Synthomer Regulatory News (SYNT)

13 August 2013

Synthomer plc

Interim Results for the six months ended 30 June 2013

SOLID PERFORMANCE IN CHALLENGING MARKET CONDITIONS

· Performance in Europe impacted by on-going weak demand, particularly in construction related areas, reflecting the current macro environment.

· Growth in Asia and ROW driven by continuing strong nitrile demand growth and modest recovery in unit margins from H2 2012 levels.

· Strong cash flow enabling strategic investment in additional capacity and Emerging Markets.

· Net debt reduced to £151.7 million (H1 2012: £174.2 million).

· Interim dividend declared of 2.4p per share (H1 2012: 2.2p) in line with policy.

* Restated due to the adoption of IAS19 revised, see note 11

Commenting on the results, Adrian Whitfield, Chief Executive Officer, said:

"Synthomer has delivered a solid performance in the first half of 2013, in line with expectations. Business in Europe has remained challenging, with a continuation of the weak demand trends seen in the second half of 2012 reflecting the current economic environment.

In Asia, the performance of our nitrile business has been encouraging, with the pace of recovery being faster than originally anticipated. We have seen good demand growth and a modest improvement in margins from the low levels we saw over most of last year.

For the balance of the year, absent any recovery in demand in Europe, the Board expects that our European business profitability will be somewhat lower than the first half, largely reflecting the impact of normal seasonal factors. The Asia and ROW business is expected to operate at a similar level to the first half."

ENQUIRIES:

The Company will host a meeting for analysts and investors at 09.30 at the Andaz Hotel (40 Liverpool St, London EC2M 7QN). The presentation will be webcast on the company's website www.synthomer.com

Synthomer plc (SYNT) may also be referred to in this report as "Synthomer", the "Company" or the "Group"

Cautionary statement

This Interim Management Report (IMR) has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The IMR should not be relied on by any other party or for any other purpose.

The IMR contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

This IMR and the condensed set of financial statements for the six months ended 30 June 2013 and for the six months ended 30 June 2012 have been reviewed but not audited. All reference to sales and operating profit in the Chairman's statement and business review, which follows, reflect underlying performance including share of joint ventures, as per note 4, unless otherwise stated.

CHAIRMAN'S STATEMENT

Overview

The Group delivered a solid set of results for the first half of 2013 given the on-going challenging economic conditions in Europe, and the reduced demand we have seen as a result in the region. Demand in Asia and ROW remains strong, with volumes ahead by over 8%.

Whilst it is always disappointing to see lower results, the PolymerLatex acquisition has provided a strong platform in terms of cash generation within the Group and created a much more robust European business. This has allowed us to remain focused on our long-term growth strategy of using strong European cash flows to invest in new products and accelerate our growth in emerging markets.

H1 Results*

Group revenues declined by 7.5% to £558.3 million (2012: £603.3 million). Group EBIT decreased by 11.4% to £56.0 million (2012 restated: £63.2 million) due to the weaker results in our European business. Volumes were 1.3% lower.

Underlying profit before tax decreased to £48.6 million, 10.3% behind prior year.

Earnings per share for the half year, on an underlying basis, were 10.9 pence per share, 7.6% behind prior year.

\* The 2012 result has been restated on adoption of IAS19 (revised).

Divisional Performance

Europe & North America (on an underlying basis)

Operating profits in our European and North American business segment were down 14.6% on the first half of 2012 mainly as a result of weaker demand in Europe.

Volumes were down by over 5.1% on the first half of 2012. In recent years the Group's focus on margin management and the associated "softer synergies" from the acquisition of PolymerLatex have allowed the group to more than offset the impact of volume declines. However, the current environment has restricted our ability to do this, and over the period, compared to prior year, there was some slight unit cash margin erosion.

Volume shortfall remains most pronounced in construction related areas, particularly across our CCF (Carpets, Compounds and Foam), C&C (Construction and Coatings) and FP (Functional Polymers) businesses, where activity levels remain depressed due to the persistent tough macro-economic environment in the region.

Over the longer term, we continue to target average through the cycle growth in line with GDP from our European business. We have a good pipeline of new products from our R&D centres of excellence, and have enhanced our links with a number of universities. We have now started full production of our new enhanced Lithene product range, and during the second half will be starting sales of a new starch modified paper latex grade, and an HSSBR grade for Bitumen modification, along with other product launches.

We have closed three plants in Europe as part of the PolymerLatex synergy process, which has allowed us to keep firm control over our total production costs. We are also investing in future growth areas in Europe, with an expansion of our PVOH plant underway, and plans are in train for additional capacity for specialty dispersions in the UK and Germany.

Asia & Rest of World (on an underlying basis)

Profitability in nitrile improved on the run rates we saw through the second half of 2012. This improvement was earlier than anticipated, with good market demand growth. Margins remain below historic levels, albeit, improved on the lower rates we saw through the majority of last year. Whilst we do not anticipate any further improvement in the current run rate of nitrile profitability over the balance of the year, we would expect to see some further improvements in 2014, based on current growth rates in demand continuing, and we remain confident about the underlying long term attractiveness of the high growth Asian nitrile latex glove market.

The non-nitrile business performed well, though we remain capacity constrained in Asia. Our initial Middle East capacity expansion commenced manufacture in the second quarter and we have now commenced a further expansion of 35% to commission H2 2014. Plans are progressing well to expand capacity in both Malaysia and Vietnam which will also be available in H2 2014. As always we remain alert to bolt on acquisitions and continue to explore greenfield opportunities along with key customers.

Overall, volumes in Asia and Rest of World were up 8.1% on the prior year.

We continue to target growth in Asia and ROW ahead of GDP, supported by investment and new product introductions. We remain the clear global number one in supply to the high growth Nitrile Latex market, and the number one dispersion manufacturer in Saudi, Malaysia and Singapore.

Cash flow and balance sheet

The Group's financial position remains robust, with strong cash generation reducing net borrowings to £151.7 million down from £174.2 million at the midpoint of 2012. Net debt was slightly down on the year end position of £155.8 million, with the half year working capital outflow of £11.9 million in line with the normal seasonality from the year end and after £22.1 million of planned capital expenditure in the first half.

There was no significant change in the level of the Group's pension deficit from the start of the year.

At the end of June, the Group had net liquid resources available of £49.7 million (cash and equivalents and financial assets less current borrowings) and an undrawn £60.0 million revolving credit line maturing in March 2015 together with various uncommitted overdraft lines. 

Dividend

The Board has a stated dividend policy of progressively moving to a dividend cover of three times by 2015.

Consistent with this we are declaring an interim dividend of 2.4p, an increase of 9.1%.

IFRS

The Group reported an IFRS profit before tax of £32.9 million (2012 restated - £36.4 million). This is £15.7 million below underlying profit before tax (2012 restated - £17.8 million) due to the special items detailed in the 'Special Items' paragraph below.

Special items

The Group had a number of special items in the half year, which are not part of underlying results. The operating expense amount of £15.3 million relates to the PolymerLatex acquisition, comprising £1.0 million of restructuring expenses associated with the final integration and synergy extraction and £14.3 million of intangible amortisation. The loss on fair value within finance costs of £0.4 million relates to the cross currency swaps that hedge the Group's US private placement debt into sterling, but do not qualify for hedge accounting under the narrow framework of IAS 39. The majority of the taxation amount of £4.4 million is the notional tax credit on the intangible amortisation expense.

Taxation

The Group benefits from pioneer status tax incentives in the nitrile business in Malaysia and relief on contributions to the closed defined benefit UK pension fund. Together with tax expense in the other countries that the Group operates in, particularly Germany, has resulted in an overall underlying taxation rate of 22%.

Outlook

For the balance of the year, absent any recovery in demand in Europe, the Board expects that our European business profitability will be somewhat lower than the first half, largely reflecting the impact of normal seasonal factors. The Asia and ROW business is expected to operate at a similar level to the first half.

NEIL JOHNSON

Chairman

12 August 2013

CONsolidated income statement for the SIX MONTHS ENDED 30 JUNE 2013

Special items

The special items are shown in more detail in note 3.

Consolidated income statement for the SIX MONTHS ENDED 30 JUNE 2013 continued

Special items

The special items are shown in more detail in note 3.

Consolidated STATEMENT OF COMPREHENSIVE INCOME for the SIX MONTHS ENDED 30 June 2013

Consolidated STATEMENT OFCHANGES IN EQUITY

Consolidated balance sheet as at 30 June 2013

The financial statements were approved by the Board of Directors and authorised for issue on 12 August 2013.

The Group's US private placement US dollar term debt was economically hedged from dollars into sterling using long dated cross currency swaps at the date it was borrowed. The US dollar term debt is shown at the 30 June 2013 spot rate in net borrowings. The mark to market of the currency element of these swaps which hedges this US dollar term debt is shown as a reconciling item in the above analysis.

Consolidated cash flow STATEMENT for the SIX MONTHS ENDED 30 JUNE 2013

RECONCILIATION OF NET CASH FLOW FROM OPERATING ACTIVITIES TO MOVEMENT IN NET DEBT FOR THE SIX MONTHS ENDED 30 JUNE 2013

NOTES TO THE FINANCIAL STATEMENTS

1. General information

The information for the year ended 31 December 2012 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditors' report on those accounts was not qualified, did not contain a reference to any matters which the auditor drew attention by way of emphasis without qualifying the report, and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

2. Accounting policies

The annual financial statements of Synthomer plc are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in the half-yearly financial report has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with International Accounting Standards 34 'Interim Financial Reporting', as adopted by the European Union. The same accounting policies and methods of computations are followed in these financial statements as in the most recent audited annual financial statements with the exception of the application of IAS19 (revised). This is discussed in more detail in note 11.

Having regard to the financial position and future prospects of the Group, the directors have concluded that the Group is a going concern and have prepared these financial statements on that basis.

3. Special items

The special items disclosed are made up as follows:

Further details are provided in the Chairman's statement.

 4. Segmental analysis