Synthomer Regulatory News (SYNT)

5 August 2021

Synthomer plc

Interim Results for the six months ended 30 June 2021

Proven strategy delivering record results

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 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.

Threefold increase in Group EBITDA to £322.7 million (2020: £100.2 million)

· Strong growth delivered across all divisions, with all ahead of H1 2020 and H1 2019

· Exceptional growth in nitrile butadiene rubber (NBR) reflecting COVID-19 related demand

· Swift action taken to successfully recover raw material price inflation

· Performance of OMNOVA, acquired 1 April 2020, ahead of acquisition investment case

Investment and strategic initiatives underpin strong performance

· Significant historic investment in NBR capacity; long-term growth market, with 200ktes of new capacity planned in Asia by 2024

· Restructuring of European SBR network on track; materially improved H1 2021 performance

· Excellent growth in Functional Solutions with OMNOVA integration delivering new opportunities

· Strong financial and operational performance in Industrial Specialities

Free Cash Flow up 59.3% to £89.5 million

· Continued strong Free Cash Flow conversion at 77%*

· Significant investment in working capital in H1 2021 reflecting higher raw material prices and activity levels, expected to reverse in H2

· Working capital remains in line with guidance at ~10% of sales

· Leverage reduced to 0.8x EBITDA (December 2020: 1.8x) supporting opportunities for continued organic and inorganic investment

Launch of Vision 2030 underpins environmental, social and governance (ESG) programme

· Vision 2030 roadmap outlines ambitious, measurable goals aligned with UN SDGs

· Awarded London Stock Exchange's Green Economy Mark, given to companies that derive more than 50% of revenues from sustainable solutions

2021 interim dividend confirmed in line with policy

· Interim 2021 dividend of 8.7p (2020: 3.0p)

Board changes

· Michael Willome joining as Group CEO on 1 November

· Steve Bennett standing down as Group CFO in due course; process to appoint new CFO underway involving external and internal candidates

*Free Cash Flow conversion excludes movement in working capital.

Caroline Johnstone, Chair, commented:

"This is an outstanding first half result, driven by both organic and inorganic investments, strategic initiatives as well as a significant improvement in demand versus H1 2020. The board recognises the continuing hard work and dedication of our employees, which has enabled us to show such strong progress. All divisions have performed strongly, reporting results that are well ahead of H1 2019, with additional benefits coming from OMNOVA and an especially strong performance from our nitrile latex business. All our sites have continued to operate without any significant interruptions due to COVID-19, with the health and safety of our employees remaining our top priority. This focus on safety will remain the number one priority in everything we do and is a key element of our new Vision 2030 ESG roadmap.

Synthomer has a proven strategy and a robust balance sheet which underpin our confidence in being able to continue the Group's excellent momentum and deliver long term growth and strong returns for our shareholders."

Outlook

Synthomer expects growth across its three core divisions to continue in the second half of the year, with ongoing high levels of demand for NBR as a consequence of the COVID-19 pandemic. Accordingly, the Board expects FY21 EBITDA to be in excess of £500 million, as previously guided.

Looking ahead, the outlook remains encouraging, with good demand across all divisions and the ongoing benefits of the OMNOVA integration, new capacity investment and further efficiency measures. Our rapid deleveraging and strong balance sheet also position us well to take advantage of growth opportunities. The Group also has a proven track record of delivering organic growth through investment in the business and has a strong platform to deliver future inorganic growth. While the investment planned in new NBR capacity demonstrates our confidence in the outlook for this market, we currently expect the exceptional performance of Performance Elastomers to normalise early in H1 2022 as the impact of the COVID-19 pandemic reduces and incremental market capacity comes online.

Further information:

The Company will host an webcast for analysts and investors at 09.00 BST today. To join, please register at https://www.synthomer.com/index.php?id=106, by clicking on the webcast link provided to register.

BUSINESS REVIEW

Our record H1 2021 EBITDA demonstrates the benefits of our organic and inorganic investment initiatives as well as a significant improvement in demand versus H1 2020. In H1 2021, our three core divisions grew EBITDA by record levels: Performance Elastomers by 398.5%, Functional Solutions by 54.7%, Industrial Specialities by 78.8%, while Acrylate Monomers also recovered strongly. Performance Elastomers was driven by the exceptional demand that has continued for nitrile butadiene rubber (NBR) hygiene products as a result of the pandemic. Whilst demand levels are likely to normalise early in H1 2022, the growth opportunities in NBR are compelling and underpin today's announcement that we will invest in 200ktes of new capacity in Asia. This is expected to come on stream by 2024.

This outstanding performance has enabled us to further strengthen our balance sheet. We have successfully deleveraged to 0.8x EBITDA from 1.8x in the last six months, meaning that we are well positioned to pursue further inorganic and organic growth opportunities in the future.

Overall, the diversity and differentiation of our products, leadership positions in high-growth markets, and the synergies from our integration of OMNOVA mean that the Group is well placed for consistent and sustainable growth as demand in all our main markets continues to recover. To meet that demand, we are focused on fulfilling our purpose to continually innovate to meet the needs of customers and society in a sustainable way, in particular through our expertise in water-based polymers. In July, the London Stock Exchange recognised Synthomer's contribution to the global green economy through the Green Economy Mark, given to companies that derive more than 50% of revenues from environmental solutions. Making a sustainable contribution is at the heart of our new Vision 2030 roadmap, which will help guide Synthomer to future success.

Continued resilient performance through the COVID-19 pandemic

Managing our business through the pandemic has been a significant challenge for all our stakeholders. Our employees have shown great resilience, and thanks to their dedication and the fact that the chemical sector is considered an essential industry by government authorities, we have been able to operate our 36-site global network largely as normal. We have had no significant issues with raw material supply, the distribution of finished goods or the availability of operating personnel, and we have managed all our sites in line with local safety requirements.

Group EBITDA increased 238.0% to £322.7 million (2020: £100.2 million)

Record growth in EBITDA was driven by a strong performance from all core divisions and the successful integration of OMNOVA. Performance Elastomers EBITDA grew by 398.5%, driven not only by strong demand for hygiene products, reflecting our ability to draw on our investment in new NBR capacity and strong pricing throughout H1 2021, but also as a result of improved demand and pricing in our SBR market marking a step change in this business.

Functional Solutions EBITDA grew by 54.7%, reflecting our stronger global position and increased market diversity following the integration of OMNOVA, and strong demand as industrial markets strengthen and sectors such as oil and gas recover from the downturns caused by COVID-19.

Industrial Specialities EBITDA grew by 78.8%, which again reflects the integration of OMNOVA and its engineering surfaces businesses, as well as strengthening demand in industrial segments. 

Improved demand also saw Acrylate Monomers EBITDA grow to £14.0 million, from a small loss in 2020, enabled by favourable market conditions and the ongoing transformation of the division. That transformation includes the closure of the Sokolov (Czech Republic) coal-fired power station, ending the use of coal across the Group and significantly reducing our carbon footprint.

Excluding the contribution from the acquisition of OMNOVA, EBITDA for our PE and FS divisions were well ahead of the first half of 2019 and IS was in line with the first half of 2019, reflecting the strength of the performance of the underlying Group and our successful navigation of the COVID-19 pandemic.

Free Cash Flow up 59.3% to £89.5 million; strong balance sheet providing capacity for future investment

Strong cash generation has helped to drive a rapid reduction of net debt to £354.5 million and leverage of 0.8x EBITDA. Our long-term committed funding is confirmed until 2024, and we have a strong financial platform on which to pursue our overall strategy of organic and inorganic growth.

Our investment in working capital in H1 2021 was £159.4 million, reflecting significant increases in both raw material prices and activity levels, albeit the ratio of working capital to sales remained unchanged at approximately 10%. Our expectation is that the investment in working capital will reverse in H2 as raw material prices fall and activity returns to more seasonal levels.

Strong performance from nitrile butadiene rubber (NBR) following long-term investment

The COVID-19 pandemic accelerated the growing demand for NBR products, predominantly through their use as protective equipment. Our nitriles business continued to benefit in H1 2021 from our significant investment in capacity and technology at a time when there was an imbalance between demand and supply. NBR remains an area of long-term growth, driven by megatrends around hygiene and health, particularly in emerging markets. We aim to maintain our leadership position in this market and continue to invest in both the innovation and production of nitriles. Our project to introduce 60ktes of new capacity at Pasir Gudang (Malaysia) remains on track, and we expect to supply customers from Q1 2022.

As part of our commitment to support the growing demand for NBR, we are pleased to announce a further investment in 200ktes of new capacity in Asia, due to come on stream by 2024, increasing our total NBR capacity by ~40%.

Alongside our investment in capacity, we launched SyNovus®, a proprietary patented NBR latex product with significant efficiency and energy benefits for our customers and which offers superior sustainability metrics from its Life Cycle Analysis relative to existing NBR products, PVC and natural rubber.

Restructuring of European styrene butadiene rubber (SBR) network on track

In H2 2019 we began a strategic review of our European SBR network with the goal of addressing falling plant utilisation rates across our SBR assets as demand for coated graphic paper weakened. In line with that review, in Q1 2021 we closed our Oulu (Finland) SBR plant and began transformation plans at Marl (Germany) following consultation to confirm the rationalisation programmes including the mothballing of a single SBR reactor train. The work we have done has led to our SBR assets becoming more profitable. We remain committed to the SBR latex markets in Europe and the US and are working to continue to optimise our assets in this highly competitive market.

We also sold our Chonburi (Thailand) site in H1 as part of our ongoing network efficiency programme, while projects to improve long-term profitability are underway in Kluang (Malaysia), Sokolov (Czech Republic), and Ribécourt (France).

Our fixed cost reduction programme, 'Mindset', which involved a line-by-line review of our non-manpower fixed costs, has been rolling out in Europe since 2019. We will continue to roll it out across Synthomer during H2, with the goal of minimising the impact of rising costs.

Functional Solutions benefitting from demand recovery and OMNOVA integration

Functional Solutions is a key growth platform for Synthomer, developing innovative and differentiated products for its customers and serving a wide range of end markets. There was a notable improvement in demand in the coatings, adhesives, sealants and elastomers (CASE) and Oil & Gas markets in the first half, and the division was also able to successfully pass through unusually high raw material prices and maintain unit margins. The investment in our Worms plant, which was completed in 2019 and increased capacity from 80ktes to 120ktes, is continuing to bring significant benefits. The plant is running at full capacity and allowing us to deliver differentiated products across our European network.

During the first half, Functional Solutions remained focused on continuing to deliver the benefits of the acquisition of OMNOVA, helping to increase the scale and geographic diversity of this division. In addition to delivering cost synergies, the successful integration of the Functional Solutions sales team with that of the former OMNOVA business is opening up significant new sales opportunities, particularly in the US. 

Launch of Vision 2030 underpins environmental, social and governance (ESG) programme

The environmental and social challenges facing the world are increasingly urgent, and it has never been so important for business to play its full part. At the same time, our integration with OMNOVA has given us the opportunity to embed a single set of values and a unified ESG approach across a truly global business.

In July we announced our new 'Vision 2030' roadmap for ESG, which sets our goals for the next decade on our route to meeting our long-term 2050 net zero emissions commitment. Vision 2030, developed from a Group-wide review, is designed to align with the UN Sustainable Development Goals, and includes targets for our three 2021 priority ESG issues: carbon and climate change, diversity and inclusion, and supply chain assurance. It also commits us to delivering top quartile performance for personal and process safety, which is central to our culture and values. Further details on Vision 2030 can be found in our Sustainability Report 2020: https://www.synthomer.com/fileadmin/files/company/sustainability_2021/Synthomer%20plc_Sustainability%20Report%202020.pdf

Performance Elastomers and Functional Solutions - our two largest divisions - principally develop water-based polymers, which offer significant sustainability advantages versus solvent-based alternatives. The CO2 intensity of these divisions is top quartile compared to peer chemical companies and their increasing adoption of renewable energy will contribute strongly to our ambitious Vision 2030 Goals for Scope 1 and 2 emissions.

Board updates

In June, we announced the appointment of Michael Willome as Group Chief Executive Officer. Michael will succeed Calum MacLean, who announced in January 2021 that he wished to step down once a suitable successor had been identified. Michael will join the Synthomer Board as Chief Executive on 1 November 2021.

Steve Bennett has informed the Board that he would like to stand down as Chief Financial Officer in due course. Steve has a twelve-month notice period and has agreed to remain in his role until a successor is appointed to ensure a smooth transition. Steve has been with the Company for nearly 7 years, during which time he has made a significant contribution. He has established a strong team and finance function, overseen several refinancings, significant investment and multiple acquisitions. The Board has initiated a process to appoint Steve's replacement involving both internal and external candidates and will make a further announcement when a replacement has been appointed.

Outlook

Synthomer expects growth across its three core divisions to continue in the second half of the year, with ongoing high levels of demand for NBR as a consequence of the COVID-19 pandemic. Accordingly, the Board expects FY21 EBITDA to be in excess of £500 million, as previously guided.

Looking ahead, the outlook remains encouraging, with good demand across all divisions and the ongoing benefits of the OMNOVA integration, new capacity investment and further efficiency measures. Our rapid deleveraging and strong balance sheet also position us well to take advantage of growth opportunities. The Group also has a proven track record of delivering organic growth through investment in the business and has a strong platform to deliver future inorganic growth. While the investment planned in new NBR capacity demonstrates our confidence in the outlook for this market, we currently expect the exceptional performance of Performance Elastomers to normalise early in H1 2022 as the impact of the COVID-19 pandemic reduces and incremental market capacity comes online.

DIVISIONAL REVIEW

Our H1 2021 results include a full six months of reporting on the enlarged division following the acquisition of OMNOVA, compared to three months from 1 April 2020, in H1 2020.

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.

Results

Performance Elastomers delivered an extremely strong performance, driven by higher volumes and unit margins across the division and in particular in our NBR business, which ran at full capacity as a result of extraordinary demand for health and hygiene products during the COVID-19 pandemic.

Overall, volumes and unit margins were significantly higher than in H1 2020 in all major business segments in Performance Elastomers driven by the strong performance of NBR and supported by both our European SBR business and the Performance Materials businesses acquired from OMNOVA recovering from the significant impact of COVID-19 in Q2 2020.

We have announced plans to bring a further 200ktes of new NBR capacity in Asia, due to come on stream by 2024. This will bring our global capacity to 660ktes, and the new investment will manufacture our full range of nitrile products including the latest patented 'SyNovus®' products we developed in our R&D facility in Malaysia. We have now procured long-lead items for this project and expect to complete installation by the end of 2023, subject to final decisions and regulatory approvals on its location. We will finalise and announce the location in due course. The investment in new NBR capacity demonstrates our confidence in the outlook for the high growth NBR market.

In H2 2019 we began a strategic review of our European SBR network with the goal of addressing falling plant utilisation rates across our SBR assets as demand for coated graphic paper weakened. In line with that review, in Q1 2021 we closed our Oulu (Finland) SBR plant as planned and began transformation plans at Marl (Germany) following consultation to confirm the rationalisation programmes including the mothballing of a single SBR reactor train. The work we have done has led to our SBR assets becoming more profitable. We remain committed to the SBR latex markets in Europe and the US and are working to continue to optimise our assets in this highly competitive market. The SBR business recovered in H1 through the combination of improved economic conditions in the majority of our product segments and the good progress with our European SBR network transformation which allowed us to increase plant utilisation.

ESG progress

Our strong innovation record continues to deliver differentiated technology which has an increasing focus on sustainability. Our 'SyNovus®' products deliver best in class sustainability compared both to competing technologies and earlier generations of technology through lower processing temperatures and faster processing speeds but also better consumer properties. Our Vision 2030 Goals set out ambitious KPIs to ensure that our focus of driving innovation to deliver sustainability benefits adds focus on meeting both the needs of our customers and society.

In addition the network transformations underway in the division will improve utilisation rates and efficiency from the closure of the SBR capacity in Finland and Germany. This will allow us to concentrate production in our most efficient locations and minimise our emissions as a result.

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.

Results

Functional Solutions performed strongly, driven by the benefits of our integration of OMNOVA, which has generated synergies as well as increasing our scale, geographic diversity and product differentiation. The division delivered EBITDA of £70.0 million in H1 2021, an increase of 54.7% on H1 2020, reflecting both the acquisition and continued recovery in our key end markets.

Total volumes grew by 29.9% compared to H1 2020 with unit margins stronger than the comparative period. Our coatings, adhesives, sealants and elastomers (CASE) business recorded significant volume growth across the board in a climate of robust demand in our major global markets, particularly the Europe, Middle East and Africa region. Our Oil & Gas business is recovering more quickly than expected, as oil prices rose and drilling activity increased. Notably, both our CASE and Oil & Gas businesses were resilient in the face of unusually high raw material prices, successfully passing on raw material price increases and maintaining unit margins.

Functional Solutions is a key global growth platform for Synthomer, developing innovative and differentiated products for its customers and serving a wide range of end markets. Growth has been delivered from both inorganic and organic growth. Our 2019 investment in Worms (Germany) increased our capacity from 80ktes to 120ktes on this world scale speciality dispersion plant which is located in the heart of Europe to meet the growth in demand required by our customers in our key segments. The plant is now running at full capacity and allowing us to deliver differentiated products across our European network. In Roebuck (USA) our investment programme delivered 12ktes of new capacity for our differentiated adhesive focused US customers. The investment supports our expanded network of US plants following the acquisition of OMNOVA and further increases our proportion of higher margin speciality products.

During the first half, Functional Solutions remained focused on continuing to deliver the benefits of the acquisition of OMNOVA, which completed in April 2020 and helped to increase the scale and geographic diversity of this division. In addition to delivering cost synergies, the successful integration of the Functional Solutions sales team with that of the former OMNOVA business is opening up significant new sales opportunities, particularly in the US.

Growth is driven by the GDP+ end markets in which we operate supported by favourable megatrends and the drive to the use of sustainable polymer solutions. Functional Solutions is the most global of our divisions, and will continue to benefit from revenue synergy opportunities, the drive to improve our mix to increase differentiation and to maximise our productivity through manufacturing excellence and network rationalisation.

ESG progress

Our innovation is helping to meet the growing demand for sustainable polymer solutions across our 3000 customers through our portfolio of approximately 900 products. Aligned with our Vision 2030 Goals our target to increase the percentage of new products with enhanced sustainability benefits is a key target to support further growth in Functional Solutions.

Our drive to improve productivity and optimise our network led to the decision to close the Chonburi (Thailand) site, exit its solvent-based product range and transfer its water-based products to our existing Asian network to drive stronger utilisation.

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.

Results

Industrial Specialities performed very strongly, driven by robust demand for our products in key end markets, an excellent operating performance, and a substantial contribution by businesses acquired through our integration of OMNOVA.

H1 2021 EBITDA at £25.1 million was 78.8% higher than H1 2020 (£14.6 million). Sales volumes for the division were 48.2% higher than in the prior year, largely due to continuing strong market conditions which recovered during the second half of 2020. All markets saw strong demand, particularly automotive and consumer-facing industrial.

Our Laminates and Films business in particular grew significantly in H1 2021, partly due to increased demand for products in the kitchen and bathroom and recreational vehicle markets during the pandemic. The business continued to gain market share and grow ahead of the market, as customers substituted traditional materials with our superior, lower cost laminates and films. With a strong consumer and design focus this business has opportunities for further growth and investment. Having been acquired from OMNOVA the strategy has been reviewed to focus on growth and we look forward to developing this business further.

The strong recovery in automotive demand and our investment in growth has benefitted our Polybutadiene Lithene and Powder Coatings businesses. Both businesses have grown compared to 2019 benefitting from the increasingly differentiated product ranges which supply broad markets in addition to automotive such as construction, rubber modification and adhesives.

ESG Progress

Our manufacturing excellence programme continues to be a major focus to drive reliability, plant utilisation and to deliver growth. The adoption of our 'Value Gap' programme across the enlarged Industrial Specialities division continues to drive debottlenecking, cycle time improvements and deliver additional capacity. This approach delivers improved productivity, increasing utilisation and identifying opportunities to minimise our environmental profile.

The emissions intensity in Industrial Specialities is higher than the other divisions because these products are not water-based and generally involve higher energy intensity manufacturing to produce a low volume, more highly specialised often solid end products. Our Vision 2030 to reduce Scope 1 and 2 emissions by 40% across our Group will drive an ongoing focused approach to manufacturing improvement, innovation and targeted investment across Industrial Specialities. 

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.

Results

EBITDA of £14.0 million was significantly higher than in the comparative period (2020: loss of £0.5 million), driven by higher margins. Total external and internal sales volumes were broadly flat year-on-year, albeit more product was sold internally to the Group compared with H1 2020. Unit margins increased significantly due to strong underlying demand and a tightening of the market caused by a number of competitor force majeures. We expect these unit margins to reduce gradually in the coming months, as the competitor force majeures are resolved and more balance returns to our markets.

The transformation programme at our Sokolov site continues to progress well, reducing costs and making the division more resilient. Regrettably the programme will involve making a number of employees redundant, as part of closing the site's coal-fired power station, which will take place in Q4 2021. This is the last key element of the transformation programme and will mark the end of coal use in Synthomer, contributing to our target to reduce GHG emissions by 20% by the end of 2021 (compared to 2019), and reinforcing our strong commitment to reducing our carbon footprint.

ESG Progress

Acrylate Monomers operates from a single site in Sokolov (Czech Republic) which remains at the forefront of our ESG agenda. The site was acquired in 2016 with the improvement of the ESG profile a key part of our strategy for the Division. The closure in 2021 of the coal fired power station marks the end of the use of coal for power generation across the Synthomer Group. The investment will also allow the us to reduce by 23% our site water requirements and deliver a 24% reduction in the site CO2 emissions. The investment marks a significant milestone for both the Group and the Sokolov site and ensures the site meets the exacting standards required for a Synthomer business.

SPECIAL ITEMS

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

· Amortisation of acquired intangibles increased during the period reflecting the acquisition of OMNOVA Solutions Inc which completed on 1 April 2020. Consequently, H1 2021 included six months of amortisation compared to three months in H1 2020

· Restructuring and site closure costs comprised £3.1 million of OMNOVA integration costs and £0.7 million in relation to the closure of our plant in Oulu (Finland). The 2020 charge related entirely to integration costs, principally severance payments to employees, required to deliver acquisition synergies

· Acquisition costs incurred during the period related to acquisition opportunities which did not complete or have yet to complete. Acquisition costs and related gains in 2020 related to the acquisition of OMNOVA and comprised mainly professional advisers' fees, offset by a gain of £8.7 million on a foreign exchange derivative entered into in July 2019 to hedge the acquisition price

· Sale of business related to a loss on the sale of Synthomer (Thailand) Limited on 7 April 2021, on top of the £3.3 million impairment charge taken in 2020. Sale of business in 2020 related to the disposal of our European Tyre Cord business, which was required by the European Commission Competition Authority to clear our acquisition of OMNOVA

· The impairment charge in 2020 related to our European SBR assets in Finland and Germany which, as part of our strategic review, were impaired by £10.6 million

· In July 2018 we entered into swap arrangements to fix euro interest rates on the full value of the then €440 million committed unsecured revolving credit facility. Over the period we had no floating rate euro borrowings and the full swap was unhedged. The fair value gain on unhedged interest rate derivatives relates to the movement in mark-to-market value of the swaps over the period.

TAXATION

The Group's Underlying tax rate for H1 2021 was 23.1% (H1 2020: 22.1%; FY 2020: 23.4%). The decrease in the effective tax rate compared to the year ended 31 December 2020 is a result of the geographical mix of profits.

The effective tax rate for Special Items was 48.9% (H1 2020: 6.8%; FY 2020: 11.2%). Tax Special Items includes a current tax credit of £6.4 million in relation to the release of a tax provision following the conclusion of a tax audit in France.

CASH PERFORMANCE

At 30 June 2021, our net debt was £354.5 million, compared to £462.2 million at 31 December 2020 and £575.5 million at 30 June 2020. This reflects our generation of strong Free Cash Flow during H2 2020 and H1 2021.

Underlying operating profit increased by £219.3 million to £287.2 million. This was offset by a £159.4 million increase in working capital, reflecting significant increases in both raw material prices and our volumes. The ratio of working capital to sales remains unchanged at approximately 10%. Capital expenditure in the period was £29.1 million, as we continued to invest in additional nitrile capacity in Pasir Gudang (Malaysia), both in terms of the 60kt of additional capacity due online at the end of 2021 and also the long lead items for the 200kt expansion due online in 2024. Capital expenditure also included replacement of the coal-fired power station in Sokolov (Czech Republic), continued investment in the Pathway Programme and regular recurring SHE and sustenance expenditure.

Interest paid increased from £6.4 million to £14.6 million reflecting the first full period of additional borrowings drawn for the OMNOVA acquisition and the successful issue of €520 million 3.875% unsecured senior loan notes to settle bridging finance facilities in June 2020.

Our debt is denominated in euros and dollars both of which fell against sterling during H1 2021, leading to a foreign exchange gain in net debt; this compares with H1 2020, when sterling fell against all our principal overseas currencies.

The cash impact of Special Items was £4.0 million, offset by proceeds of £0.6 million from the sale of our Chonburi (Thailand) site.

FINANCING AND LIQUIDITY

We have committed unsecured borrowing facilities until July 2024, comprising a $260 million term loan, a €460 million revolving credit facility, and five-year €520 million 3.875% senior loan notes. These borrowing facilities of approximately £1,080 million are subject to one leverage ratio maintenance covenant. At 30 June 2021 our leverage ratio was 0.8x, well within our leverage ratio covenant of 4.0x at 30 June 2021 and 31 December 2021, and 3.5x thereafter. At 30 June 2021, our net borrowings were £354.5 million, and accordingly we had approximately £750 million of liquidity.

RETIREMENT BENEFIT PLANS

Our pension liability decreased to £163.4 million from £221.4 million at December 2020. This £58.0 million reduction largely comprised £13.7 million of cash contributions and actuarial gains of £41.6 million. This actuarial gain arose due to the £43.7 million impact of changes in discount rates which was offset by £2.2 million of experience adjustments.

Consolidated income statement

for the six months ended 30 June 2021

Consolidated income statement for the six months ended 30 June 2021 (continued)

Consolidated statement of comprehensive income

for the six months ended 30 June 2021

Consolidated statement of changes in equity

for the six months ended 30 June 2021

Consolidated balance sheet

as at 30 June 2021

Consolidated cash flow statement

for the six months ended 30 June 2021

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 for the six-month period ended 30 June 2021 have been prepared on the basis of the policies set out in the 2020 annual financial statements and in accordance with UK adopted IAS 34 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority.

These interim financial statements need to be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2020 which were prepared in accordance with IFRS in conformity with the requirements of the Companies Act 2006 and IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. This change does not constitute a change in accounting policy but rather a change in framework which is required to ground the use of IFRS in company law. There is no impact on recognition, measurement or disclosure between the two frameworks in the period reported.

These interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006 and do not include all the notes normally included in annual financial statements. Statutory accounts for the year ended 31 December 2020 were approved by the Board of Directors on 4 March 2021 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.

Going concern

We have modelled our cash flow projection and stress test for the next 18-month period by including several severe but plausible downside scenarios which are linked to our principal risks. These downside scenarios include additional COVID-19 impacts on trading volatility, the expected duration of restrictions, and the length of time to recovery. In determining these impacts, we took account of the experience we gained from the COVID-19 pandemic in 2020. 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 manufacturing facilities for a period of two months. We believe that the risk of enforced plant closure remains low and have implemented additional health and safety measures in each of our sites to reduce the risk of a major disruption in supply.

No mitigating actions have been included for any of the scenarios. Mitigations within management's control, should they be required, include reduction of capital spend and dividend payments as well as other reductions to costs and cash outflows similar to those we implemented during the course of 2020.

As at 30 June 2021, the condensed consolidated balance sheet reflects a net asset position of £821.6 million and the liquidity of the Group remains strong with headroom of more than £750 million of cash and committed facilities. The earliest maturity date of our facilities is July 2024. Debt leverage covenant limits for the term loan and revolving credit facility are set at a ratio of 4.0x at 30 June and 31 December 2021, 3.5x at 30 June 2022 and 31 December 2022 and 3.25x thereafter. At the half year, net debt was £354.5 million and our covenant ratio was 0.8x. Under all scenarios modelled, our forecasts did not indicate insufficient liquidity or a debt leverage covenant breach on any of the dates through to December 2022.

Having considered the outcome of these assessments, the Directors have, at the time of approving the interim report and financial statements, a reasonable expectation that the Company and the Group will have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis of accounting in preparing the 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. In the six months to 30 June 2021 no such indications were identified.

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are set out in the 2020 Annual Report. Estimates and underlying assumptions are reviewed on an ongoing basis and at 30 June 2021 there were no changes to existing estimates and assumptions and no new sources of estimation uncertainty were identified.

2. Accounting policies

The annual financial statements of Synthomer plc are prepared in accordance with UK-adopted IFRSs 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. Effective from 1 January 2021, no updates to IFRSs have been made that would affect the Group.

In April 2021, the IFRS Interpretations Committee issued a new interpretation in relation to accounting for customisation and configuration costs of cloud computing arrangements. Following an initial review, this new interpretation is not expected to materially impact the accounting treatment for costs incurred on the Group's Pathway programme. A detailed assessment will be completed later 2021 and reported on in the full year financial statements.

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 18 and has been consistently applied.

Special Items comprise:

3. Special Items (continued)

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

· Amortisation of acquired intangibles increased during the period reflecting the acquisition of OMNOVA Solutions Inc which completed on 1 April 2020. Consequently, H1 2021 included six months of amortisation compared to three months in H1 2020.

· Restructuring and site closure costs comprised £3.1 million of OMNOVA integration costs and £0.7 million in relation to the closure of our plant in Oulu (Finland). Integration costs are required to deliver acquisition synergies and mainly relate to employee severance costs. The £11.6 million charge in the six months to 30 June 2020 related entirely to integration costs. The full year 2020 charge comprised £19.5 million of integration costs, £20.9 million rationalising our European SBR network and £2.1 million rationalising the Acrylate Monomers site.

· Acquisition costs incurred during the period related to acquisition opportunities which did not complete or have yet to complete. Acquisition costs and related gains in 2020 related to the acquisition of OMNOVA and comprised mainly professional advisers' fees, offset by a gain of £8.7 million on a foreign exchange derivative entered into in July 2019 to hedge the acquisition price.

· Sale of business related to a loss on the sale of Synthomer (Thailand) Limited on 7 April 2021, on top of the £3.3 million impairment charge taken in 2020. Sale of business in 2020 related to the disposal of our European Tyre Cord business, which was required by the European Commission Competition Authority to clear our acquisition of OMNOVA.

· The impairment charge of £36.6 million in 2020 related to four sites, with the first two resulting from the strategic review of our European SBR network:

o Oulu (Finland): property, plant and equipment was impaired by £9.2 million

o Marl (Germany): property, plant and equipment was impaired by £5.5 million

o Sokolov (Czech Republic): unfavourable feedstock prices and continued oversupply in Europe, partly reflecting the impact of COVID-19, led to a £18.6 million impairment charge

o Chonburi (Thailand): reduction in demand for solvent-based products led to a £3.3 million impairment charge.

The impairment charge in the six months to June 2020 related to Oulu and Marl.

· In July 2018 we entered into swap arrangements to fix euro interest rates on the full value of the then €440 million committed unsecured revolving credit facility. Over the period we had no floating rate euro borrowings and the full swap was unhedged. The fair value gain on unhedged interest rate derivatives relates to the movement in mark-to-market value of the swaps over the period.

· Tax Special Items of £6.4 million relates to the release of a tax provision following the conclusion of a tax audit in France. The 2020 tax charge arose in Malaysia from a disputed assessment from the Malaysian Tax Authorities regarding the tax treatment of the sale of plantation land from 2007 to 2017. This was offset by a tax credit in relation to the closure of 2001 to 2003 open tax years in the UK by HMRC.

4. Segmental analysis

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

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 and also includes our performance materials and elastomeric modifiers businesses.

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, coated fabrics, 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 included a £4.5 million gain in Special Items (six months ended 30 June 2020: a £9.3 million loss; year ended 31 December 2020: an £8.5 million loss) as set out in note 3.

4. Segmental analysis (continued)

5.  Reconciliation of operating profit to cash generated from operations