Synthomer Regulatory News (SYNT)

11 August 2014

Synthomer plc

Interim Results for the six months ended 30 June 2014

Continued progress in Europe with strong cash generation; interim dividend up 25%

· Europe and North America: Reported operating profit slightly down but 1.9% up on a constant currency basis, with higher volumes and cash margins firming from H2 2013 levels.

· Asia and ROW: Despite good progress on volumes, performance continued to be impacted by the competitive environment among glove manufacturers which depressed margins in the nitrile business.

· Strong cash generation reduced net debt to £114.6 million (FY 2013: £133.6 million).

· Updated dividend policy: 2.5 times dividend cover effective 2014; interim dividend increased by 25% to 3.0 pence.

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

"Against challenging market conditions, particularly in our Asian nitrile business, Synthomer has delivered a solid performance in the first half of 2014, with Group volumes up 1.8%.

In Europe and North America, we saw improvements in demand across most business segments, and encouragingly, cash margins have firmed from the levels seen towards the end of 2013. In Asia and ROW, whilst we saw good progress with volumes increasing by 4.9% during the half, margins in our nitrile business continued to be impacted by the strong competition between glove manufacturers as previously reported. However, we expect nitrile unit margins to firm in the second half.

Given the strong cash generative nature of our business, the Board has today updated the Group's dividend policy, increasing the level of cash returns for shareholders.

We expect the improved demand in Europe to continue through the remainder of the year. In Asia, we expect continued growth in nitrile demand, and some firming in nitrile cash margins. Together with the impact of currency, we expect full year underlying profit before tax to be broadly in line with the level achieved in 2013."

ENQUIRIES:

The Company will host a meeting for analysts and investors at 09.00 at Canaccord Genuity (88 Wood Street, London EC2V 7QR). The presentation will be webcast on the Company's website www.synthomer.com

(a)Underlying performance excludes special items. This is primarily amortisation of acquired intangibles, see note 3.

(b) Total sales includes Group revenue and share of joint venture revenue.

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

Cautionary statement

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

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

This IMR and the condensed set of financial statements for the six months ended 30 June 2014 and for the six months ended 30 June 2013 have been reviewed but not audited. All reference to sales and operating profit in the Chairman's statement and business review, which follows, reflect underlying performance including share of joint ventures, as per note 4, unless otherwise stated.

CHAIRMAN'S STATEMENT

Overview

Against challenging market conditions, particularly in Asia, the Group has delivered a solid performance in the first half of 2014. The performance in Europe was encouraging, as we saw improved demand over the prior year, and unit margins start to firm from the lows at the end of 2013. In Asia, volumes were 4.9% up, but difficulties in the nitrile market resulted in lower operating profit overall in our Asian and ROW business.

Strong cash generation reduced net borrowings further to £114.6 million. In light of the cash generative nature of the business, the Board is pleased to announce a new dividend policy and strategy to maintain an efficient balance sheet.

H1 Results

Total sales declined by 8.6% to £510.1 million (2013: £558.3 million). Group operating profit decreased by 8.8% to £51.1 million (2013: £56.0 million) due to the weaker results in our Asian business, and an adverse currency translation effect of £2.5 million. Overall Group volumes were 1.8% higher.

Underlying profit before tax decreased to £45.0 million (2013: £48.6 million), 7.4% behind prior year.

Earnings per share for the half year, on an underlying basis, were 10.1 pence per share (2013: 10.9 pence), 7.3% behind prior year.

Divisional Performance

Europe & North America (on an underlying basis)

Operating profit in our European and North American business segment was £47.8 million slightly down on the first half of 2013 but 1.9% ahead on a constant currency basis, with £1.5 million of the Group's adverse translation effect attributable to the weaker euro.

Total volumes were ahead by 0.4%. Within the business, paper volumes were slightly lower and we exited approximately 9 ktes of very low margin compound business. Average volumes across the construction related segments (Construction & Coatings; Functional Polymers; Performance Polymers) were up 5.9%.

We reported with our full year results that our average cash margins had declined during 2013, given the very difficult environment in Europe, and we entered the year with unit cash margins below the average of 2013. Encouragingly we have seen some firming from these levels, and as always we remain very focused on the active management of cash margins.

We have a good pipeline of new products from our R&D centres of excellence, and a good number of completed and planned product launches this year in Europe, particularly in the Functional Polymers and Construction & Coatings business segments. Last year we launched our green hybrid latex for the paper business, from our Finnish plant, and during the half, we completed the necessary upgrade to our Marl facilities to provide a similar paper product into central Europe.

We announced with the full year 2013 results our improvement initiatives for the European business. These are progressing, and we can confirm our guidance that these will deliver annualised benefits of €10 million, with a cash cost of €15 million (of which €5 million is capital expenditure). The benefit to 2014 will be minimal, with full annual benefits in 2016, as per previous guidance.

Asia & Rest of World (on an underlying basis)

Operating profit in our ARW business segment was £7.3 million (2013: £11.5 million), 36.5% down on prior year.

The strong competition between glove manufacturers reported at the time of our IMS in May continued throughout the half. This has caused ongoing margin pressure in our Nitrile business, exacerbated by weak Butadiene pricing and a related period of customer de-stocking. However, as the second half progresses we expect demand for nitrile latex to continue to grow and unit margins to firm.

In our non-nitrile business, the business has continued to trade in line with our expectations.

We will be launching two new nitrile products in the second half of the year, which will support ongoing growth.

Cash flow and balance sheet

The Group's financial position remains robust, with strong cash generation reducing net borrowings to £114.6 million, significantly down from £151.7 million at the midpoint of 2013, and below the year end position of £133.6 million. Capital expenditure, as expected, was substantially lower, after the higher spending over 2012 and 2013 associated with the PolymerLatex integration.

The Group's pension deficit increased to £124.1 million, mainly due to lower discount rates, caused by the reduction in high grade bond yields since the year end.

At the end of June, the Group had net liquid resources available of £78.1 million (cash and equivalents and financial assets less current borrowings, excluding borrowings classified as current on the Group's main debt facility, and private placements) and an undrawn £60 million revolving credit line maturing in March 2015 together with various uncommitted overdraft lines. The Group's main debt facility at the end of June comprised a €178 million term loan combined with the undrawn £60 million revolving credit line maturing March 2015. This facility was cancelled at the end of July and replaced with a new 5 year, £210 million committed revolving credit facility. There is $70 million of private placements to repay in September 2014 classified as short term debt, which will be settled from available net liquid resources.

We commented on excess land sales in our 70% owned subsidiary in Malaysia with our 2013 results. We still expect the sale to complete by the end of 2015, with gross proceeds, at current exchange rates of some £27 million.

Dividend and capital management policy

Since 2012 the Board's dividend policy has been to move progressively to a dividend cover of three times by 2015. In addition, the Company's balance sheet objectives are to maintain an efficient capital structure over the long term, with net debt / EBITDA ratio not to exceed 2x for a sustained period and not to move structurally below 1x.

Given the progress on deleveraging, and the strong annual cash generation of the business, the Board has considered how best to return funds to shareholders. Key to this is a sustainable long term dividend policy.

As a result, the Board intends to move its regular dividend policy to 2.5 times earnings cover effective 2014. In addition, if excess capital has not been deployed for either bolt on acquisitions or capital expenditure, the Board will consider periodically, one-off capital returns to shareholders to maintain an efficient balance sheet in line with our previously stated objectives.

Consistent with this revised approach, the Board has declared an interim dividend of 3.0p per share, an increase of 25%.

IFRS

The Group reported an IFRS profit before tax of £29.9 million (2013: £32.9 million). This is £15.1 million below underlying profit before tax (2013: £15.7 million) due to the special items detailed in the 'Special Items' paragraph below.

Special items

The Group had a number of special items in the half, which are not part of underlying results. As previously announced a cost reduction programme for the European business is underway and at half year £1.1 million of costs relating to this had been incurred. In addition the amount of £13.5 million relates to intangible amortisation from the PolymerLatex acquisition. The loss on fair value within finance costs of £0.5 million relates to the cross currency swaps that hedge the Group's US private placement debt into sterling, but do not qualify for hedge accounting under the narrow framework of IAS 39. The majority of the taxation amount of £4.2 million is the notional tax credit on the intangible amortisation expense.

Taxation

The Group benefits from pioneer status tax incentives in the nitrile business in Malaysia. Together with tax expense in the other countries that the Group operates in, particularly Germany, this has resulted in an overall underlying taxation rate of 22%.

Outlook

We expect the improved demand in Europe to continue through the remainder of the year. In Asia, we expect continued growth in nitrile demand, and some firming in nitrile cash margins. Together with the impact of currency, we expect full year underlying profit before tax to be broadly in line with the level achieved in 2013.

NEIL JOHNSON

Chairman

11 August 2014

CONsolidated income statement for the SIX MONTHS ENDED 30 JUNE 2014

Special items

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

Consolidated income statement for the SIX MONTHS ENDED 30 JUNE 2014 continued

Special items

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

Consolidated STATEMENT OF COMPREHENSIVE INCOME for the SIX MONTHS ENDED 30 June 2014

Consolidated STATEMENT OFCHANGES IN EQUITY

Consolidated balance sheet as at 30 June 2014

The financial statements were approved by the Board of Directors and authorised for issue on 11 August 2014.

The Group's US private placement US dollar term debt was economically hedged from dollars into sterling using long dated cross currency swaps at the date it was borrowed. The US dollar term debt is shown at the 30 June 2014 spot rate in net borrowings. The mark to market of the currency element of these swaps which hedges this US dollar term debt is shown as a reconciling item in the above analysis.

Consolidated cash flow STATEMENT for the SIX MONTHS ENDED 30 JUNE 2014

RECONCILIATION OF NET CASH FLOW FROM OPERATING ACTIVITIES TO MOVEMENT IN NET DEBT FOR THE SIX MONTHS ENDED 30 JUNE 2014

NOTES TO THE FINANCIAL STATEMENTS

1. General information

The information for the year ended 31 December 2013 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditors' report on those accounts was not qualified, did not contain a reference to any matters which the auditor drew attention by way of emphasis without qualifying the report, and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

2. Accounting policies

The annual financial statements of Synthomer plc are prepared in accordance with IFRSs as adopted by the European Union. The following standards have been adopted by the Group for the first time for the period beginning on 1 January 2014; IFRS 10, 11, 12 and IAS 28 (amended) and IAS 39 (amended). None of these has had any material effect on the interim financial statements. The condensed set of financial statements included in the half-yearly financial report has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with International Accounting Standards 34 'Interim Financial Reporting', as adopted by the European Union. The same accounting policies and methods of computations are followed in these financial statements as in the most recent audited annual financial statements.

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

3. Special items

The special items disclosed are made up as follows:

Further details are provided in the Chairman's statement. 

4. Segmental analysis