headwinds. There's a wage inflation. You take GBP 300 million. Our wage bill is GBP 300 million. You take 3% as opposite to last year. It was more 4.5% to 5%. So you take 3%, you have GBP 9 million and then a few things -- you always have a few things left and right. What we don't have to do this year is the normalization of bonus that has been done last year. And that was also a relatively big headwind we had. So, I think these are about the numbers, GBP 25 million to GBP 30 million, plus GBP 10 million, minus GBP 10 million to GBP 20 million, something like this.

That is very, very helpful, actually.

But again, sorry, I have to say this is really without any recovery of the market. Yes, this is the conservative base case we are calculating. That's the base case we had for last year, and this does not include any type of recovery.

Very helpful. And the final one is on potential EU-wide or German stimulus and implications. If you can provide some color on what your exposure to the German construction is and overall construction is? And how do you see this whole whatever it takes, stimulus stocks for your business?

Yes. If I start on the construction side, I mentioned that we do see some upside since several months on our construction business. I believe, fundamentally, it's good that we are in construction. We have to work on our product offering. We have to work on our innovation capabilities, but we have a very healthy balanced construction business over the whole world. We work with the prime customers in this market. So, we are not kind of niche-niche. We really work with a very nice customer portfolio. I think even the construction markets are depressed right now still as they are, but you have a lot of infrastructure, you have a lot of refurbishment. You have also, starting at one point, new construction coming up. Refurbishment construction is always there. So, I think fundamentally, construction is a very healthy market. People will invest. Governments will invest into infrastructure and people want to have a roof over the head. So, I think generally, we are here. It's a good market. Now how do we see it developing, especially with this German package? And first of all, I'm very happy that it looks like Germany is having kind of a good government soon anytime because I think that was a big drag over the last 2 years in Europe and the big contributor of the difficult situation in Europe. We have to see how this plays out exactly, how this stimulus package, where will it land? I think for now, we take it as a positive. We have our divestment program for the good reasons of base chemicals in Germany, but we will -- even after, we will have 2 sizable factories in Langelsheim, in Worms. So, we do have exposure to the German market. And if we have a bit of tailwind there for such packages, we have many customers there, which we supply from Italy, from France as well. So, I think, generally, I mean, let's see how it plays out. Exactly, I think these are initial announcements by the -- to be government, but I think generally, it could help our industry quite a bit.

And we have a further question now from Harry Philips from Peel Hunt.

It's just one question, please, around NBR pricing and what might happen in 2025. Just thinking of a scenario where you're saying you're running at 80% capacity utilization at the moment. You've obviously got the interesting dynamic of the tariffs in North America. But just thinking about the lower utilization rates elsewhere, China product being diverted away from North America into other markets, so how do you think about pricing in other regions? And then also yourselves at 80% capacity utilization, are you on a sort of contract basis or pre-sold basis? Or do you have -- should we think of this as a spot business or a contract type business? What I'm trying to get to if prices do start to go up at some point, can you switch through to those higher prices pretty much immediately? Or is there a lag as you work through that contract element, please?

Yes, it's a 100% spot business. So you change -- these orders, they come sometimes within 2 weeks, within 3 weeks. And that's why there's still quite some volatility in the production volumes. Like I mentioned, the pre-buying of the Chinese, then it goes down, then it's much below 80%, then there's a month of 80% again overall, even maybe of 90% for 1 month. So, we can react immediately there. And also remind you, we are -- we have critical mass in this business, almost GBP 300 million business. We have a leading position there. So, we do have the pricing power. So the moment things happen, we can participate. So I think here, there's nothing to wait for. I just caution on the -- the margins are significantly below the pre-COVID margin. That's because the Chinese are producing. Now they have tariffs in China, as I mentioned, and they go to other countries and so on. Fundamentally, as long as these tariffs are there, if there's industrial logic, it must help the Malaysian chain to increase the prices. And I believe that this is going to happen if we go further into the year. I don't think it will come back, but there's a huge difference. If we made last year kind of -- we made more because of our of our U.S. partnership. But if you take underlying business, which was for 2 years, was slightly loss-making at breakeven. And last year, we probably made some GBP 10 million. So I think here, there's a good chance to take a next step now in 2025. And that's a mixture of increased volumes, but also on increased margins. I'm convinced about the volume part. And the margins, we have to see how it plays out. But this tariff situation must help. And I think at the end, you also see a lot of consolidation of the Chinese players. Chinese players, they also want to make money at one point in time. So when this consolidation is coming to an end, which we see it is coming to an end and you have then 2 or 3 significant players left in China, I think then the whole industry has a good potential to increase prices again. And again, the end market demand is strong. So on this side, we don't have a supply-demand problem. So I'm optimistic on the volumes, and I'm cautiously positive on the margins as well. I think what we have seen by the end of last year was very low margins because, again, the Chinese kind of pumped out everything they had before the tariffs came into effect. Is that okay, Harry or...?

Okay. No, that's very helpful. I can sense the optimism in your voice. So, that's very helpful.

We suffered a lot there.

We currently have no further questions over the telephone. So, I'd like to hand the call back over to the room for any further questions or closing remarks.

So we have one final question from the webcast, which was -- I suspect this is one for Lily. How do you plan to deal with the GBP 150 million remaining outstanding on the 2025 bond? And if the cash flow deteriorates, would you contemplate tapping the 2029 bond to do so?

Thank you for that question. So, our plan is to pay down the stub amount of EUR 150 million from our own fund. As I said, we have GBP 470 million of liquidity, committed undrawn liquidity at the moment. We are monitoring our situation. I would never say no. But at the moment, we don't see that need to tap into the 2029 bond.

And that's all the questions we have.

Maybe I could add one more. I'm just thinking about Sebastian. The amount of the divestments is almost EUR 400 million. So it is quite on sales with very little profitability, obviously. But just to build into the models, it would be quite significant. It's exactly in line with our strategy when we were standing here at the end of 2022. We said that we are going to divest about 1/3 of the business. Now half of the 1/3, 16% are done. So this will be the other 16%, just to give a bit of the magnitude. So it's quite substantial, which then has all the advantages of reallocating of capital, talent, energy and everything. So it's, yes, substantial.

I think, actually, in your question, you mentioned an EBITDA margin of 10% for the divested businesses. We would love for that to have been the case in 2024.

I missed that one. No, it's highly dilutive with very little profitability. It's EUR 400 million with -- did I miss something else?

No, no. That's everything. Good.

Okay. Thank you very much. Thank you.

Thank you.