Synthomer Regulatory News (SYNT)

6 August 2020

Synthomer plc

Interim Results for the six months ended 30 June 2020

Diversity and differentiation underpin robust H1 performance; FY 2020 guidance reinstated

1. Underlying performance excludes Special Items, unless otherwise stated.

2. Constant currency revenue and profit retranslate current year results for heritage Synthomer using the prior year's average exchange rates. Results from businesses acquired in the year are not retranslated.

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

4. Prior year comparative adjusted for bonus factor 1.0713 relating to the rights issue in July 2019.

H1 Highlights

No material disruption to operations through COVID-19 pandemic with chemical sector largely designated as essential industry

- All sites operated in line with local safety requirements

- Global network of 38 sites operated effectively during Q2

H1 2020 EBITDA £100.2 million in-line with H1 2019 (£99.7 million):

- Robust heritage Synthomer H1 2020 EBITDA £92.3 million, 7% below comparative H1 2019 EBITDA of £99.7 million; OMNOVA Q2 EBITDA £7.9 million

- Heritage Synthomer H1 2020 volumes 699kt, 7% below comparative, but strong rebound in June 2020 with volumes flat on June 2019; OMNOVA Q2 volumes 64kt

- Underlying profit before tax £58.4 million (2019: £70.2 million), IFRS loss before tax £4.7 million (2019: profit before tax £56.6 million) after Special Items of £63.1 million. The Special Items are described in the Chief Executive Officer's review.

Strong balance sheet supported by H1 free cash flow of £56.2 million:

- Post-acquisition net debt reduced to £575.5 million with proforma leverage steady at 2.5x (reported covenant leverage 2.8x)

- Significant liquidity at circa £500 million

- 5 year unsecured high yield bond issued at 3.875% providing committed long-term capital structure and eliminating bridge refinancing risk

OMNOVA integration ahead of schedule and synergy target increased to $40 million:

- Now expect $20 million run rate end of 2020 (increased from $15 million)

- $40 million run rate by end of 2022 (increased from $30 million)

Strategic review of European SBR network reaching conclusion

- Intention to initiate consultations with employees at both Oulu (Finland) and Marl (Germany)

Actions taken on cost and cash preservation

- Enlarged group proforma capital expenditure reduced from £90 million in 2019 to £50 million in 2020

- Fixed cost reduction programme and salary freeze (2020) for Board and Executive Team

- 2019 final dividend suspended at onset of COVID-19 and no 2020 interim dividend

2020 guidance reinstated and expect to pay 2020 final dividend

- Assuming demand recovery continues, H2 2020 expected to return to more normalised Group EBITDA levels

- Expect FY 2020 EBITDA to be broadly in-line with current market consensus*

- Expect to pay FY 2020 final dividend

* FY 2020 EBITDA consensus: £211.3 million (source Teneo)

Commenting on the results, Neil Johnson, Chairman, said:

"Geographic and end market diversity and product differentiation have underpinned Synthomer's resilient performance with our half year EBITDA in line with last year. Delivering these results whilst also making strong strategic progress is testament to the commitment, dedication and sheer hard work of our employees, and I would like to thank them all for their great contribution in these unprecedented times.

OMNOVA has been swiftly integrated leading to a significant increase in our synergy forecast and we have also progressed the strategic review of our European SBR network and have now announced our intention to initiate consultations with employees in Oulu (Finland) and Marl (Germany). We have also taken prudent actions to protect liquidity whilst further strengthening our balance sheet.

We are encouraged by much improved trading in June and July and accordingly we have reinstated guidance and, subject to continued progress, expect to pay a 2020 final dividend."

Further information:

The Company will host an audiocast for analysts and investors at 09.00 today. To participate please register at www.synthomer.com, please visit the Investor Relations homepage and click on the webcast link provided to register.

Chief Executive Officer's review

A resilient performance in challenging conditions

Managing our business through the COVID-19 pandemic has been a significant challenge for all our stakeholders. The chemical sector has been largely designated as an essential industry in the geographies in which we operate and therefore our 38-site global network has operated largely as normal. No significant issues have been experienced to date with regards to raw material supply, the distribution of finished goods or the availability of operating personnel. With safety our priority we have managed all our sites in line with local safety requirements and I would like to thank the dedication, hard work and flexibility of our employees to maintain our supply chains in often very challenging circumstances.

Benefitting from the Group's broad geographic and end market diversity, the heritage Synthomer business experienced a good Q1 2020 with EBITDA 5% ahead of prior year and was largely unimpacted by COVID-19. The impact of the pandemic on demand was felt in Q2 across the enlarged Group. April and May volumes were lower than the comparative period by approximately 20% with June returning to more normal levels in line with the prior year. Demand for Nitrile latex, non wovens and adhesives continued to be strong as a result of COVID-19 but sales into industrial markets including automotive, graphic paper, carpet and the oil and gas sector were impacted more significantly.

Creation of a global differentiated chemical company

We completed the £654 million acquisition of OMNOVA, a US listed speciality chemical company, on 1 April 2020. The transaction creates a global differentiated chemical company with significant scale and a robust platform from which to invest and drive its sustainable growth strategy. Synthomer is now a global leader in water-based polymer solutions with greater customer reach, improved market position, strong operational capabilities and superior innovation platform.

Since the completion of the transaction we have made strong progress with the integration of this highly complementary synergistic acquisition. We have now completed the cut and carve of the OMNOVA business into our Functional Solutions, Performance Elastomers and Industrial Specialities divisions of Synthomer. The integration of the acquisition is now expected to result in recurring pre-tax cost synergies of $40 million and we are on track to deliver $20 million of run rate synergies by the end of 2020. This not only reflects a significant increase to the total synergies set out in our investment case of $29.6 million, but also accelerates the timing of the anticipated delivery. Synthomer will continue to utilise its proven best practice processes to improve productivity, reduce costs and accelerate revenue synergy opportunities across the enlarged Group.

Strategic review of SBR business reaching conclusion

The strategic review of our European SBR network was announced in Q4 2019 to address lower plant utilisation rates across our SBR assets resulting from slower economic activity and ongoing weaker demand for coated graphic paper. Following this review, the Company has announced its intention to enter into consultation processes with employees in Oulu (Finland) concerning future options for the site, and with employee representative bodies in Marl (Germany) to consider future capacity requirements for the paper and carpet markets. In parallel the Company is in the early stages of evaluating the prospects for additional NBR latex capacity at its existing facilities in Europe following the increased demand for Nitriles gloves as a result of the COVID-19 pandemic.

Synthomer remains committed to the SBR markets in Europe and is working to ensure its assets continue to remain viable in a highly competitive market. The consultation periods are anticipated to conclude in the next few months after which the outcomes will be announced.

Separation of Acrylate Monomers

As set out in the Q1 2020 interim results, following a change in the management structure and reporting lines to provide greater management focus, we have separated the reporting of our Acrylate Monomers business from our Industrial Specialities division. Operating from a single manufacturing site in Sokolov (Czech Republic), the business supplies the Group's European Functional Solutions and external customer monomer demand. A transformation programme has been announced on this site to reduce costs, drive manpower efficiencies and to close the site's coal-based power station. This action will end the use of coal for power generation across the enlarged Synthomer group and allow a material improvement in our carbon footprint. The Group remains committed to the production of the full product range at the Sokolov site and to the supply of product to meet internal and external demand.

Prudent actions to preserve balance sheet strength and liquidity

In light of the uncertainty created by COVID-19, Synthomer has taken a number of prudent and proactive actions to preserve the strength of the balance sheet, reduce capital expenditure and position the cost base of the enlarged Group to allow it to deliver its long term growth strategy. Whilst these decisions were not taken lightly, we have been resolutely focussed on maintaining our balance sheet strength and protecting our significant liquidity and leverage covenant headroom.

Our actions included a senior management and executive pay freeze, suspending our 2019 final dividend and not paying a 2020 interim dividend, preserving approximately £47 million of capital and cash for the Group, and reducing our ongoing capital expenditure to approximately £50 million for the full year 2020, some £40 million lower than the proforma combined spend of the Synthomer and OMNOVA heritage businesses in 2019.

Our investment in growth capital expenditure during 2017-2019 has now brought on stream additional low-cost capacity at our Asian and European plants. This investment provides a catalyst for ongoing growth, the delivery of improved profits, notably in our Asian Nitrile latex business, and has allowed us to reduce capital expenditure in 2020 as we focus our attention on the integration of the OMNOVA acquisition. Our asset base remains well invested and our commitment to invest in growth projects such as the 60kt Nitrile latex plant scheduled to be commissioned in 2021 and the Asian Innovation Centre, above our sustenance capital requirement of approximately £30 million, remains.

Successful issuance of first high yield bond

The Group successfully issued its first high yield bond in June raising €520 million due 2025, completing the Group refinancing post the acquisition of OMNOVA and eliminating the bridge facility refinancing risk. Synthomer now has its long-term financing structure in place, a strong balance sheet and significant leverage covenant headroom (leverage covenant limits 4.25x and 4.00x EBITDA for 2020 and 2021). The Group also has significant liquidity underpinned by its committed unsecured 5 year €460 million revolving credit and $260 million term loan bank facilities due July 2024, and now the €520 million high yield bond due 2025. Cashflow remains strong and with raw material prices lower in Q2 2020 net indebtedness reduced from £658 million on 1 April 2020 to £575.5 million on 30 June 2020.

H1 Results - Underlying performance

Group revenue was £733.7 million (2019: £762.7 million). The decrease reflected the very significant fall in raw material prices in Q2 2020 as a result of the impact of COVID-19, more than offsetting the overall increase in volumes of approximately 2%. Whilst volumes of the heritage Synthomer business were down by 7% relative to the comparative period, mainly reflecting the challenging Q2 pandemic conditions, OMNOVA contributed 9% incremental volumes following its acquisition on 1 April 2020.

In a period of challenging economic activity, the Group delivered H1 2020 Underlying EBITDA of £100.2 million, in line with the H1 2019 of £99.7 million. We reported that the Group was making good progress in Q1 2020 with our EBITDA at £45 million 5% ahead of the 2019 comparative period results. Whilst Q2 2020 was impacted by COVID-19, the H1 2020 Underlying EBITDA reflected a robust performance of the heritage Synthomer business of £92.3 million, just 7% down on the comparative period, and the EBITDA contribution from OMNOVA of £7.9 million.

Underlying finance costs increased to £10.2 million (2019: £4.5 million), mainly reflecting the interest on the borrowings relating to the OMNOVA acquisition from 1 April 2020. The finance costs reflect the interest on the €460 million committed unsecured 5 year revolving credit facility, the $260 million committed unsecured 5 year term loan, the €520 million committed unsecured bridge, refinanced in June 2020 with the €520 million 3.875% 5 year unsecured high yield bond, the associated debt amortisation costs, and the IAS 19 pensions interest costs in respect of our defined benefit pension schemes.

The effective tax rate increased from 14.0% in H1 2019 to 22.1% in H1 2020 principally as a result of the pre-announced ending of the Malaysian Pioneer Status in February 2020, and the impact of COVID-19 on the geographical mix of profits, with proportionately more profits being generated in Malaysia.

Underlying earnings per share was 10.8 pence per share, down 34.5% (2019: 16.5 pence per share), reflecting the lower profits before tax, the higher effective tax rate, and the impact of the pre-emptive acquisition financing 85 million shares rights issue in July 2019 ahead of the acquisition which completed on 1 April 2020.

H1 Results - IFRS performance

IFRS loss before tax was £4.7 million relative to a profit before tax of £56.6 million in H1 2019. The IFRS loss before tax reflects the Underlying profit as adjusted for the Special Items set out in note 3.

Special Items in H1 2020 totalled a net charge of £63.1 million, compared to a net charge of £13.6 million in H1 2019. This net charge comprises amortisation of acquired intangibles of £11.8 million, acquisition costs and related gains of £13.2 million and restructuring and integration costs of £11.6 million, the latter two principally in relation to the OMNOVA acquisition. It also includes a £10.6 million impairment charge in relation to our European SBR network assets and a £6.6 million loss on sale of heritage Synthomer's European Tyre Cord business as required by the European Commission Competition authority as a clearance remedy in relation to the acquisition of OMNOVA. Finance costs within Special Items comprise a fair value loss on unhedged interest derivatives of £4.4 million and following the refinance, a £4.9 million loss on the extinguishment of earlier financing facilities. The Special Items are described later in this review.

Outlook 

The return to more normalised trading seen in June has continued through July. Following detailed discussions with stakeholders in each of our markets, and subject to continued progress , we are confident that the second half of the year will see a sustained return to more normalised Group EBITDA levels. As a result, we now expect full year EBITDA to be broadly in line with current market consensus* and accordingly the Board expects to pay a full year 2020 final dividend.

*FY 2020 EBITDA consensus: £211.3 million (source Teneo)

Divisional - Underlying performance

Performance Elastomers

1 Constant currency revenue and profit retranslate current year results for heritage Synthomer using the prior year's average exchange rates. Results from businesses acquired in the year are not retranslated.

Following the acquisition of OMNOVA, Performance Elastomers now includes the former OMNOVA Performance Additives and the Paper and Carpet businesses. All of these businesses were part of the Performance Materials division of OMNOVA. Three of the 13 OMNOVA sites are now managed as part of the Performance Elastomers division (Ningbo (China), Caojing (China) and Calhoun (USA)).

Performance Elastomers delivered a solid performance with the Nitrile latex business experiencing strong demand as a result of the increased requirement for health and hygiene products during the pandemic. Divisional volumes were unchanged on 2019 with unit margins modestly ahead. Underlying H1 2020 EBITDA was lower at £47.6 million (2019: £53.5 million) as the performance of the OMNOVA and SBR businesses were more significantly impacted during Q2 and offset a strong Nitrile latex performance. The majority of the OMNOVA Performance Materials division was transferred to our Performance Elastomers division and contributed an EBITDA loss of £3.4 million to Underlying EBITDA in Q2 2020.

Our Nitrile latex business continued to benefit from the additional 90 kilotonnes of capacity introduced in Q4 2018 at our Pasir Gudang site. In addition, we saw further strengthening of demand due to COVID-19 leading to higher Nitrile latex volumes and full utilisation of our assets. Nitrile latex unit margins improved through H1 on the back of lower raw material cost with unit margins marginally lower in H1 2020 relative to a strong comparative in H1 2019.

Following a solid Q1 2020 performance, SBR latex market conditions were impacted by the COVID-19 pandemic in Q2 resulting in weaker demand with volumes and unit margins below prior year in the paper, carpet and foam end markets. A strategic review of our European SBR network was announced in Q4 2019 to address lower plant utilisation rates across our SBR assets resulting from slower economic activity and ongoing weaker demand for coated graphic paper.

Following this review, the Company has announced its intention to enter into consultation processes with employees in Oulu (Finland) concerning future options for the site, and with employee representative bodies in Marl (Germany) to consider future capacity requirements for the paper and carpet markets.

In parallel the Company is in the early stages of evaluating the prospects for additional NBR latex capacity at its existing facilities in Europe following the increased demand for Nitrile gloves as a result of the COVID-19 pandemic.

Synthomer remains committed to the SBR latex markets in Europe and is working to ensure its assets continue to remain viable in a highly competitive market. The consultation periods are anticipated to conclude in the next few months after which the outcomes will be announced.

Consistent with the strategic review, the Company has recorded an impairment provision in relation to its European SBR network fixed assets of £10.6 million. The charge for the impairment provision has been included in Special Items.

Functional Solutions

1 Constant currency revenue and profit retranslate current year results for heritage Synthomer using the prior year's average exchange rates. Results from businesses acquired in the year are not retranslated.

Following the acquisition of OMNOVA, Functional Solutions now includes the majority of the former OMNOVA Speciality Coatings & Ingredients and Oil & Gas businesses. Both of these businesses were part of the Specialty Solutions division of OMNOVA. Six of the 13 OMNOVA sites are now managed as part of the Functional Solutions division (Akron, Mogadore, Fitchburg, Chester (USA), Sintra (Portugal) and Le Havre (France)). The enlarged Functional Solutions business now benefits from greater geographic diversity and product differentiation, superior innovation platforms and increased scale.

Functional Solutions delivered a robust performance supplemented by the OMNOVA acquisition from 1 April 2020. Underlying EBITDA at £46.4 million was 19.0% higher than 2019 (£38.9 million) with OMNOVA contributing £9.1 million of Underlying EBITDA in Q2 2020. Sales volumes were 3.1% higher compared to prior year reflecting incremental volumes contributed by the OMNOVA acquisition offset in part by the impact of COVID-19 on Q2. Unit margins increased as a result of improved mix, impact of the acquired business and softer raw material prices. Underlying unit margins strengthened in coatings, textiles, adhesives and oil and gas markets relative to the prior year period.

After a strong Q1 2020 performance, April and May volumes were lower in all industrial segments as a result of COVID-19 relative to the comparative period. This was compensated for by stronger unit margins with progress supported by the acquisition of OMNOVA and the expansion of our dispersion facilities in Worms (Germany) and Roebuck (USA) which introduced low cost capacity to drive organic growth in increasingly differentiated applications. June saw demand improve with encouraging exit rates as conditions returned to more normalised levels.

Industrial Specialities

1 Constant currency revenue and profit retranslate current year results for heritage Synthomer using the prior year's average exchange rates. Results from businesses acquired in the year are not retranslated.

The Industrial Specialities business now includes the former OMNOVA Laminates and Films business (which was part of the Specialty Solutions division of OMNOVA) and the Coated Fabrics business (which was part of the Performance Materials division of OMNOVA). Four of the 13 OMNOVA sites are now managed as part of the Industrial Specialities division (Jeanette, Auburn, Monroe (USA) and Rayong (Thailand)).

Industrial Specialities delivered a resilient performance supplemented by the OMNOVA acquisition from 1 April 2020. Underlying H1 2020 EBITDA at £14.6 million was 14.1% higher than 2019 (£12.8 million) for the equivalent business excluding the Acrylate Monomers division which is now reported separately. OMNOVA contributed £4.6 million of Underlying EBITDA. Sales volumes were 17.2% higher compared to prior year and unit margins increased significantly as a result of the acquired business with heritage margins ahead of prior year. Following a solid Q1 performance, demand in Q2 was impacted by COVID-19 in all industrial segments but notably in products supplied to automotive end markets with June seeing improved demand in key end markets.

Acrylate Monomers

1 Constant currency revenue and profit retranslate current year results for heritage Synthomer using the prior year's average exchange rates. Results from businesses acquired in the year are not retranslated.

Following a change in management structure and reporting lines, and in order to provide greater management focus, the Acrylate Monomers business will be reported separately going forward. This business comprises the acrylic acid and acrylate monomer production in Sokolov, Czech Republic. The business supplies the Group's European Functional Solutions and external customer monomer demand and was formerly reported within the Industrial Specialities division.

Underlying EBITDA in Acrylate Monomers was lower at a loss of £0.5 million relative to the comparative period (2019: profit of £1.8 million), comprising a loss in Q1 of £1.1 million and a profit in Q2 of £0.6 million. Notwithstanding challenging market conditions in Q2 adversely impacting volumes, lower raw material prices and a change in customer mix resulted in sequentially higher unit margins.

A transformation programme is underway at the Sokolov site. A cost reduction programme is now in place which will drive manpower efficiencies whilst maintaining our commitment to the ongoing production of both Acrylate Monomers and Functional Solutions dispersions at the site. A key part of the transformation is the planned closure of the coal fired boiler, which marks the end of coal use in the enlarged Synthomer Group and reinforces our strong commitment to reducing the carbon footprint of the site and the wider Group.

Special Items

The following items of income and expense were reported as Special Items and accordingly were excluded from Underlying performance:

· Amortisation of intangibles increased during the period as a result of the acquisition of OMNOVA Solutions Inc.

· Acquisition costs and related gains in the six months to June 2020 relate to the acquisition of OMNOVA and comprise £18.6 million of costs and the £3.3 million impact of unwinding the fair value adjustment on acquisition of inventory offset by a gain of £8.7 million on a foreign exchange derivative entered into in July 2019 to hedge the acquisition price. Acquisition costs in 2019 also relate to the acquisition of OMNOVA.

· Restructuring and site closure costs in 2020 relate to the integration of OMNOVA and were required to deliver the synergies of the acquisition. In 2019 the costs related to the reorganisation of the Group into global business segments.

· Following the strategic review of our European SBR network we have impaired the European SBR fixed assets by £10.6 million.

· To obtain clearance from the European Commission Competition authority for the acquisition of OMNOVA we were required to dispose of heritage Synthomer European Tyre Cord business, which represented less than 0.5% of 2019 revenue. The disposal resulted in a loss of £6.6 million.

· In July 2018 the Group entered into swap arrangements to fix Euro interest rates on the full value of the €440 million committed unsecured revolving credit facility. The fair value of the unhedged interest derivatives relates to the mark-to-market of the swap at the respective period ends in excess of the Group's current floating rate borrowings.

· Following the Group's successful refinancing, capitalised debt costs relating to the 2018 refinancing and the 2019 bridge to bond were written off, leading to a loss on extinguishment of £4.9 million.

Tax

The Group's Underlying tax rate at 22.1% (H1 2019: 14.0%, Full Year 2019: 14.0%) was higher than the prior year principally as a result of the pre-announced ending of the Malaysian Pioneer Status in February 2020, and the impact of COVID-19 on the geographical mix of profits, with proportionately more profits being generated in Malaysia.

Refinancing and covenants

In July 2019, in preparation for the acquisition of OMNOVA, the Group refinanced its 2018 €440 million revolving credit facility with financing conditional on the completion of the acquisition. At the same time the Group put in place deal contingent foreign exchange contracts to deliver $480 million at a fixed rate to Euro at completion of the acquisition to hedge the acquisition purchase price currency exposure. These contracts reduced the amount of Euro borrowed to finance the acquisition by £12.7 million equivalent and the gain was recognised in Special Items in 2019 (£4.0 million) and 2020 (£8.7 million).

The new facilities comprising the $260 million term loan and the €520 million acquisition financing bridging facility were fully drawn and the €460 million revolving credit facility was partially drawn on the acquisition of OMNOVA. Subsequently, on 25 June 2020, the €520 million acquisition financing bridging facility was repaid with the proceeds of the 5 year €520 million 3.875% unsecured high yield bond due 2025. The committed unsecured term loan and the revolving credit facility have terms ending on 3 July 2024.

The Group now has committed unsecured borrowing facilities comprising the $260 million term loan, €460 million revolving credit facility and the 5 year €520 million 3.875% high yield bond, and accordingly has committed borrowing facilities of approximately £1,080 million through until July 2024. The borrowing facilities are subject to one leverage ratio maintenance covenant. At 30 June 2020 the Group's leverage ratio was 2.8x, well within the leverage ratio covenant of 4.25x at 30 June 2020 and 31 December 2020 and at 4.0x at the same dates in 2021. At 30 June 2020, the Group's net borrowings were £575.5 million and accordingly the Group had approximately £520 million of liquidity.

Acquisition

On 1 April 2020, the Group completed the acquisition of OMNOVA Solutions Inc by acquiring all of the share capital and repaying their financing for a cash outflow of £611.1 million, net of cash acquired. In accordance with IFRS, the assets and liabilities have been included at fair value with the balance of consideration reported as goodwill. KPMG LLP were engaged to advise on the fair value of the Property, Plant and Equipment (PPE) and Intangibles. The value of PPE was increased by £12.8 million. The most significant intangible assets are customer relationships. Accordingly, on acquisition the Group recognised goodwill and acquired intangibles in relation to the OMNOVA business of £170.2 million and £330.1 million respectively. The estimation of the fair value of the assets and liabilities is provisional and this is planned to be finalised by the end of 2020.

The disposal of heritage Synthomer's European Tyre Cord business was required by the European Commission Competition authority as part of the competition clearance for the OMNOVA acquisition. The disposal was completed on 1 May 2020 and the terms of the disposal agreement resulted in a loss on disposal of £6.6 million.

Cash flow summary

The Group generated an operating cash flow of £57.4 million (2019: £36.5 million). The £20.9 million increase was due to an increase of £26.3 million in cash generated from operations partly offset by a £2.9 million increase in cash tax and a £2.5 million increase in interest paid (comprising an increase of £0.3 million on the Euro fixed interest rate derivatives and £2.2 million higher interest charges as a result of the OMNOVA acquisition).

The increase in cash generated by operations mainly reflected the relative movement in working capital of £51.5 million as offset by the acquisition costs of £25.8 million, integration and restructuring costs of £12.2 million, mitigated by the exchange gain on the deal contingent foreign exchange contracts of £12.7 million. Cash tax increased to £10.2 million (2019: £7.3 million) due to the changes in the geographical mix of profits and the non recurrence of a tax refund received in the prior year.

Capital expenditure in the period was £26.7 million (2019: £28.4 million), as the Group continued its investment in Pasir Gudang JOB 6, the Asia Innovation Centre, the Pathway Programme and regular recurring SHE and sustenance expenditure.

After other operating, investing and financing flows, the cash, cash equivalents and bank overdrafts increased by £101.1 million (2019: £19.3 million).

The Group pension liability increased to £243.9 million from £140.0 million at December 2019, reflecting the acquisition of OMNOVA pension liabilities of £89.8 million with a subsequent increase of £1.8 million, an increase in the heritage Synthomer UK liability of £6.5 million and an increase in heritage Synthomer overseas liabilities of £5.8 million. The increase in heritage Synthomer liability in the period primarily reflected the net impact of a decrease in discount rates in Group's UK defined benefit schemes, partly offset by asset returns.

Dividend position

On 26 March 2020 we announced that despite the Group's strong financial position, the uncertainty relating to COVID-19 meant that alongside other prudent and proactive actions we were taking to maintain a strong balance sheet and liquidity, the Board had decided not to recommend the payment of the 2019 final dividend.

In accordance with the announcement the Board has reviewed its dividend position. Whilst our trading performance has improved in June and July providing confidence to reinstate guidance for the full year, consistent with our proactive cautious measures taken earlier in the year, the Board has decided to cancel the 2019 final dividend and not to pay an interim dividend for 2020. Subject to continued progress, we are confident that the second half of the year will see a sustained return to more normalised Group EBITDA levels, and accordingly, the Board expects to pay a full year 2020 dividend.

Consolidated income statement

for the six months ended 30 June 2020

Consolidated income statement

for the six months ended 30 June 2020 (continued)

Consolidated statement of comprehensive income

for the six months ended 30 June 2020

Consolidated statement of changes in equity

for the six months ended 30 June 2020

Consolidated balance sheet

as at 30 June 2020

Consolidated cash flow statement

for the six months ended 30 June 2020

Notes to the interim financial statements

1. Basis of preparation

Synthomer plc is a public limited company incorporated and domiciled in the United Kingdom under the Companies Act. The Company is listed on the London Stock Exchange and the address of the registered office is Temple Fields, Harlow, Essex, CM20 2BH.

These interim financial statements have been prepared in accordance with applicable law, the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 Interim Financial Reporting, as adopted by the European Union.

These interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2019 were approved by the Board of Directors on 5 March 2020 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The interim financial statements do not include all the notes of the type normally included in annual financial statements. Accordingly, this report is to be read in conjunction with the Annual Report for the year ended 31 December 2019 and any public announcements made by the Company during the interim reporting period.

Going concern

The directors have considered the appropriateness of adopting the going concern basis in preparing the interim report and financial statements by reviewing a range of scenarios including the impact of COVID-19.

We updated our latest forecast for the estimated impact of COVID-19 and considered a number of scenarios. The most severe scenario assumes a recurrence of the trading conditions experienced during Q2 of 2020 for a prolonged four month period along with the unavailability of one of our largest facilities for a period of two months. Q2 was when we experienced the largest impact on our business as a result of COVID-19 when each of our diverse businesses was impacted to differing degrees. We believe that the risk of enforced plant closure is low and have implemented additional health and safety measures in each of our sites to reduce the risk of a major supply disruption.

No mitigating actions other than those already taken (capital expenditure and cost reductions, dividend suspension or salary freezes) were required under each scenario looked at. If required, further similar mitigating actions will be initiated, such as further capital expenditure and cost reductions, which are all within management control. These further actions relate to discretionary spend, and do not impact the ability to meet demand.

As at 30 June 2020, the condensed consolidated balance sheet reflects a net asset position of £661.8 million and the liquidity of the Group remains strong with headroom of more than £500 million of cash and committed facilities. The earliest maturity date of our facilities is July 2024. In all scenarios modelled our liquidity requirements are well within our committed facilities. Debt leverage covenant limits for the term loan and revolving credit facility are set at a ratio of 4.25x at 30 June 2020 and 31 December 2020 and at 4.0x at the same dates in 2021. At the half year, the net debt position was £575.5 million and our covenant ratio was 2.8x. Under all scenarios modelled our forecasts did not indicate a debt leverage covenant breach on any of the dates through to December 2021.

On the basis of this review, the directors consider it appropriate for the going concern basis to be adopted in preparing the interim report and financial statements.

Goodwill and acquired intangible assets

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. As a result of the impact of COVID-19 the Group undertook a review of the carrying value of goodwill and acquired intangibles.

The Group's four cash generating units ('CGUs') are Performance Elastomers, Functional Solutions, Industrial Specialities and Acrylate Monomers and their recoverable amounts are determined from value in use calculations.

The key assumptions for the value in use calculations are the discount rate, profitability and growth rate. These assumptions have been revised in the year in light of the current economic environment. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. The discount rate is based on the Group's weighted average cost of capital adjusted, where appropriate, for the risk premium attributable to the particular CGU's activities and geography of operation. A pre-tax discount rate of 8.6% has been used in the above calculations for each CGU.

The Group prepares cash flow forecasts derived from the most recent five-year business plans. These forecasts were updated to take account of the impact of COVID-19 in 2020 and 2021, and were approved by the Board. These cash flows were extrapolated for the following five years based on estimated growth rates. These rates do not exceed average long-term growth rates for relevant markets. The cash flow for year ten is then assumed to apply without further growth into perpetuity.

The Group has conducted a sensitivity analysis on these impairment tests. For each CGU, the Directors believe that there is no reasonably possible change in the key assumptions on which the recoverable amount is based that would cause the aggregate carrying amount to exceed the aggregate recoverable amount.

2. Accounting policies

The annual financial statements of Synthomer plc are prepared in accordance with IFRSs as adopted by the European Union and applicable law. The same accounting policies and methods of computations are followed in these financial statements as in the most recent audited annual financial statements. There are no updates to IFRSs effective from 1 January 2020 that impact the Group.

3. Special Items

IFRS and Underlying performance

The IFRS profit measures show the performance of the Group as a whole and as such include all sources of income and expense, including both one-off items and those that do not relate to the Group's ongoing businesses. To provide additional clarity on the ongoing trading performance of the Group's businesses, management uses "Underlying" performance as an alternative performance measure to plan for, control and assess the performance of the segments. Underlying performance differs from the IFRS measures as it excludes Special Items.

Special Items

Special Items are disclosed separately in order to provide a clearer indication of the Group's underlying performance.

Special Items are either irregular, and therefore including them in the assessment of a segment's performance would lead to a distortion of trends, or are technical adjustments which ensure the Group's financial statements are in compliance with IFRS but do not reflect the operating performance in the year, or both. An example of the latter is the amortisation of acquired intangibles, which principally relates to acquired customer relationships. The Group incurs costs, which are recognised as an expense in the income statement, in maintaining these customer relationships. The Group considers that the exclusion of the amortisation charge on acquired intangibles from Underlying performance avoids the potential double counting of such costs and therefore excludes it as a Special Item from Underlying performance.

The definition of Special Items is shown in note 17 and has been consistently applied.

Special Items comprise:

The following items of income and expense were reported as Special Items and accordingly were excluded from Underlying performance:

· Amortisation of intangibles increased during the period as a result of the acquisition of OMNOVA Solutions Inc.

· Acquisition costs and related gains in the six months to June 2020 relate to the acquisition of OMNOVA and comprise £18.6 million of costs and the £3.3 million impact of unwinding the fair value adjustment on acquisition of inventory offset by a gain of £8.7 million on a foreign exchange derivative entered into in July 2019 to hedge the acquisition price. Acquisition costs in 2019 also relate to the acquisition of OMNOVA partly offset by a gain of £4.0 million on a foreign exchange derivative in the second half of 2019.

· Restructuring and site closure costs in 2020 relate to the integration of OMNOVA and were required to deliver the synergies of the acquisition. In 2019 the costs related to the reorganisation of the Group into global business segments.

· Following the strategic review of our European SBR network we have impaired the European SBR fixed assets by £10.6 million.

· To obtain clearance from the European Commission Competition authority for the acquisition of OMNOVA we were required to dispose of heritage Synthomer European Tyre Cord business, which represented less than 0.5% of 2019 revenue. The disposal resulted in a loss of £6.6 million.

· Foreign exchange gain on rights issue represents a gain made on a forward contract which was entered into to swap the proceeds of the Sterling rights issue into Euro in order to pay down part of the Group's Euro borrowings.

· In July 2018 the Group entered into swap arrangements to fix Euro interest rates on the full value of the €440 million committed unsecured revolving credit facility. The fair value of the unhedged interest derivatives relates to the mark-to-market of the swap at the respective period ends in excess of the Group's current floating rate borrowings.

· Following the Group's successful refinancing, capitalised debt costs relating to the 2018 refinancing and the 2019 bridge to bond were written off, leading to a loss on extinguishment of £4.9 million.

4. Segmental analysis

The Group's Executive Committee, chaired by the Chief Executive Officer, examines the Group's performance.

With the acquisition of OMNOVA the Group has reassessed how the business will be managed going forwards. The Group's Acrylate Monomers business, which was previously managed and reported within the Industrial Specialities division has been identified as a separate segment by the Group's Executive Committee. A new management structure has been implemented and management information for Acrylate Monomers is now reported separately to the Committee.

The Group's reportable segments are:

Performance Elastomers

Performance Elastomers is focused on healthcare, paper, carpet and foam markets through our water-based Nitrile Butadiene Rubber latex (NBR) and Styrene Butadiene Rubber latex (SBR) products.

Functional Solutions

Functional Solutions is focused on coatings, construction, adhesives and technical textiles markets through our water-based acrylic and vinylic based dispersions products.

Industrial Specialities

Industrial Specialities is focused on speciality chemical additives and non-water-based chemistry for a broad range of applications from polymer additives and laminates and films to emerging materials and technologies.

Acrylate Monomers

Acrylate Monomers is focused on the production of acrylate monomers which are sold to external customers in European markets as well as our European Functional Solutions dispersions business.

The Group's Executive Committee is the chief operating decision maker and primarily uses a measure of earnings before interest, tax, depreciation and amortisation (EBITDA) to assess the performance of the operating segments. No information is provided to the Group's Executive Committee at the segment level concerning interest income, interest expense, income tax or other material non-cash items.

No single customer accounts for more than 10% of the Group's revenue.

A segmental analysis of Underlying performance and Special Items is shown below.

Finance costs for the period include £9.3 million of Special Items (six months ended 30 June 2019: £3.0 million; year ended 31 December 2019: £0.5 million) as set out in note 3.

5.  Reconciliation of operating profit to cash generated from operations