Good morning, and welcome to our first half 2024 results presentation. As usual, I will be joined by Lily Liu, our CFO, to present our review of Synthomer's strategic, operational, and financial performance in the period. Then our Head of Investor Relations, Faisal Tabbah, will join us as we look forward to answering your questions at the end. In terms of the agenda, I will start by providing an overview of our performance and the further steps that we have taken to transform the business in line with our strategy. Lily will then walk through the numbers in more detail before I come back to show how we are making good and differentiated progress in each of the divisions, and how we are positioning ourselves to succeed in delivering our medium-term ambitions.
Starting with trading, after a sustained period of extremely challenging market conditions, both for Synthomer and the wider industry, our markets were more stable overall in the first half, and our performance evolved broadly as we had anticipated at the start of the year. As such, we delivered revenue, earnings, and EPS progress in line with expectations. Overall, activity levels continued to incrementally improve, led by market share gains in our adhesives business and an improvement in volumes from the very low levels of last year in our NBR business, while CCS division was more stable and at a strong and improved margin. We have made earnings and margin progress principally as a result of our self-help measures in an environment of reasonably stable markets.
Our net debt was higher than at the start of the year for a number of reasons that we have previously flagged, and which Lily will talk about in more detail, but this has not changed our expectation that we will deliver positive free cash flow for the year as a whole. We will come back to recent trading in more detail later in the presentation, but again, our overall outlook for 2024 is unchanged, with some earnings progress expected, even if market conditions do not significantly change. Meanwhile, we continue to make good progress with the strategy we presented to you in October 2022, which was founded on Synthomer evolving to become more specialty-focused, more geographically balanced, and more efficient.
We are proud of some of the creative solutions we are implementing to continue to advance our strategy, despite the relatively challenging market conditions and the constraints of our balance sheet. Alongside other developments, such as our investment to better serve our growing customer base in China, evolving our approach to innovation and sustainability, and our non-core divestment program, we continue to explore capital-light technology alliances with partners in the USA and in China, which are important consumer and producer markets in the rapidly changing space of medical gloves. Overall, I'm very encouraged by the progress we have made to further transform the group. A different-looking business is beginning to emerge, with improving geographic reach, a significantly consolidated manufacturing footprint, down from 43 to 32 sites in less than 2 years, 55% of revenues now from specialties, more sustainability-focused products than ever before, and improving customer centricity scores.
In essence, we are doing what we said we would do, and that strategy is delivering. Our job is to sustain the momentum and continue this evolution, and the good news is that we see no shortage of opportunities in being able to do that. I'll come back to talk about some of these developments in more detail in a moment, but first, over to Lily to run through the numbers in detail.
Many thanks, Michael, and good morning, all. I'm delighted to report our H1 2024 results, which reflect the progress we made, both strategically and operationally in the half. Starting with the financial summary, the results were in line with our expectations, with progression at the revenue, earnings, and EPS level. Group revenues for continuing businesses were 3.5% higher on a constant currency basis, at just over GBP 1 billion. This reflects a 10.7% volume growth, driven principally by Adhesive Solutions and Health and Protection businesses recovering from the historically low levels seen last year. Our more resilient CCS division, which is already around three-quarters specialty, continued to trade robustly. We saw a lower price mix of 7.2%, mainly reflecting the pass-through of lower raw material input prices versus H1 2023.
Overall, we were encouraged by an improved gross profit contribution as a result of operating leverage, and our H1 2024 result also benefited from GBP 13 million of self-help actions across the group. However, as we indicated at the start of the year, we knew we would also be absorbing some higher operating costs, partly due to wage inflation and increased bonus accruals relative to last year, impacting also our corporate cost line. Notwithstanding this, we were able to deliver group continuing EBITDA of GBP 76 million, a 7.6% increase versus comparable period on constant currency. Our EBITDA margin of 7.2% showed an improvement against H1 2023, with each of our businesses contributing to the margin expansion. Continuing business underlying operating profit was GBP 29 million for the half, an increase of 18.7% in constant currency.
The interest charge was lower, reflecting the successful rights issue in October 2023, partially offset by the timing of the bond interest payment. We continue to expect net finance cost to be approximately GBP 60-65 million in 2024, increasing to GBP 65-70 million in 2025 as a result of a full year of higher coupon following the recent bond refinancing. Discontinued operations, including the compounds business divested in April 2024, contributed an EBITDA of GBP 2.6 million for the period. The underlying effective tax rate expectation for the group continues to be in the range of 23%-25%. But for 2024, our ETR is expected to be outside of the normal range due to the small profit before tax amount and some small movement in group tax provision.
The total group, continued and discontinued, had underlying earnings per share of 1.3 pence for the half, up from an EPS loss in H1 2023. Our special items are coming down for the continuing operations and comprise mostly acquired intangible amortization and restructuring and site closure costs in the period. As always, we have included a schedule for special items in the appendix. As guided, our net debt at the end of June was higher than at the end of 2023, mainly due to payment of European Commission fine in January, and a leverage of 4.7 times, well within our covenant. We'll come back to what we expect the year-end later in the presentation. Turning to each of our divisions.
In CCS, revenue was GBP 430 million, down 2.1% in constant currency from H1 2023, mainly as a result of the pass-through of raw material price, which came down versus H1 2023. Volume was up 0.7%. Our coatings, consumer materials, and energy solutions business continues to perform well, whereas the construction business faced some market challenges. Encouragingly, while reduced raw material costs were reflected in our pricing, the gross margin has held up well, reflecting a more specialty nature of our portfolio. In addition, our efforts to tighten costs and various other strategic initiatives meant the EBITDA margin increased year-on-year to 12.3% from 12.1%, despite absorbing the higher operating costs I mentioned earlier, with total EBITDA reported at GBP 53 million. The division typically is more H1 weighted.
This year, we expect such weighting to be partially offset by further cost benefit in the second half. We continue to develop and expand our market presence in the U.S. and Asia, leveraging our leading European positions in many product areas. We're very pleased with the further progress we achieved in turning around the Adhesive Solutions division. Revenue increased by 2.2% in constant currency, bolstered by 11.7% volume growth. Our specialty product portfolio continued to be robust, with good pricing management and modest volume growth. While coming to our base product, have higher volume growth as our improved reliability and cost competitiveness enable us to regain market share.
EBITDA grew by 43% versus H1 2023 on constant currency, driven largely by our performance improvement plan, which realized circa GBP 8 million in benefit in the first half of 2024, although clearly, we have ambition to go much further. Overall, EBITDA margin of 7.1% was a 210 BPS improvement. Encouraging progress, given we have absorbed the higher operating costs described earlier. The business also reported further inventory efficiency to date in 2024, with further gains expected over longer period. And finally, coming to Health and Protection and Performance Materials division. Revenue was up 13.8% in constant currency, benefiting from 21% volume growth, which was partially offset by the pass-through of lower raw material price.
Within Health & Protection, NBR volume grew by 37% from the historically low point of H1 2023, although that only takes them back to 2017 levels. The benefit of self-help capacity reduction from the mothballing of our Kluang plant was offset by the unit margin, which remain substantially lower than the pre-pandemic levels, although they did begin to improve a little in the second quarter. Our plant utilization is currently around 70%. The performance materials side of the division grew volume by 12%, with some business benefiting from Red Sea supply disruption, but also continued experience ongoing pricing pressure, especially with raw material price reducing. Overall, our effort to enhance capacity utilization and efficiency meant that the division EBITDA margin improved by 40 basis points in H1 2024, compared versus H1 2023, with EBITDA increased by 24.4% in constant currency.
We made good progress in the non-core part of the division. To date, we have disposed the laminate films and compounds businesses, closed the U.S. paper and carpet operations, and we have further divestment program ongoing. As I mentioned, our half-year net debt was GBP 561 million, as expected, higher than the year-end position of GBP 500 million, reflecting the European Commission fine payment of GBP 39 million, the pension contribution, and the typical seasonality of working capital investment in the first half, partially offset by the proceeds from the compounds divestment. We expect to drive this number down in the second half, with free cash flow becoming at least modestly positive overall for the year.
In terms of the contributors to that, we expect further progress with our multi-year self-help programs, which already delivered GBP 30 million benefit in the first half of 2024, with additional savings expected as our procurement program really gets underway during the second half. We reported working capital outflow in the first half, as previously communicated. This is partly due to seasonality between the two halves and partly due to higher raw material price versus December 2023 level. It is worth noting, however, average raw material price for H1 2024 was lower than H1 2023, as reflected in the P&L. With our continued focus on inventory efficiency, coupled with seasonal unwind, we are expecting good working capital inflow in the second half, assuming no significant increase on raw material price.
CapEx was GBP 38 million, and our overall expectations for the year remain to be similar to that of the last couple of years. Other than SHE and sustenance spend, we selectively invested in some strategically important areas, such as our APO line, a new innovation center in China, and new production capabilities in the U.S. for our CCS divisions. If microeconomic conditions do not improve, we will still expect to be at least modestly free cash flow positive in 2024, although the net debt will be modestly higher compared to end of 2023 as a result of the European Commission fine. We successfully issued our bond in Q2 2024. Together with the various financing activities we have completed in the last couple of years, we have extended our debt maturity with the next major financing requirement by 2027.
We're now on a much more robust foundation, supporting the ongoing delivery of our strategy. Leverage was 4.7 times net debt to EBITDA at the half-year end, higher than the 2023 year-end level by 0.5 times due to the aforementioned factors, but well within our covenant. We have committed liquidity more than GBP 500 million, with additional support from unused portion in our factoring program. Let me reiterate our capital allocation priorities. While we intend to continue to invest in carefully selected organic growth opportunities aligned to our specialty strategy, our key priority is to reduce our leverage towards our 1-2 times medium-term target level through a combination of increased EBITDA, continued robust cash generation, and non-core divestment proceeds. The board has confirmed that dividends will remain suspended at least until our leverage is below 3 times.
In summary, I'm pleased with the strategic and operational progress we made. We continue to focus on our short-term cash and cost actions, and balance this with selective investment guided by our strategy. Let me stop there and hand back to Michael to update you on our strategic initiatives and outlook.
Thank you, Lily. Slide 13 will be familiar to many of you by now, but we keep coming back to the strategy because it really does drive our thoughts and our actions on a day-by-day basis across the group now and in the future.... I have also said before that some aspects of the strategy are more subject to the current trading environment and balance sheet constraints than others, but they are executable actions for us across all five pillars and all three of the enablers that run across the page. In addition, we have consistently sought to find creative solutions across the group to help deliver the strategy despite the challenges both the industry and Synthomer are facing.
Our strategic upstream investment to strengthen the hydrocarbon supply chain for AS division in Europe, the disciplined growth investment in APO capacity in the U.S., the coatings capacity growth in the Middle East, or the new innovation center in China, are good examples for this. These are executable steps that have allowed us to recycle or reallocate our resources towards the areas where we see greatest opportunity, steadily improving our potential for greater returns on capital over time. The ambition, as you know, is to make Synthomer a more specialty-weighted, more geographically balanced, and more streamlined business. As you can see, this is a journey that we are only partway through, but the consistency and quality of our business is improving. One point I will note here is the considerable progress we have made in the last two years to reduce our site footprint through non-core divestments and rationalization.
As we get close to our target of less than 30 sites, we are becoming a more efficient organization with less overhead and fixed cost. Most importantly, it means both the sustenance and the growth capital that we do deploy is increasingly going to our best assets and opportunities and ensures a proper allocation of capital. Now let me quickly go through each of our divisions, focusing on the key actions or developments we have taken in the period to drive our strategic priorities. CCS is currently our most specialty-weighted division, and therefore the best example of where we are trying to take the whole organization by focusing on customer needs and aligning our resources accordingly. We have continued to strengthen the organic growth capability of this division and its geographic balance, including extending our leading market positions in European markets to other markets globally.
We are doing this through a more end-market-aligned approach with strategic key account management for top global customers and marketing to additional regional leaders in North America and Asia. In the period, we commissioned a small investment which enhances our coatings capacity to support growth in the Middle East. We are also increasing our focus on growing our customer base in China, with the recent commissioning of the group's new innovation center in Shanghai, providing a platform for growth in a country that is and will be fundamental to the global chemicals industry, which I have mentioned before. Alongside our growing focus on value selling and optimizing our product mix, we have undertaken an intensive review of our approach to innovation, exploring, in particular, initiatives that have made us more end-market focused and enable us to get products to market quicker.
We continue to respond to the growing demand for more sustainable alternatives with our bio-based emulsion polymer platform for coatings progressing to market in 2024. Finally, we have continued to optimize our asset base to increase our efficiency. All our plans are supported by and integrated with our asset optimization projects and other cost control and capacity management activities. For example, we recently ceased production at our Fitchburg, Massachusetts, site ahead of schedule. We are also making modest new investments to advance our strategic focus on organic growth, including by increasing the manufacturing flexibility of our key facilities. All this resulted in a further increase in relative profitability despite the challenging market environment and flat volumes. We are encouraged by the strong progress Adhesive Solutions is making with its principal focus, which remains on increasing the operational reliability and cost efficiency, primarily of the acquired adhesive resins operations.
Good progress has been made with the performance of key facilities improving significantly during the first half. We now have monitoring systems in place to identify yield and other efficiency opportunities and task forces on site at our main facilities in the U.S. and the Netherlands to unlock them. We have continued to broaden our raw material supply. For example, as mentioned, we made good progress in the period in our project to strengthen our supply chain for hydrocarbon resin production in Europe through investment in certain raw material production assets from Arakawa, which will be managed under contract by Dow in Böhlen, Germany. More recently, we have focused on end-to-end supply optimization, including planning, procurement, and logistical enhancements. Overall, our performance improvement plan delivered GBP 8 million of benefits in the first half, and we continue to target total annualized savings of GBP 25 million by 2025.
At the same time, we are beginning to focus more on growth. To some degree, our improved reliability and cost competitiveness is already allowing us to recapture market share, but increasingly we are building on this progress by targeting new business. We continue to invest in expanding our specialties capability, for example, our APO capacity in North America, coming on stream in Q1 of next year. We continue to strengthen customer relationship management and build our portfolio of innovation projects, many of which will benefit from sustainability considerations. Our customers have shown increasing interest in collaborating with us in this area. Having put in place ISCC PLUS certification of our major manufacturing sites, we are well-placed to partner with them to create more sustainable value chains.
Finally, another priority for the division has been to reduce working capital closer towards group levels, and in the period, the division successfully reduced inventory by a further GBP 4 million. Overall, I am pleased to confirm that the turnaround of AS division is well underway. Coming to Health and Protection and Performance Materials, recognizing that much of the division has base chemicals characteristics, our differentiated approach to our core Health and Protection business is to strengthen its overall competitiveness. In the period, we completed the mothballing of our Kluang facility, reducing our NBR capacity by around 20%. Production is now consolidated at our site in Pasir Gudang, and we've successfully transitioned across all our customers. With capacity utilization in Pasir Gudang now at 70%, helped by the site consolidation and increasing volumes, we are finally in a position to earn some money again with that business.
In addition, we continue to explore a number of partnership opportunities to capture growth and value from this business with little or no capital investment, including in the USA and China. We also continue to focus on truly understanding our end markets and customers and remain agile to potential opportunities as conditions evolve. For example, we recently redesignated our Specialty Vinyl Polymers business in Harlow as core, following a review of a number of growth adjacencies in Synthomer-focused end markets that the team has identified. Separately, we have continued to enhance our overall value proposition to our customers through selective investment in process and product innovation and sustainability of our most differentiated products, for example, in nitrile latex for thin gloves and bio-based acrylate monomers.
Turning to portfolio management, we recently completed the divestment of our compounds business, and our rationalization of other non-core activities continued to progress, including the process to divest the SBR business for European paper, carpet, and foam markets. Ensuring excellence across all aspects of our operations is pillar three of our strategy. We are seeing the benefits, not least in safety, where we achieved another strong performance in the first half. We are steadily improving the sites that we have acquired in recent years, and our data tells us that the longer the sites are part of Synthomer and our management systems, the better their performance. On procurement, you will recall that we launched a project in Q1 to identify and capture material savings in this area.
There is an increasing speed of specific actions to achieve the targeted benefits of GBP 30 million-GBP 40 million, which we expect to come through in 2024 and 2025. Finally, our SynEx program, which focuses on building the group's capability to deliver end-to-end continuous improvement in processes and systems, goes from strength to strength. The team completed three end-to-end site missions in the first half, and a further 10 are currently underway or in the pipeline for the remainder of the year. Meanwhile, the commercial excellence team has rolled out a number of detailed initiatives based on customer feedback, which have already resulted in a significant improvement in our customers' willingness to recommend us. We are proud of an increase in our Net Promoter Score by nine points and confident that this will translate into accelerated organic growth.
Innovation, particularly aligned to our sustainability agenda, remains an important priority for the group. The opening of our China Innovation Center in Shanghai, completed in just six months, represents a step change in our ambitions to serving potential customers in China with our specialty products. Our innovation efforts more broadly are increasingly focused on creating more sustainable products, both as a commercial proposition and as important to our purpose as an organization. As part of this, our industry-recognized product sustainability scorecard continues to guide our innovation strategy, with 69% of new products launched over the last 12 months with clearly defined sustainability benefits. In the period, we made good progress towards launching several products with bio-based feedstocks, such as a new emulsion polymer platform for coatings in CCS or adhesives that support debonding for a more circular economy in AS.
These are supported by achieving ISCC PLUS certification at seven of our key sites in the period, placing us at the center of our value chains for more bio-based and circular products. Our sustainability efforts are also recognized by key external rating providers. In the period, for example, we retained our silver rating in EcoVadis' annual sustainability assessment, which is only awarded to the top-performing 15% of all companies assessed and with an advanced rating for carbon management. Turning to our outlook, on current trading, we are cautiously encouraged that volumes continue to improve from historically low levels. However, evidence of a sustained end-market demand recovery continues to be limited. Accordingly, our outlook that we provided at our full year results in March remains unchanged.
We continue to expect to make some earnings progress on a continuing group basis and be at least modestly free cash flow positive, even absent broad-based macroeconomic demand improvement. As we have previously said, this progress is supported by our AS divisional performance improvement program, the annualization of delivered savings, procurement excellence savings from H2, partially offset by higher operating costs, mainly wage inflation and normalization of bonus accrual. In summary, we are continuing to make good progress to execute our strategy and evolve Synthomer in a fundamentally stronger business. Trading was in line with expectations, with revenue, earnings, and EPS progression, and we are reiterating our guidance for the full year. Our self-help initiatives are working, and these, together with operating leverage, are driving our EBITDA and margin progress. Our strategic transformation towards specialty solutions is progressing well through disciplined resource and capital allocation and some innovative thinking.
We continue to believe that our end markets are a long way from their potential in a demand recovery scenario. But in the meantime, we have a lot of opportunities for generating further operating leverage that are in our own hands to deliver and will serve us well once all end markets start to recover. We are encouraged by our progress to date, and we believe that we are increasingly well positioned to deliver our medium-term targets and ambitions. Let me stop there, and both Lily and I are happy to take your questions. Lily and I are happy to take your questions.
Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad, and please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. And if you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, it is star one to ask a question. Our first question comes from Chetan Udeshi from J.P. Morgan. Please go ahead.
Yeah, hi. Thanks, morning, all, and, thanks for taking my question. I had two questions. First, I think on, Michael, on your outlook comments, you know, we've seen recently some, let's say, weakening of macro data points, both in China, US, but also Europe. Is that visible in your, you know, like, forward order book? Or let's say Q3 trends in any of your markets suggest things are worsening, or, like you said, you know, it's much more stable, with no movements either way? That would be my first question. And can I confirm the... Second part I wanted to confirm is on your self-help cost savings program.
I'm looking at the slide 10, and it says, "Targeting GBP 30-40 million in annual cost benefits from procurement program and GBP 25 million from AS program in 2025." So can I confirm, let's say, give or take, these GBP 60 million of savings, are they incremental in 2025 on top of what you will achieve in 2024, or is this a cumulative number? And if it's, if it is, can you just help us with what is the incremental, cost savings number that we should have in mind for 2025 versus this year?
Thank you very much, Chetan. I take the first question. Outlook, I would say it's stable. It's not getting better, like we said, but it's also not getting worse. You mentioned China, you mentioned U.S. I think in both geographies, it's about the same situation. We do not see a weakening over the last one or two months. That's one statement, and the other statement is, if you don't have a market share of more than 20%, you always have opportunities to gain somewhere. So we are not too much worried about the external markets. We know we would need some tailwind at one point, that's clear. But as you've seen in our results, our self-help measures, they are working, and they are quite considerable. And you can work on your margins, you can work on your costs, you can also regain market shares.
I think we are very confident, even in a stable market, to make progress. Again, we did not see a weakening over the last one or two months. Lily, if you would go into the savings program.
Sure. Sure. Hi, Chetan. Second question in terms of our cost saving programs. So we say there are two major programs. One is on procurement operations improvement, around GBP 30-40 cumulative savings by 2025, and the second one is our performance improvement program in our AS division. That's about GBP 25 by 2025. Again, that's cumulative. We would expect sort of up to about half-ish to be realized this year, so not all the GBP 60 would be incremental in 2025, some of which has already been underway.
Thank you.
Thanks.
Thank you. We will now take our next question from Vanessa Jeffriess from Jefferies. Please go ahead.
Good morning. Great to see you've regained some of the market share that you lost. I was just wondering if maybe the reliability performance is where you want it to be at this time, and if there are any kind of incremental market share gains that you've had on top of the last year?
The reliability in AS is improving, and it's improving month by month. As we have said, now, since we owned the business 18 months ago, that was one of our biggest problems. We did lose market share because we just couldn't supply to the customers. We then mentioned in the first step, that was probably 6 and 12 months ago, that we could contain the issues to 2 sites in Jefferson and in Middelburg. I would say now that even in Jefferson and Middelburg, we are on the right track, and that's one of the reasons. There are also marketing efforts. There are different approaches towards our customers. But one of the reasons why we did have this volume growth in AS is because we are regaining market share, which we lost for the reliability issues. Are we 100% there? Not yet.
We are working on, but I would say really improvements month by month. I think we took here an approach with a TMO, with a transformation management office, extremely focused approach, and it's paying out. It's clearly paying out. So I hope that by the end of this year, we are basically in a steady state. So huge improvements over the last few months. We are there, I would call it 80, 85%, but we will get there to 100.
And then NBR, I guess you're back at 2017 volumes now. How do you think about the pricing outlook over the next five years? I mean, it's obviously not really getting any easier, is it?
Yeah. It's, I think it's just a changed market. Like we have always said, it's a market of NBR pre-COVID, and there's one post-COVID. Pre-COVID, Chinese had a market share of about 70%. Now they have a market share in gloves, in gloves, not in NBR, in gloves of about 50%-55%. I think this will stabilize at that level. I have seen this many times in the past, the Chinese are taking or eating into a market, but they, at the end, they never have a 100% market share. So I believe that we will reach a certain stabilization at 50%-55%. I think that the volumes will continue to pick up. You saw some quite remarkable volume increase numbers in our books for the first six months.
I think the situation also with our self-help measures has, has improved because we closed the Kluang facility, so we are operating now at 70% in Pasir Gudang. This helps, but I believe if you look forward, the margin, they are still below. The margins, they are... In the first quarter of this year, the margin were about one-third of the pre-COVID margins. Now they have improved to significantly ahead of half of pre-COVID margins. So it's a big improvement, Q2 against Q1. I believe that that is something that is prevailing, usual supply and demand. But I don't see the margins coming back to the levels of pre-COVID, and that is because the market is structurally changed, because the Chinese have entered the glove market, and this also has a, has an impact on the NBR production.
When I say that we are now at 70% of capacity utilization, I should also say that the whole industry is still at around 50%, and that obviously weighs, weighs on the margins. So in summary, I believe that the volumes will continue to go up. I think the famous destocking has come to an end. So from there, there's positive news, but I believe on the margins, they will also improve slightly over time, but they will remain clearly, for the foreseeable future, below the pre-COVID margins.
Thank you. And then, sorry, just a quick one on innovation. Continues to be a big focus on innovation, clearly, but R&D spend sitting still at quite a bit under 2% of sales. Is that something that needs to increase?
When I came to the company, we were just a little bit ahead of 1%. We are now approaching 2%. I think for our industry and our product portfolio, something like 2% is a very healthy, very healthy level. I believe that there are always, again, self-help, that you can do many things, and that's why we have taken a different look at our innovation. We have taken out projects. We focus much more on the projects which believe are the juicy ones going forward. I think there are a lot of self-help measures, and I believe, looking at our product portfolio, our geographic portfolio, I believe that 2% is quite a promising number. So I wouldn't expect it in the immediate time to increase it to 2.5%-3%.
I think 2% gives us enough opportunities to increase sales and margins. I would again come back to what we said in the statements before. I believe our China Innovation Center will help us a lot. China is a very promising market for us. We had almost no innovation capabilities there, and now we have really a state-of-the-art innovation center, and I believe that is an investment which also we will benefit significantly. But again, take the 2% as a number which probably will remain for the foreseeable future.
It's worth also saying that the-
Thank you.
The 2% across the group is being allocated differently between the specialty and the base. So the proportion effectively that's going to the specialty businesses is relatively higher than that group-wide number.
Yeah, makes sense. Thank you.
Thank you. Our next question comes from Sebastian Bray from Berenberg. Please go ahead.
Hello, hello. Good morning, and thank you for taking my questions. Could I start with H1 versus H2 trading comparison? Michael, you mentioned earlier there was no big change in order book or trading conditions, but if I might try and take a positive take on this, from what I can tell, nitrile prices are up by about 10%-15% on declining raw materials over the last 2-3 months. Freight rates are again up, which is presumably supportive of Adhesive Solutions. Can you give us a sense of how price cost spreads have developed, especially for nitrile and also for Adhesive Solutions as we move into Q3?
In other words, even if we allow for a slowdown in trading, it looks as if there might be some room, in at least in my view, to the upside for nitrile spreads and some other parts of the business. Is this fair or would you be more cautious on that?
No, I think it is fair. We cannot overdo it, but I think it is fair. If you look at the first six months compared to the first six months of last year, in all three divisions, the gross margins increased by about 100 points. And that is what we always say, that is creating the operating leverage. That's what we work on since 18 months, and you see it in this first half.
In CCS division, we had stable margins, we had stable volumes, but we still could increase our margin, and that creates really the operating leverage. So I think that the margins are stable. And the second statement. Our pricing power is quite good. I think over the time when the raw material costs went up, we could increase our margin the same when they came down. So I believe our, yeah, pricing power, our margin management is quite okay. So in a way, I believe that there are some opportunities to the points that you're making. But let's see now also how raw material prices develop. Let's see.
There are signs in some markets, as we have heard before, that the second half of the year, people even calculate with with lower volumes, which I have said we don't see in our case, but this will all have an impact on supply and demand, and at the end of raw material prices. But I'm very confident, and if they go up or if they go down, that our margin management can cope with it. And obviously, we were very happy in our NBR business and in our CCS division, that we really got a quite a big boost in volume uptake.
Yeah. And Sebastian, I just,
Just to check on the point around my drop. Are the prices up moving into Q3? And if so, why have the prices increased? Because from what I can tell, they are up reasonably substantially over the last two months on raw material basket, that might be down. Is this just general improvement in industry utilization or what is going on here?
Again, I wouldn't say... I think it depends now. Some of the raw materials, they went for a long time, they went down, and now they're coming up again. Styrene is coming up again, which is generally a good sign for the market because supply-demand seems to be improved. But I wouldn't. We have, we had very little changes now, so I wouldn't calculate onto this. I think I would really come from the margins rather than for the prices. We have about 40% of our business is index price, is formula pricing, so there you just have a time lag of two to three months. But at the end, I would come from the margin management point and not from the pricing.
That's helpful. Thank you. My second question is just on the interest charge guidance for GBP 60 million-GBP 65 million this year and GBP 65 million-GBP 70 million next year. I haven't seen an estimate of Synthomer's interest rate sensitivity, but let's assume that interest rates would go down 100 basis points year on year, as set by central banks. What type of impact does this have on the amount of interest that Synthomer would pay?
So maybe I just add a little bit on your first question. You talk about our H1 to H2. Two factors I think you should also consider in our H2 to protect your forecast. One is we do have some sort of seasonality in our CCS business. And secondly, we talk about a full year inflation, but our merit increase kick in second quarter, so second half would have one more quarter of wage inflation.
So coming to your second question of interest charge, I would say our, you know, in a pro forma level, so if you normalize our debt after we pay down the stub amount, which is about EUR 150 million, that we intend to pay down using our own cash, sort of July next year, and then you average the interest payment, I think we're coming in around the 7% level. So you can see where the 1% or 100 basis points would mean. Not every, you know, debt will be sensitive to every part of the debt will be sensitive to interest movement because our bond is fixed interest, fixed coupon, but the U.K. facility is sensitive.
That's helpful. Sorry for missing you earlier, Lily.
No problem.
I believe that the line was a bit.
Thank you. Well, I'll move to our next question from Harry Phillips, from Peel Hunt. Please go ahead.
Good morning, everyone. Just a couple, please. Just thinking about potential divestments and so on. You go back to the Capital Markets Day a couple years ago, and you had sort of circa GBP 600 million revenue described as non-core, and obviously, raw material prices have moved, and obviously, you've made some disposals, but just how much non-core is left? And obviously, you highlighted the European SBR side as sort of still there potentially to go. So maybe some updated thoughts around possible phasing on that. Excuse me. And then secondly, just in terms of the cost savings and the procurement savings, just the cash cost of that, because I'm presuming procurement doesn't so much cost anything, but obviously, if that's producing profit savings, I'm guessing it also produces some working capital savings as well.
So is that, would I be in danger of double counting the benefits there? I probably am.
Yeah, yeah, yeah. So on your first question, divestments, I think as usually in our strategy, we do exactly what we said we would do. We have sold films and laminates, we have sold now the compounds business to the paper and carpet business. So there basically is one bigger divestment that's about EUR 300 million in sales that is on the way. That's a progress, a process going on. That's the paper carpet business in Europe. Then there's one more business, and then we are pretty much there where we want to be. So there's very little left, but one of them is a big business.
So I hope that we can conclude this one or two remaining pieces to the divestment work by this, by this year, and then at one point, also to start to go the other way and, and build our pipeline, which we are building for some bolt-on acquisitions, of course, the, the, when the balance sheet allows. So I think that's about the schedule. There is nothing else on the divestment block. It's exactly like we said two years ago, or almost two years ago. There's one change, what we did. We declared now the Harlow VP business. We declared as a core business. So I think that is a strong message also that we are not dogmatic with our strategy.
That is not a huge business, but we believe that it has a lot of opportunities there, and the team came forward and found many adjacencies and opportunities. So we reallocated this business to core. But all the other businesses, exactly as we have said, and again, there is one or two more transactions going on, and we hope that we can conclude them during this year. On your second question on the procurement, I think there would be a bit of double counting. The procurement doesn't have costs to it. These are simple procurement savings that we get, indirect spends, I would say, even as a first point, but then also direct spend that we just get better deals on it, that we have better structure on it, that we have different suppliers on it, that we work in a more professional way.
We started to work with the e-auctions, which we didn't do before. A different portfolio of suppliers, a different portfolio of how we approach those markets. So I think this you should take as a saving, and in a way you cannot do the double count. We always said that we have the different buckets. We have our AS-related savings, we have our procurement savings, and we have our annualized savings coming from last year. I think these are the three big buckets, and we should stick to those ones. And then we can rely to Lily's answer to Chetan at the very beginning, what are about the numbers?
Yeah. Maybe just add a bit, Harry, if you look at procurement cost savings, you know, to some extent, that could potentially, you know, have positive impact on our working capital, in, in particular, on inventory, as well. But, you know, you have to just take the inventory turn and, you know, proportion it, at some, at some stage when we, when we come to, report the numbers. To, Michael's point, yes, we have three buckets of savings, and some of the cash costs associated with those, you know, cost programs we reported into the special items. As you can see, the first half, and we do have, you know, close to GBP 7 million. That's a closure cost, site closure cost and restructuring-related cost.
And maybe one more word on the inventory. We always said that the Synthomer businesses, and that includes then the Omnova business, we run at about 10% of sales of net working capital. I think that's kind of an industry leading indicator, so there's very little room there. Where we do have room and not down to Synthomer general levels of 10% is in Adhesive Solutions. So we took last year GBP 25 million out. Now, again, we reported GBP 4 million lower inventory. I think here we still have a little bit of potential, but as usual, yeah, there's the rate of decreasing returns. And at one point, we are at the level which this business needs to operate, knowing that there are different supply chains for this business, there are different raw materials, there are tracker economics behind it.
So it will never be at the level of 10%, but I think we are approaching there. So there, there is some more potential, but you can see it in the numbers. If you annualize the GBP 4 million, you could make it GBP 8 million. We had last year, GBP 25 million. So also here, it's getting smaller, but there, there are some further opportunities. But I wouldn't relate it necessarily with the procurement initiative. It's more a supply chain logistics initiative by the AS division.
Fantastic. Thanks very much indeed.
Thank you. We will now move to our next question from Stephanie Vincent , from Bank of America. Please go ahead.
Thank you so much for taking my questions. I have a few more on the credit side, if I might. My first is, is just talking about paying down the EUR 150 million of 2025 notes. Just wondering where Synthomer feels comfortable in terms of cash holdings on their balance sheet, kind of minimum cash levels. It's always quite useful to know and be updated from time to time. So hopefully that's a simple question. My next question is just on the credit rating. There are negative outlooks at both agencies, and I realize it might be better to speak with them, but just your thoughts after the first half about your ability to be able to maintain the high B1 at Moody's as well as BB- at Standard & Poor's after these results. And then finally, you talk about some ways to make capital-light investments.
In your view, how will these partnerships impact the overall spend in CapEx over the medium term, whether or not that's in an absolute number or in terms of growth CapEx to revenues, for example?
Um-
Lily, you take the first two, I take the third one, okay?
Yeah. I was going to say exactly the same, Michael. So, thank you for your question. So question one, about paying down the stub amount, EUR 150 million. We expect to utilize our own cash, and you can see we have about 270-ish million of cash that we currently hold on the balance sheet. And after paying down it, we still have sufficient cash to run the business. And from a liquidity perspective, today, we are over GBP 500 million liquidity committed, and after paying down, the stub will be, you know, somewhere around the GBP 400 million still. So both from a cash holding perspective and also from a liquidity perspective, we'll be very comfortable. The second question about my confidence level about rating agencies, rating.
Look, I think we have generated a good set of results, both from a PNL and cash flow and also from a balance sheet perspective. Now, we have dealt with our bond, and we're in a much better platform, on a much better platform supporting our strategy. I am expecting the rating agencies to take everything into account. So, yeah, I think, you know, our rating should, over time, improve. Michael, over to you.
Yeah, I have one more comment on the first one. The 500 million, I think that is a very comfortable number, more than GBP 500 million. And in cash, we also hold more than GBP 100 million. So I think this really covers us very nicely in the current conditions of the, of the business. And that's obviously a very different situation than we had, 12 or, or 18 months ago. So I think the general financial situation, the balance sheet, everything is really in very safe hands for sure, until 2027, when there's the next refinancing. But obviously at this time, our world, will also look, very different. Then your, your question on, on smart, capital, capital-free, capital-light investments. I think we should go back to pillar four of our strategy, the differentiated steering.
So the growth CapEx that mainly goes into the core businesses, and as examples, we have mentioned the China Innovation Center that we have built in six months, the APO, very special high-margin business that comes on, comes on stream in the US for AS division in Q1 of next year. We have added, and that is already on stream now, since a few weeks in Mogadore, in Ohio, the continuous monomer addition system, where we converted one reactor. So there are plenty of growth opportunities which we are doing. Why we call them kind of smart one and creative ones? Because they are not huge. These are usually single-digit million investments, but they clearly are geared towards the growth side of the business, towards the specialty side of the business. And then we have our base business, core, but base business, which is our NBR business.
Here we are looking into partnerships because we don't want to put capital there, so we are looking into no capital, capital-light, partnerships. I am quite confident that we will soon be able to report some progress, especially in the U.S. there. We are looking in the U.S., we are looking in China. Because I mentioned before, the U.S. is clearly the largest consumer market of the gloves. China has now, as I mentioned, 55% of market share in the gloves. And I'm just not ready to have no position in these two huge markets, especially Chinese producer market. I think company, as a market leader, and we are still a market leader in this business, we need to take a position, but we need to take a capital-light or capital-free position. So we are working with potential partners.
I'm hopeful that this year we will have a nice conclusion in China, and I really believe that in the US, it's quite imminent that we can announce a partnership there for a local production partnership. And I think these are, yeah, in a way, smart deals, because we don't want to put capital into that business. We wanna allocate the capital really to our specialty businesses. So I think these are the two approaches that we are taking.
Very clear. Thank you.
Thank you. As a reminder, to ask a question, please signal by pressing star one. Our next question comes from Kevin Fogarty, from Deutsche Numis. Please go ahead.
Hi there, morning, all, and thanks for taking my questions. If I could just start off, just the first one, just revisiting the question of seasonality. Did I sort of pick up on the call that you think the sort of greatest area of seasonality is in CCS, and perhaps, you know, we might see that sort of weighting towards H1, as opposed to kind of being more evenly balanced over the second half? Or did I kind of pick up you think that, you know, any kind of shortfall for seasonality might be made up by cost savings? Just to sort of clarify that, and I guess kind of how that sits kind of relative to consensus expectations, which seems to be a bit more balanced, at least, or weighted towards the second half.
Any comments you could sort of just clarify in terms of seasonality would be great.
Sorry.
The second point, in terms of industry inventory levels, I just wondered, kind of within your supply chains, is it sort of medical gloves where you think kind of inventories in the supply chain have kind of eased away, or are they still elevated, or are there other sort of channels where you're kind of most concerned about inventory levels, in the industry supply chain currently?
Yes. So on your first question, I think we should come from the end and answer the question, and here we should stick to our guidance that we have given since early in the year. We said that we are making progress, EPS earnings this year, that you basically take last year and some progress, and we reiterate this one. Now, how do you arrive there? If you're gonna go through the seasonality calculations, I think in general, seasonality is a little bit overrated and overused. I can give you simple, simple numbers. In our CCS division, especially in the coatings division, coatings business, there is some seasonality, but make CCS division 52-48 towards the first half, and basically take the other two divisions pretty much 50/50.
I think that is a guidance which shows you, if you take then the whole company, that's actually quite, quite limited. That there's a, yeah, a small amount towards the first half. I think that we do have additional, additional measures on cost savings because there is annualization. There's everything that we have mentioned and a few things that come in as we go, as we have shown since over the last 18 months. But again, everything should end up in the guidance because we have some counterpositions to the savings, we have the wage inflation, we have the bonus accrual, which we openly declare. So at the end, everything will result. So I, I'm not willing now to kind of upgrade the guidance. The guidance is some progress compared to last year. And then the question about inventory levels in NBR.
I think that the story of the famous destocking is really over. I believe that this has normalized. I think in the U.S., if you talk to all the big distributors there, that is a normalized situation right now. Also, the NBR is always a fast-turning product, so here we don't have really an inventory situation. So, in summary, I would just say that we have now a normalized situation. We have not a normalized situation with margins, as I have mentioned before, but we have a normalized situation on inventory.
Okay, great. Thank you. And just as I've got the mic, are there any kind of areas like CCS, for example, where you think kind of inventories might be sort of elevated? Or is it really sort of the markets themselves getting back to growth?
I think it's, it's the market going back to growth in certain areas. I think our coatings business, consumer materials business, our energy business, they're all doing quite well. Our construction business is in a more difficult situation because the construction market, especially in Europe, are in a more difficult situation. But I would not put a lot of attention there to the, to the inventory. I think we manage this as we go, and you can take numbers from the history over the last two years, and I think you are pretty safe then.
Great. That's helpful. Thanks a lot.
Thank you. It appears there are currently no further questions at this time. With this, I'd like to hand the call back over to Michael for any additional or closing remarks. Over to you, sir.
We have... Well, if you have no more question, kind of your last chance, if there's one more. If not, I would wish everybody a nice day and see you the next time. Thank you very much. Thank you.
Thank you.
Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.