Synthomer : Preliminary Results

Tuesday 28 March 2023

Synthomer plc

Preliminary Results for the year ended 31 December 2022

Solid performance with strong strategic delivery in a challenging year

Constant

Full year ended 31 December	2022	2021	Change	currency1
£m	£m	%	%
Continuing operations*
Revenue	2,383.9	2,144.2	+11.2	+9.7
Functional Solutions (FS)	127.8	139.2	(8.2)	(9.4)
Industrial Specialities (IS)	31.8	23.4	35.9	36.8
Adhesive Technologies (AT)**	39.5	-	-	-
Performance Elastomers (PE)	49.1	320.7	(84.7)	(84.2)
Acrylate Monomers (AM)	21.7	35.3	(38.5)	(39.1)
Corporate	(20.7)	(20.6)
EBITDA2	249.2	498.0	(50.0)	(50.0)
EBITDA % of revenue	10.5%	23.2%
Underlying3 operating profit (EBIT)	162.5	432.8	(62.5)	(62.1)
Statutory operating (loss)/profit (EBIT)	(20.5)	296.5	(106.9)
Results from continuing and discontinued operations*
Underlying3 profit before tax	125.0	420.1	(70.2)	(69.8)
Statutory (loss)/profit before tax	(47.6)	283.9	(116.8)
Underlying3 EPS (p)	20.6	75.2	(72.6)
Basic EPS (p)	(7.0)	48.3	(114.5)
Free Cash Flow4	69.2	217.6	(68.2)
Net debt5	1,024.9	114.2

* **

The Laminates, Films and Coated Fabrics business sold on 28 February 2023, which generated revenue of £201.2m and EBITDA of £15.9m in 2022, is classed as a discontinued operation throughout this announcement.

Comprises the nine month contribution from the adhesive resins acquisition which completed in April 2022.

Solid financial performance (Total Group revenue £2,585.1m, Total Group EBITDA £265.1m including discontinued operations) following exceptional 2021 results, amidst year-long nitrile latex destocking and deteriorating macroeconomic conditions during H2

• − H1 growth in all divisions excluding Performance Elastomers; demand in construction, coatings and adhesives end-markets progressively weakened over Q3 and Q4

• − Performance Elastomers saw significantly reduced demand for nitrile butadiene rubber (NBR) due to extreme medical gloves inventories built up in the COVID-19 pandemic

• − Adhesive Technologies synergies on track; Q4 trading impacted by raw material supply and asset reliability issues which are being resolved. These issues, together with lower-than-expected capacity, result in £133.7m non-cash goodwill impairment

Actions taken to reinforce financial resilience given current trading conditions and to support strategy

• − £131.2m Free Cash Flow in H2 (compared with £(62.0)m outflow in H1), supported by rigorous focus on costs, capital expenditure and working capital actions to preserve cash

• − On track to deliver £150-200m cash savings target by end 2023

• − New $480m revolving credit facility signed in March 2023, with longer duration and prudent covenant headroom reflecting current market uncertainties

• − £1,024.9m net debt at end December 2022; reduced substantially after year end with cash proceeds of Laminates, Films and Coated Fabrics sale completed in February 2023

• − Committed pro forma liquidity of c.£500m as at end February 2023, including new revolving credit facility as well as the £450m UK Export Finance facility and €200m receivables financing put in place during H2 2022

New strategy implemented to increase speciality weighting and focus on higher growth end-markets

− Divisions reorganised into Coatings & Construction Solutions (CCS), Adhesive Solutions (AS) and Health & Protection and Performance Materials (HPPM); effective 1 January 2023

• − Targeting stronger organic growth through increased innovation, sustainability and end-market focus, with margin enhancement from end-to-end business excellence and streamlining manufacturing footprint

• − More focused capital and resource allocation - differentiated steering for base and speciality businesses reflected in capital expenditure, cost and portfolio plans

• − Take full advantage of Synthomer's enhanced global reach, product and customer footprint following adhesive resins acquisition completed in April 2022 and other acquisitions in recent years

• − Portfolio rationalisation underway, with c.£565m 2022 revenue in non-core businesses remaining, following sale of Laminates, Films and Coated Fabrics for net $267m proceeds

Good progress on innovation, sustainability and other non-financial targets:

• − 36% reduction of scope 1 & 2 carbon footprint vs 2019; more ambitious absolute decarbonisation targets set, aligned with 2015 Paris agreement

• − Internal carbon price set for all sustainability-related projects and any significant capital projects; 80% of electricity from renewable sources

• − Sustained focus on innovation - 20% of sales volume from new and patented products; proportion of new products with enhanced sustainability benefits increased to 50%

• − Growing momentum in diversity, equality and inclusion - improving gender balance at senior management and graduate intake levels

Current trading and outlook

Our year to date trading performance reflects the continuation of the challenging macroeconomic conditions in the final quarter of 2022, with subdued levels of demand across most of our end markets and geographies. We expect to make progress in the second half of 2023 reflecting the benefits of our operational and cost actions, supplemented by the anticipated start of an improvement in market conditions, although visibility of this is currently limited. As previously indicated, while underlying end-market demand for medical gloves remains robust, we do not expect the unprecedented period of destocking, and hence low NBR production levels, to abate before the end of 2023.

We have taken decisive actions to strengthen our business in the current difficult environment and position ourselves for profitable growth as demand recovers. We remain confident in our ability to execute Synthomer's refreshed strategy and deliver the medium term targets we set out in October 2022, which were mid-single-digit growth in constant currency over the cycle, EBITDA margins above 15% and mid-teens return on invested capital.

Commenting, Synthomer CEO Michael Willome said:

"Following an exceptional prior year and a robust first half, our overall performance in 2022 was significantly affected by deteriorating macroeconomic conditions during the second half and the prolonged destocking in nitrile latex. The Group has been swift to respond. We are on track to save £150-200m of cash by the end of this year, have rapidly executed the first successful divestment from our non-core business portfolio and completed a refinancing with our banks, strengthening the Group's financial platform. We are implementing operational changes to strengthen delivery in our adhesives business whilst executing our new strategy which will increase our focus on the more speciality, higher growth end markets in our portfolio. This strategy, together with the Group's larger global footprint and the depth and breadth of our innovation and sustainability capabilities, means that we are well-positioned to make progress toward our medium term profitable growth targets."

Further information:

Investors: Faisal Tabbah, Vice President Investor Relations Media: Charles Armitstead, Teneo

Tel: [phone]

Tel: [phone]

The Company will host a meeting for analysts and investors at 9:00 British Summer Time today at JP Morgan, 45 Victoria Embankment London. The meeting will also be webcast atwww.synthomer.com,please follow links to the financial calendar on the investor relations page to register.

Notes

• 1. Constant currency revenue and profit measures retranslate current year results using the prior year's average exchange rates.

• 2. Operating profit before depreciation, amortisation and Special Items.

• 3. Underlying performance excludes Special Items unless otherwise stated.

• 4. Free Cash Flow is defined as the movement in net debt before financing activities, foreign exchange and the cash impact of Special Items, asset disposals and business combinations.

• 5. Cash and cash equivalents together with short- and long-term borrowings.

Legal Entity Identifier (LEI): 213800EHT3TI1KPQQJ56. Classification as per DTR 6 Annex 1R: 1.1.

Synthomer plc is a leading supplier of high-performance, specialty polymers and ingredients for coatings, construction, adhesives, and healthcare end markets. Headquartered in London, UK and listed there since 1971, we employ around 5,000 employees across nearly 40 locations across Europe, USA and Asia. With more than 6,000 customers and £2.4bn in revenue in 2022, our three divisions are aligned to our end markets which play an important role in global megatrends including urbanisation, climate change, and economic and demographic shifts. In Coatings & Construction Solutions, our tailored solutions enhance the sustainability and performance of a range of products such as architectural and masonry coatings, mortar modification, fibre bonding, waterproofing and flooring, while our energy solutions promote drilling stability in the challenging operating environments of the oil and gas industry. Adhesive Solutions is a leading supplier of products that bond, modify and compatibilise surfaces and components for a range of end markets including tapes and labels, packaging, hygiene, tyres and plastics. In Health & Protection and Performance Materials we are a world-leading supplier of water-based polymers for medical gloves and a major European manufacturer of high-performance binders, foams and other products for a range of niche applications. Our purpose is creating innovative and sustainable polymer solutions for the benefit of customers and society. Around 20% of our sales volumes are from new and patent protected products. At our innovation hubs in the UK, Germany, Malaysia and Ohio, USA we collaborate closely with our customers to develop chemical formulations tailored to their needs while also minimising environmental impact. We are working to embed sustainability in everything we do. We have reduced our scope 1 and 2 carbon footprint by one third since 2019, and have been recognized for our leadership in sustainability by a number of authorities. Since 2021 we have held the London Stock Exchange Green Economy Mark, which recognises green technology businesses making a significant contribution to a more sustainable, low-carbon economy. Find us atwww.synthomer.com,@Synthomer_Group on Twitter or search for Synthomer on LinkedIn.

Chief Executive Officer's review

Focusing our business for future opportunities

In more challenging times it is more important than ever to be close to our customers, to focus on the things we do best and to follow a clear strategy.

2022 has certainly seen its share of challenges for Synthomer, for our people and our wider stakeholders. Following the unprecedented demand for nitrile latex in 2020 and 2021, we have experienced a prolonged destocking of medical gloves, which our customers manufacture from our nitrile butadiene latex (NBR), resulting in far weaker levels of demand. The war in Ukraine, ongoing COVID-19 disruption and broader recessionary pressures have all contributed to economic volatility, including supply chain disruptions, sustained higher raw material costs and energy price hikes. The cost-of-living crisis has affected a number of our markets, with demand deteriorating over the course of the second half of the year. And during the fourth quarter, the macroeconomic environment also began to affect demand in our Adhesive Technology business, alongside the additional impact of supply chain issues constraining access to raw materials and site reliability challenges, which we are working to resolve, as well as the impact of lower-than-expected capacity.

We are grateful to our people, who have continued to demonstrate real commitment to deliver for our customers around the world throughout this volatile period. The Total Group revenue of £2.6 billion and EBITDA of £265.1 million delivered in 2022 was a solid performance given the challenges we have faced. At the same time, and crucially for the future of Synthomer, we have launched a refreshed strategy and reorganised our business - work that is centred on becoming a truly global specialised chemical company, concentrated on three attractive growth markets: coatings and construction, adhesives, and health and protection. It gives us a clear pathway to emerge stronger and more focused from these volatile times - and a platform from which to create sustainable value for all our stakeholders.

Towards specialised, high-performance, high-growth markets

Our refreshed strategy and new structure make our business simpler, more efficient and more sharply focused on areas where we add most value. It will move us towards the more specialised, higher-performance, higher-growth markets where we know we can win. We are becoming more end-market focused, with sustainability and innovation at the centre of what we do. We are also driving a Group-wide emphasis on making our execution bolder and faster through business excellence.

Just as importantly, the new strategy renews our focus on organic growth and portfolio management. Our business has expanded significantly through acquisitions in recent years, giving us greater reach globally and particularly in North America, opening up opportunities in attractive markets, reinforcing our innovation capabilities and strengthening our leadership positions. However, that expansion has also made our business more complex and taken us into some non-core areas - perfectly strong and sound businesses in themselves, but either more cyclical in nature or too small for us to generate strong, consistent growth.

Following a full evaluation of our portfolio we are now allocating capital more effectively, applying differentiated steering to invest in core areas where it will have the most impact. We are also rationalising our portfolio through the disposal of non-core businesses. We took an important step in this process when we announced the sale of the Laminates, Films and Coated Fabrics businesses in December 2022. This sale, which completed on 28 February 2023, increases the speciality weighting of our overall portfolio and is margin accretive in line with our strategy. The $267 million cash proceeds (including $5 million payable in 2024) will also help strengthen our balance sheet and support our drive to reduce our leverage to our medium-term target of between 1 and 2x net debt to EBITDA - another key strategic focus. Our CFO Lily Liu describes this further on pages 7-8, alongside the work we are doing to improve our working capital position and optimise our cost base.

Harnessing growth to sustainability

Our strategy aims to bring us closer to our customers, immersing us in their markets so we can identify the trends driving demand and develop the solutions to meet them.

Sustainability is one of the most important of these trends. Regulation is driving the requirement for cleaner, more environmentally friendly solutions and for renewable raw materials. As a market leader in water-based and emission-reducing polymers, that creates a huge opportunity for Synthomer.

We have a long track record of helping our customers towards their own sustainability goals. Our emission-reducing solutions and lower-carbon-intensity operations all make a positive contribution towards customers'

Scope 3 carbon footprints. Our capabilities and products can help our customers in multiple areas - whether that is replacing solvent-based coatings with water-based alternatives, developing water-based polymers and redispersible powders for construction customers, or innovating bio-based, low-carbon-footprint and circular solutions for adhesives.

We are also making progress with our own sustainability objectives. Our Vision 2030 ESG programme is a long-term, embedded part of our business strategy - a key part of ensuring we remain competitive, as well as the responsible approach to doing business. We are committed to science-based targets to navigate our decarbonisation, and are targeting 60% of our new products to have sustainability benefits by 2030. We have already delivered a 36% reduction in absolute Scope 1 and 2 emissions since 2019, and we are actively working on reducing Scope 3. In 2022 we made our decarbonisation objectives more ambitious and focused on absolute reductions rather than lower carbon intensity, in alignment with the 2015 Paris Agreement. We hold the London Stock Exchange Green Economy Mark, awarded to companies who earn more than 50% of their revenue from products that contribute to environmental objectives. This year we were upgraded from an 'A' to a 'AA' rating by MSCI, putting us in the top quartile of ESG performance for the Specialty Chemicals sector.

Diversity and inclusion: at the heart of our strategy

The dynamism and resilience of any business is created by the people who work there - and I strongly believe that diverse teams help create better ideas and drive innovation in what and how we deliver.

Diversity and inclusion forms a critical pillar of our refreshed business strategy, and has been a focus for me from my first day at Synthomer, because it is vital to delivering value for all our stakeholders. We have made strong progress this year, particularly in the leadership team, which has been transformed by several appointments that have broadened the range of backgrounds and experiences we can draw on, and which now contains more women than ever before. Of course there is more we can do, and to ensure we maintain our recent momentum in this area we have committed to achieving 40% gender diversity across senior management by 2030 as a stepping stone to true gender balance.

The evolution of our strategy does not mean a change in our values however - among which our highest priority remains safety, health and environment (SHE). We know that we have more to do on safety in particular. Our legacy businesses have benefited over many years from our SHE programme and continue to perform well. Our near-term objective is to ensure that newly acquired businesses are aligned to Synthomer standards within a three-year cycle. That process is on track at our former OMNOVA sites, which show good improvement since acquisition; we are applying the same rigour to the adhesive resins sites acquired in 2022.

Positioning Synthomer for profitable growth

The actions that we have taken will enable Synthomer to navigate the current difficult environment and ensure that the Group is in a strong position to make progress when macroeconomic conditions improve. Looking ahead, we will continue to enhance our efficiency through asset optimisation and by improving cost control and capacity management throughout the Group. In our new Coatings & Construction Solutions division, our focus is on driving organic growth. In Adhesive Solutions we will increase operational and supply chain reliability, reprioritising capital expenditure to support debottlenecking and broaden raw material supply while taking further steps to reduce working capital to typical Group levels. We will also benefit from recent organisational changes and the implementation of Synthomer's operational excellence standards. Within Health & Protection and Performance Materials, we will continue to strengthen our cost competitiveness and enhance customer intimacy while reviewing opportunities to divest other non-core businesses.

Synthomer is on a journey to become a global specialised chemical company focused on three core end markets, with excellence embedded throughout our business and a sharp focus on sustainable innovation. While we are experiencing such a challenging point in the trading cycle for our key markets, we will continue to focus on generating cash and strengthening our balance sheet. But cycles move on, and I am confident that our strategy is the right one - and that it will make us a trusted and responsible player in our customers' value chains, meeting the needs of the end consumer through sustainable innovation, so that we grow back stronger and continue to deliver on our purpose of creating innovative and sustainable polymer solutions for the benefit of customers and society.

Outlook

Our year to date trading performance reflects the continuation of the challenging macroeconomic conditions in the final quarter of 2022, with subdued levels of demand across most of our end markets and geographies. We expect to make progress in the second half of 2023 reflecting the benefits of our operational and cost actions, supplemented by the anticipated start of an improvement in market conditions, although visibility of this is currently