Good morning and welcome to our First Half 2025 Results presentation. As usual, I'm joined by Lily Liu, our CFO, and Faisal Tabbah, our Head of Investor Relations. Lily and I will present our review of Synthomer's strategic, operational, and financial performance in the period, and together 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 continued progress we are making despite clearly subdued end markets. Lily will then walk through the numbers in more detail before I come back to present the key developments in our three divisions, in the execution of our strategy, and how we are continuing to position Synthomer to deliver our medium-term ambitions. I start with trading.
In the first half of 2025, we were able to deliver gross margin, EBITDA, and relative margin progress, mainly through continued strategic delivery and cost reduction measures, which we are becoming quite good at. We view this as a robust performance overall, given the weak market environment the industry experienced, particularly in the second quarter of the year. The gross margin improvement by more than 400 basis points over three years, and more than 100 basis points in the first half of this year, shows our pricing power and operating leverage, which are very important now and even more going forward in a better demand environment. Both revenue and volume broadly tracked 2024 in Q1, but demand conditions became considerably more volatile in the second quarter following the announcement of new U.S. tariffs.
Many customers have adopted a wait-and-see attitude in the face of the sometimes day-by-day changes in the tariff situation, and this has affected activity levels in the short term, even as most of the longer-term trends in our end markets remain reasonably stable. Our net debt was higher than at the start of the year, broadly in line with our expectations. This mainly relates to the seasonal net working capital profile, which is why we are confident that free cash flow will be positive in the second half. In terms of the outlook, we are assuming that demand remains subdued as a result of the trade tensions and geopolitical situation for the remainder of the year.
We have therefore stepped up our strategic and operational efforts to transform the business, including a new GBP 20 million - GBP 25 million cost reduction program, which includes removing a further 250 positions across the group. This will help to mitigate these headwinds and enable us to deliver some earnings progress and broadly neutral free cash flow for the year as a whole. We also continue to change the portfolio in line with our strategy of making Synthomer a more resilient and more specialty-focused chemicals business. In May, we completed the divestment of William Blythe, our non-core inorganic chemicals business, and together with a site closure in China, we have now reached the milestone of less than 30 manufacturing sites, down from 43 when we began this process in late 2022. We are not done with portfolio simplification.
We have two formal non-core divestment processes currently underway, and we are giving consideration to broadening our divestment program to accelerate the group's deleveraging and focus the portfolio further on end markets where we see profitable growth. We also continue with our efforts to allocate capital and other resources in a smart way. You will recall that last year we began a technology partnership in the U.S. to leverage our intellectual property and expertise in medical glove ingredients, and in the first half, we added additional services for our U.S. partner, which contributed positively to earnings. Our sustained focus on targeted innovation, including into more sustainable products for our customers, resulted in good successes in the period and added exciting opportunities ahead.
I'll come back to talk further about some of these developments in a moment, but let me first hand over to Lily to run through the numbers in detail.
Many thanks, Michael, and good morning all. I'm pleased to take you through our H1 2025 result, which shows EBITDA and margin progress over the prior period, despite the backdrop of increased demand uncertainty created by tariff policy changes. As usual, I'll start with the financial summary. Group revenue for continuing businesses was 8.8% lower on a constant currency basis at just over GBP 925 million. This was largely driven by lower volume, especially in Q2 after the tariff announcements, as well as reflecting the pass through of lower raw material prices and the robust prior year period for energy solutions and coatings businesses. Despite this, we delivered EBITDA and EBITDA margin growth overall, with encouraging progress in our adhesive solutions and H P P M divisions, partially offset by lower performance of energy solutions within C C S.
The gross margin for our businesses improved by 110 bps versus prior year, supported by GBP 17 million from cost efficiency programs and reliability improvements, as well as a lower bonus accrual compared to 2024. We were able to deliver a group continuing EBITDA of GBP 78 million, a 5.4% increase on a constant currency basis. EBITDA margin continues to improve versus the prior period, now standing at 8.4%. Continuing business underlying profit was GBP 28.3 million for the half, in line with H1 2024, with slightly higher depreciation in the period, reflecting the capital expenditure profile. Underlying finance costs increased by 4%, higher coupons from new bonds partially offset by lower base rates. We continue to expect net financing costs of around GBP 60 million-GBP 65 million for the year. Cash interest costs continue to be lower than P&L charged by around GBP 5 million.
We continue to guide the underlying group effective tax rate around 25%. For 2025, our ETR is expected to be significantly outside of the normal range due to a geographical mix of profit and loss and adjustment on deferred tax assets in the U.S. and UK. Discontinued operations, being the William Blythe business, contributed an EBITDA of GBP 3.6 million up to its divestment in May 2025. The total group continued and discontinued had underlying earnings per share of GBP 0.036 loss for the half, down from GBP 0.013 in H1 2024. Special items are coming down for continuing operations and comprise mostly intangible amortization and restructuring and site closure costs in the period. As always, we have included schedules for special items in the appendix.
As usual, our net debt at the end of June was higher than at the December year-end, reflecting seasonal working capital movements, which I will take you through in more detail in a moment. Our leverage of 4.8 x was slightly higher than at the year-end, but within the covenant. Turning to each of the divisions, in CCS, revenue was GBP 372 million, down 12.2% in constant currency from H1 2024. Volume was down 6.5%, in part reflecting a strong prior period, including a good coating season and tariff-induced demand uncertainty. The biggest driver was lower oil and gas drilling activity, which resulted in smaller orders from our oilfield services customers in the high-margin energy solutions segment. We have seen some improvement in our construction business in Europe, which has been particularly challenged in 2024. This was not enough to offset the muted activities elsewhere, particularly in the U.S.
The energy solutions' slowdown was also reflected in the mix reduction of 5.7%. As a result, EBITDA reduced to GBP 35 million, or down 34% in constant currency. In response, we have taken decisive steps introducing the cost reduction program in the period that Michael mentioned. CCS bears a substantial share of the group's overall cost base, and so, while this is already bearing some fruit, we anticipate acceleration of the savings in H2 2025, driving more balanced performance between the halves for 2025. Now, we're very pleased with the further progress achieved in improving the adhesive solutions division, which increased EBITDA by 64.8% in constant currency versus H1 2024, raising EBITDA margin to almost 12%. Revenue was 1.4% lower in constant currency, in line with 1.8% volume reduction. This was partially driven by required operational shutdowns and delays to a capital investment project on our specialty line.
The site and the contract work are managed by a third party. The project came on stream in July, and we expect it to make a positive contribution in H2 2025. Our improved reliability and cost competitiveness have enabled AS to remain resilient in a period of market volatility, with the business continuing to report operational efficiencies and cost savings expected through 2025 and beyond. Finally, the health and protection and performance materials division. Revenue was down 12.4% in constant currency, reflecting a 10.2% volume contraction and pass through of lower raw material price. Within health and protection, NBR volumes fell by 16%, reflecting some pre-buying in the supply chain prior to the Biden administration's changes to U.S. PPE tariff that went into effect in January 2025, which muted customers' demand in H1 2025. Our customers expect this to moderate in H2 2025.
Margin per tonne in H&P benefited from mix effects, as demand for our higher margin reusable product was more robust than for disposables in the period. This continued to be substantially lower than the pre-pandemic levels. Our passive grid plant utilization is currently around 65% - 70%, with the industry as a whole at lower levels. We received further income from our U.S. technology partner, where we support their efforts in building a new U.S. NBR plant, including for a new package built and delivered in the period. The performance materials side of the division reflects the volatile market conditions for these businesses and two manufacturing shutdowns in the period. Process optimization and cost efficiency initiatives have driven performance improvement and margin progress.
We continue to focus our efforts on enhancing capacity utilization and efficiency within the division, resulting in a 180 bps EBITDA margin improvement versus H1 2024, increasing EBITDA by 21.5% in constant currency to nearly GBP 17 million. As Michael mentioned, we have also disposed of William Blythe's business this year and ended operations at our Ningbo site in China, with further divestment programs ongoing. As I've mentioned, our half-year net debt was GBP 638 million, higher than the year-end position of GBP 597 million, as we expected. This increase reflects our typical seasonal working capital investment, bonus payout, CapEx phasing, and translation of foreign currency debt, partly offset by the proceeds from William Blythe's divestment and increased receivable factoring. We reported working capital outflow in the first half, as is typical for us, with higher activity levels in June versus December reflected in the working capital balances.
Our continued focus on inventory efficiency, coupled with seasonal unwind, means we are expecting good working capital inflow in the second half. We demonstrated exactly the same pattern last year between the two halves. CapEx remains disciplined, with forecast full-year spend now expected to be just below prior year. Increased spend versus H1 2024 is driven by project timing. Other than health, safety, and sustainability spend, we selectively invested in some strategically important areas, such as our new specialty APO line in the East, Middle East capacity for CCS, technology improvements, and lower carbon solutions for our customers. Cash tax benefited from refund in H1 2025, which we expect to unwind to a neutral position by year-end, and pension costs in excess P&L are significantly lower than last year as guided.
Taken together with further self-help actions, we expect a positive second half free cash flow and a broadly free cash flow neutral position over 2025 as a whole. Regarding our core debt facilities, the remaining stub of the 2025 bond was repaid in early July. Our RCF expires in July 2027, and the U.K. facility has maturity to October 2027. As always, we keep our financing needs under review in case of opportunities ahead of that. Net debt to EBITDA was 4.8 x at the half-year on covenant definition basis, which mainly adjusts for IFRS 16, and is therefore about 0.4 x - 0.5 x higher than using headline net debt and EBITDA figures. Leverage was slightly higher than the 2024 year-end due to the aforementioned factors, but well within our covenants.
In the period, we extended the time of additional headroom under the covenants through 2026, in the event that expected recovery in demand is more drawn out. Prior to the GBP 129 million bond stub repayment in early July, our committed liquidity facilities totaled more than GBP 400 million, with additional support from the unused portion in our factoring program. Let me reiterate our capital allocation priorities. While we intend to continue to invest very selectively in organic growth opportunities aligned to our specialty strategy, our key priority is to reduce our leverage towards our 1x-2x medium-term target level through a combination of increased EBITDA and continued cash generation focus, supplemented with proceeds from divestments. The board has confirmed that dividends will remain suspended at least until our leverage is below 3x .
In summary, I'm pleased with the strategic, operational, and financial progress we have made in the period through difficult market conditions. We continue to focus on our self-help actions, balancing this with selective investment guided by our strategy. Let me stop here and hand back to Michael to update you on our strategic initiatives and outlook.
Thank you, Lily. I would like to begin this section, as usual, by reiterating the key elements of the strategy, which continue to guide how we are transforming the business. All five pillars and three enablers provide executable actions for us, also in the current trading environment. The period since we launched the strategy in October 2022 has not been the easiest environment to demonstrate progress, but our actions are showing a positive effect on the quality of the portfolio. I mentioned our significant and continuous gross margin improvement, and together with all the work we have done on the operating and overhead costs, we have increased the operational leverage in the business substantially, resulting in a drop-through rate from revenue down to EBITDA of 30% or more. As previously outlined, our ambition is to make Synthomer a more specialty-weighted, more geographically balanced, and more streamlined business.
Whilst this will always remain work in progress, the quality of our business is improving. While individual periods can be heavily affected by mixed effects, we are moving towards the specialty objectives while broadening out the geographic exposure. One point I would like to draw out is the progress we have made in the last three years to reduce our site footprint through non-core divestments and rationalization, and how we continue to challenge ourselves here. Following the divestment of William Blythe and another site rationalization, we have now reached the milestone set out in 2022 of having less than 30 sites globally, and we are today setting a new objective of further streamlining our footprint to less than 25 sites. This allows for a more meaningful capital allocation, reduces CapEx intensity, and eliminates cost.
While we will continue our overall production strategy of producing in region for region to be close to our customers, we believe there are further opportunities to make Synthomer a simpler, more efficient organization with less complexity, also in terms of overhead and fixed cost. In addition, it allows the gross capital to be deployed to our best assets and opportunities. Having sold laminates and films in 2023, compounds in 2024, and William Blythe earlier this year, we have a number of other non-core divestment processes underway, fully in line with our specialty solutions strategy launched in October 2022. At the same time, we are giving consideration to broadening our divestment program to accelerate deleveraging. Now, let me run through each of our divisions, touching on the key actions or developments we took in the first half to advance the strategy.
CCS is our most specialty-weighted division, and it faced a very mixed demand environment across its end markets in the period, as Lily has described, with some encouraging signs in construction and consumer materials, more than offset by the energy solutions market situation and the U.S. slowdown. In response, we stepped up our efficiency measures in the first half, and CCS actions are an important part of the new GBP 20 million -GBP 25 million cost reduction program we have initiated. This focuses on capacity management, including temporarily idling excess capacity and reducing shift patterns, and includes a broader review of operating costs, including headcount, and implementing a number of inventory management measures to enhance cash flow.
Alongside these near-term actions, we have continued to further align CCS with its strategic end markets, and we are targeting specific growth segments during this generally subdued demand environment, such as data centers and energy transition-related opportunities. We successfully continue with our strategic key account management for top global customers and are using targeted marketing to further develop relationships with additional regional clients in North America and Asia. Alongside our growing focus on value selling and optimizing our product mix, we changed the group CRM system in the period to what I believe is now best in class, and this will boost our targeted and data-driven customer approach in all three divisions. Our innovation process is becoming more end-market focused to enable us to get products to market quicker.
We launched a number of new construction products in the first half, and our bio-based emulsion polymer coatings are progressing to market for launch in the second half. We are making selective investments in our manufacturing capability in the U.S. to enable the localization of products previously only made and imported from Europe, and we enhanced our coatings capacity in the Middle East to support further growth in the region. The recent reduction in global oil and gas drilling activity levels has resulted in a tough period for CCS earnings in H1, but I'm convinced that the business continues to offer significant opportunities. Turning to adhesive solutions, the division delivered consistent and significant progress in earnings, driven by further solid work on its reliability and performance improvement plan.
This is supported by the division's total customer focus and end markets that are overall more consumer-led and hence more resilient than other parts of the group. The principal focus of the plan put in place by the incoming divisional management team in 2023 has been on increasing the operational reliability and cost efficiency of the adhesive resin business acquired in 2021 and integrated in 2022. At the start, we had issues in most of the six acquired sites, but this has steadily been improved, and today there's only one third-party hosted site in the U.S. left where I would say we have further work to do. An important site in Europe delivers now record output levels. The plan realized a further GBP 5 million of benefits in the first half and has achieved a total of GBP 30 million in benefits to date.
We remain on track to exceed the current GBP 35 million target by the end of 2026. The optimization of our supplier network for key raw materials, including planning, procurement, and logistics enhancements, has been a main focus, and we continue to seek opportunities to reduce working capital intensity. Our improved reliability and cost competitiveness means we are regaining market share, and we are building on this progress by targeting new business. Our key investment project to increase the specialty APO capacity at our Texas facility commenced several weeks behind schedule due to third-party contractor issues, but has been on stream and working well since mid-July and is now contributing to division earnings in the second half.
The division also made progress with a number of strategic growth initiatives designed to build on our leading positions in a range of specialty adhesive applications, leveraging our multi-year relationships with many high-quality customers and global production network. For example, in April, we announced a novel whole value chain partnership with Henkel, focused on enabling carbon emission reductions in its hot melt adhesive product portfolio. This partnership follows Synthomer's recent launch of CLIMA-branded products. Products with this designation deliver at least a 20% reduction cradle to gate in the product carbon footprint by using renewable energy in the production process. Henkel and Synthomer have jointly developed a framework that links this renewable energy use directly and certifiably to specific adhesive products, enabling measurable reductions in carbon emissions. This partnership approach to sustainability improvements is supported by our investment in ISCC PLUS certification of our major manufacturing sites.
In addition, AS has a number of other customer collaborations for sustainable fast-moving consumer goods packaging applications progressing, which we anticipate to begin to add sales in the second half. Finally, our new innovation center in Shanghai has improved our technical reach in China. Overall, I'm pleased with the continued momentum in the AS division, where we have more than doubled the EBITDA margin in two years to a very promising 11.9% in H1 2025. Coming to health and protection and performance materials, recognizing that much of the division has specialty chemicals characteristics, our differentiated approach is to focus on improving cost efficiency whilst enhancing our overall value proposition through selective investments in process innovation and sustainability.
In the period, our health and protection business had to be agile in responding to evolving market dynamics, working closely with customers as they reacted to recent changes in the global latex gloves market. These were mainly the result of the tariffs announced for Chinese imports in summer 2024 by the Biden administration, which came into effect in January 2025 and are set to increase in 2026. While we have not seen a meaningful uptick in volumes as yet for our Malaysian customers due to massive pre-buying, these tariffs have made them more competitive in the critical U.S. market, and we anticipate this to benefit the Malaysian value chain over time. Meanwhile, in H1 2025, we received good single-digit U.S. dollar millions in income for our services from our open-ended technology partnership to support growth in the onshore U.S. glove market.
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. As I mentioned, we continue to strengthen our overall cost competitiveness and implemented further operating cost efficiencies to align with market developments. We also closed the manufacturing site in China, but maintained the business via a different business model. Within performance materials, specialty vinyl polymers out of Harlow, antioxidants in China, and our European paper activities delivered a robust performance in H1. In February, we were proud to announce that Synthomer, together with Neste of Finland and PCS in Singapore, has established one of the first ISCC-certified value chains to manufacture bio-based nitrile latex for the glove industry. As mentioned, we successfully completed the divestment of William Blythe in May, and further divestment processes are ongoing.
Ensuring excellence across all aspects of our operations is pillar three of our strategy. On procurement, you will recall that we launched the project last year to identify and capture material savings in this area. We realized GBP 5 million in benefits from this project in the first half and expect cumulative benefits of more than GBP 20 million to have come through by the end of next year. Our SynEx program, which focuses on building the group's capability to deliver end-to-end continuous improvement in processes and systems, has continued to deliver the expected financial and operational benefits. We consistently invest in broadening our expertise across the group in this important area. SynEx led the implementation of the group-wide new CRM system, and we are proud of an increase in our net promoter score by 13 points over the last two years, which will translate into greater organic growth over time.
Turning to the innovation and sustainability agenda, we made further progress on a number of key initiatives which underpin the group's future growth. I have touched on several of these already, including the Henkel collaboration, so I do not intend to spend long on this slide. However, to pull out a few key points. In the period, we added a number of sites with ISCC PLUS certification up to 11 from 8. This continues to move us onto the center of our value chains in supplying more bio-based and circular products to our customers. We are now beginning to use advanced data analytics to speed up polymer formulation innovation, and our sustainability efforts continue to be recognized by key external ratings providers.
Turning to current trading and outlook, whilst our direct tariff exposure is limited as a result of our in-region and for-region manufacturing strategy and our efforts to pass on potential surcharges, the indirect consequences are adding uncertainty and volatility to our customers' demand patterns. Customers are cautious overall, resulting in smaller order sizes and a wait-and-see approach. However, at the same time, we are seeing customers reporting low inventories in many markets, and we also recognize that there are always growth opportunities in selected markets for us, as I mentioned a few of them when talking about the divisions. For 2025 as a whole, our outlook is for some earnings progress on a continuing group basis and for free cash flow to be broadly neutral. We are on track to deliver the self-help actions we had already built into our outlook since the start of the year.
We are assuming that the subdued end market conditions we have seen in Q2 will persist for the remainder of the year, but the effect of this will be mitigated by our existing and additional cost reduction programs as outlined before. These programs will logically provide additional run rate savings in 2026 as well. In summary, we are continuing to drive strategic and financial progress in a challenging environment. We have delivered significant gross margin improvement, demonstrated pricing power, and showed the EBITDA growth we committed to. The building blocks of our earnings recovery remain intact, and there is evidence that longer-term relevant market dynamics for Synthomer are becoming more supportive, including a continued improvement in European infrastructure and construction spending, for example. In the meantime, we continue with our proven self-help programs built on strategic and operational portfolio changes, margin improvements, and cost savings.
We have a total focus on de-risking and deleveraging the balance sheet through rigorous capital discipline and further cost and portfolio actions. We remain encouraged by our progress to date in difficult markets, and we believe that we are well positioned to deliver our medium-term targets and ambitions. I finish here and hand over to questions, which both Lily and I are happy to take.
Thank you. That is in Germany. If you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. Please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. Again, it is star one to ask a question. Our first question is from Tom Wrigglesworth from Morgan Stanley. Please go ahead.
Thanks very much, Michael and Lily, for the opportunity to ask questions on your presentation. Two questions, if I may. The first one is about the kind of the economic conditions. I mean, you're not alone in your commentary around the wait-and-see attitude and the low inventories at customers, albeit one of your, well, actually, Eastman in the U.S. has spoken about a new phase and the inability to understand where customer inventories are. I'm wondering if we take this to its conclusion, like what happens in its conclusion? It seems like the system is running down on inventories. You're losing volumes as a result. What's the tipping point? It seems to continue to get worse until, you know, I just can't see where this evolves through the second half or at what point you expect there to be an inflection as a result of these low inventories.
Just your kind of insights there as to how this cycle plays out. My second question is around your strategic ambition with potential for further divestitures. How are you thinking about that in the context of legacy costs? I'm guessing that the targeted sales that you've completed to date and the ones that you have in mind are ones where there's low kind of integration with the group as a whole. As you go deeper into that, will you be forced to have to address further cost cuts, which again may come with a cash out initially as well, mitigating some of the value realization that you're achieving by divestitures? Can you just kind of, as you think about divestitures, unpack for us how you're thinking about those legacy costs? Maybe they're issue, maybe they're not. Thank you.
Yeah, thank you. Your first question on the conditions, I think, is clear in the whole industry. There are difficult conditions basically since April 2022. What we see recently, it's much more volatile. Like in our case, we reported May was not a good month. June was a good month. If we look now into how July and August started, it's actually quite reasonable. I think there's a lot of volatility, and that's driven by the uncertainty overall in this world. I think we shouldn't speculate on how this is going on. We reported relatively low inventory levels at customers, which means that at one point they will have to restock. Overall, I don't expect things to get worse, but also I think for the second half of this year, I don't see any clear reasons why it should get much better.
What we are doing, we continue with our self-help. I mentioned another GBP 20 million-GBP 25 million on cost reductions. I mentioned our internal portfolio management, which we have shown in several businesses that you can upgrade the margins. Our gross margin is going up. Our EBITDA margin is going up. I think there's a lot of self-help to be done. I think it's clear that at one point this overcapacity in the industry will balance out, but I think we just shouldn't speculate when this comes because it is already now a very prolonged situation, which we have since, as I said, since April 2022. On the divestments, we are pretty much sticking to our strategy, but we would like to create something potentially in addition, and that's why we announced this additional review that really reduces our leverage and reduces our debt. Something that has impact.
We are continuing fully in line with our strategy with the two divestment processes we have announced, but we just don't want to make a bad deal. We made three deals: films and laminates, compounds, and William Blythe. They're all three good deals, and we don't want to do something bad because we are not under pressure. We have enough liquidity. We just have to get the debt down over time and the leverage to get down. That's why we are looking into additional opportunities, and we will see where they come from. There will be no cash costs attached to it. It will be a divestment, and it will be something that has a very substantial impact on our net debt and especially on our leverage. That's why some of the deals we just don't want to make.
Honestly, we would have liked to have done the two divestments we announced previously already, but we couldn't do them because either the contract was not fine, and you don't want to come back with a difficult SPA situation two years down the road. The second one is just the valuation was not in line. What we believe the business is worth, and in addition, it wouldn't have a sufficiently positive impact on leverage.
Okay, thank you very much.
Thank you.
Our next question is from Sebastian Bray from Berenberg. Please go ahead. Your line is open.
Hello, good morning, and thank you for taking my questions. I'll ask them one by one. When we look at the wider portfolio and what can be sold, I'm thinking, is it under consideration to put the whole company up for sale at this stage? If not, could nitrile latex be divested? It's relatively straightforward to carve out. It doesn't have the same type of synergy effects that other parts of the portfolio would have, and I imagine there'd be interested buyers in Asia. That's my first question.
Yeah, I can answer. I think the first one is a clear no. We are not looking into selling the whole company. I think that's not in the interest of anybody like this at this point in time. Your second question, NBR, definitely, it is a base business. It is in a different division. I think we shouldn't go now into details on what we are looking at, but definitely NBR has features which are not in the two other divisions, CCS or AS divisions. I think we just look at all the opportunities again, as I said, which reduce leverage and which represent the value each of our businesses have. Definitely NBR could be a candidate at one point in time, but let's see now how it goes.
That's helpful. Thank you. If I look at the cash flow profile of the group, if it turns out that weak demand persists into the first half of next year and the company really needs to go into defensive mode, how low could CapEx go? It's edged up slightly in H1. I appreciate the guidance as it forwards to decline slightly year on year, but could it go all the way down to GBP 50 million- GBP 60 million if needs be?
I mean, Sebastian, in a way, we are in quite defensive mode since a while, and that's the reason why actually we did increase our EBITDA from 7.3% to 8.4%, which I think is quite substantial. All the cost reductions we have, the gross margin improvements, I think there's a lot of decisive actions that we have taken in the past. Now, if I look at the next.
If you ask CapEx, you know, what's the minimum level of CapEx the business can sustain on? I draw your attention to, you know, we reduced our footprint from 43 to just under 30, so 29 as of today. We just announced a new target to get it down to, you know, 25 sites, and that substantially reduced the capital intensity of this business. I think the bare minimum, if we just spend money on safety and systems-related CapEx, we could see us, you know, running around to your number, about GBP 50 million- GBP 60 million for the full year.
I think it's really the reduction in footprint that drives this, and CapEx can go down by potentially GBP 20 million, but also capital allocation is much easier. You see the progress we are making in AS. We invested in our APO capacity in the U.S., and that needs a little bit of CapEx, but we can do much more meaningful CapEx allocation. With 29 sites instead of 43 sites, you have also much, much less cost. I think here there is, besides the costs we mentioned, GBP 25 million, GBP 30 million, GBP 20 million, GBP 25 million plus a CapEx reduction, there's plenty of work to improve the cash flow and at the end also the EBITDA.
That's helpful. Thank you. If I may focus a bit more on the half two outlook and trading, it looks like the business had quite a decent Q1. Things got tougher in Q2, albeit it was helped by what I imagine, I think, Michael, you said low single digit, let's call it GBP 2 million -GBP 3 million partnerships stroke licensing services in nitrile. Aside from cost savings, is there anything else that would be supportive and help to undo the usual seasonal pattern? A potential for any licensing income in H2? Anything else to be aware of?
Yeah, I think the licensing income has definitely potential for the whole year of some GBP 8 million to come in, which is 100% margin in a way. I think there are additional opportunities in APO. Like I mentioned, we have now this expansion on lines in the middle of July. That's one of the best product groups we have in our company. I think here, this we should capitalize on in H2. We have a lot of mixed situations that we are upgrading the portfolio more specialty. We mentioned some coatings applications are coming online in the second half. I think with the internal mix, we have quite a few possibilities. I mentioned the Harlow business, which we are running now at 15% EBITDA, the SVP antioxidants, we run north of 25% EBITDA.
I think the mix, if we are able to push volumes of those profitable segments, there's a lot of additional opportunity in a still continue to be low volume environment. The costs we have mentioned before, but I think there are a lot of additional internal portfolio management, I would call it, opportunities.
That's helpful. Last one, just on financing and interest costs. From memory, there was some type of ratchet in the working capital financing costs and/or the rest of the portfolio when it came to net debt to EBITDA, i.e., a more levered company would pay a higher interest rate. Is the interest charge for the foreseeable future, even if trading doesn't improve, likely to remain around GBP 60 million cash effective, or could there be changes to that?
Sebastian, our guidance is around the P&L charge of GBP 60 million-GBP 65 million this year, and we also say the cash charge would likely to be about GBP 5 million below. In terms of ratchet, ratchet only applies to currently in our RCF facility, and we're substantially undrawn the RCF facility as of today.
That's helpful. Thank you for taking my questions.
Thank you.
Thank you.
Our next question is from Vanessa Jeffriess from Jefferies. Please go ahead.
Morning. Thanks for taking my questions. Just first on A S, given the significant progress you've made there in the last two years, I was wondering what margins do you think that that business should make in a normalized environment, and what's the operating leverage then?
Yeah, I think we should come back to what we always went with at the time of the acquisition. I think this could be a GBP 1 billion business at about GBP 130 million EBITDA. This could go to 12%- 15% EBITDA. I think we are on a nice trajectory there. There's lots of opportunities for additional investments. Reliability, as we have said, we had six sites at the time. We have now one site with problems. That's the hosted site in the U.S., but also if we get this then done, there are additional opportunities on reliability and cost, and especially now also on growth, on market expansion, on pushing the profitable segments. I think there's plenty of headroom to bring this very close to a 15% business at GBP 1 billion turnover.
Regarding what will be driving the recovery over the next couple of years, it seems to be the momentum in Europe. I was wondering if you're rethinking that strategy to pivot more to the U.S. at all, and if you actually think that Europe is a more attractive place to be.
No, I think fundamentally the U.S. and Asia is a more attractive pattern going forward for us because we already have almost 50% of sales in Europe. I believe our fundamental assumption of the strategy three years back is still to grow over proportion in the U.S. and in Asia. I think the fundamentals for this are still absolutely intact. It's just now that in Europe, actually, we see better conditions than in the U.S. I believe that in the long term, we will continue our strategy to over proportionally invest in, especially in the U.S., but also in Asia. I think this will balance up over time. In a way, we are not unhappy right now that Europe is maybe doing a bit better than the U.S. because we still have a major footprint in Europe. Having said that, we need still to adjust our footprint in Europe.
Again, it comes to site rationalization. It comes to certain business rationalization. It comes to the divestment programs we are having. I think to reduce our exposure or focus a bit more on the really profitable opportunities, I think this will go on. At the end of the day, the final target, if you look at regions, in my view, the best setup is the famous good old 1/3, 1/3, 1/3 over Europe, Asia, and the Americas.
Thank you so much.
Thank you. Our next question is from Angelina Glazova from JP Morgan. Please go ahead.
Good morning. Thanks very much for taking my questions. I have three questions, if I may, and I will also ask them one by one. My first question is a bit of a follow-up on the previous one, only a bit broader, in terms of the midterm outlook for the business. Of course, we understand that the environment is challenging right now, but it would be good if you could remind us of what kind of midterm or mid-cycle potential you see for the company overall and maybe for divisions, in addition to what you had commented on adhesive solutions just now. What kind of potential do you expect to see and what factors will need to come in place for this to play out?
I think, again, we don't want to speculate now exactly on month. I believe at one point it will turn, and it will turn substantially. Our strategy foresees a 5% growth, which we by far had in the last year. This year in the first half, compared to a strong first half of last year, we are slightly below, but I still believe, as an assumption for our company in a semi-normalized environment, this 5% growth is possible. I think we stick to our prediction that we can double our EBITDA levels. There's a lot of operating leverage. We see it now in the businesses where we are doing well. There's 30% plus operating leverage from sales dropping down to EBITDA. You have to see we don't even need so much.
In our picture, if we have now instead of, let's say, GBP 145 million, GBP 150 million EBITDA, we have only GBP 170 million, which is basically self-help coming from the cost reductions. Through divestments and through the EBITDA, we would have GBP 500 million on net debt. You have a totally different picture. My point is that we are not totally reliable 100% on the market recovery, which is uncertain, but many, many things are in our own hands. That's why also in the first half, we did in a very weak environment, as you see from the whole market, we did do quite some progress. What is also interesting is when the market just recovers a little bit, which we have seen in the first half of last year, we had a very, very good performance.
Also, our CCS division, which is because of energy and partially coatings, had a difficult first half of this year. If you look at CCS last year, a little bit of a market recovery, a little bit of a good situation, especially in the first quarter, and we had 12.3% EBITDA. You see, it just doesn't take a lot in our case to really move the needle. That's why I'm confident that we can make the progress already starting in the second half of this year, like we promised it, in a very difficult environment because there are so many levers on the cost, on the mix, on the growth side as well for our business. We just don't want to speculate when there's a broader market recovery.
The broader market recovery, I think, like many people say, there's overcapacity in the market, the whole tariff situation, geopolitical situation, it's just very difficult to predict. We don't want to predict. We just do our thing. I think there are plenty of levers to bring us into significantly different territory.
Understood. This is very clear. Thank you, Michael. My next two questions are actually focusing a bit more on measures that are within your control with regards to managing the free cash flow. Firstly, on the newly announced cost savings for GBP 20 million- GBP 25 million, to understand that this is the cost impact, could you maybe give us some color what kind of net impact after cost inflation we should expect to see from this program? Also, what kind of maybe one-time cash outflow will be associated with the implementation of this program?
Yeah, your first point on the cost, I think you can take this pretty much as a net impact that is calculated. We don't have, that is kind of a net number, this GBP 20 million- GBP 25 million additional. There are headcount reductions in, as we have said, so there's about 2/3 of headcount is fixed cost, and there's a little bit of additional cost measures which are not headcount related.
The costs achieved are one-time costs to achieve the saving. We estimate around GBP 8 million - GBP 11 million.
Understood. Thank you very much. My last question is around receivables. Could you please remind us the current conditions for receivable financing facilities that you have, and what is the sort of the outstanding balance? To what extent will you be able to use these instruments in the future if it's necessary?
Yeah, look, the receivable, the factoring program is GBP 200 million in its totality, and the current expiry date is January 2027. It has been extended a few times in the past, and we intend to continue to utilize it. Currently, we're utilizing just under GBP 120 million for the half year. It does require, you know, demand, it does increase or decrease together with demand situations. That's the current situation, Vanessa.
Great. Thank you very much.
Thank you. Our next question is from Sanjay Bhagwani from Citi. Please go ahead.
Hi, thank you very much for taking my question. I think some of the parts of my questions you have already answered, but see, the key focus for the market, I think, at this point is on the net debt. Now, when I look at the net debt, it has increased somewhere around GBP 40 million or so versus the full year, that's sequentially. If I just take out this William Blythe, then it's probably somewhere around GBP 60 million increase. I understand that you already alluded that some of this may reverse on the working capital, but you also highlighted some negatives like the tax and stuff like that. Are you able to provide us some sort of bridge, let's say how much of this GBP 60 million increase in net debt organically can unwind into the H2? That would be very helpful.
Yeah, thank you for the question. I start maybe with a more general point. We know that the key focus in our company is on leverage and on net debt, and that's why we are taking additional now decisive steps on reducing cost. We are looking at our divestment program. What I'm much, much less concerned, if you look at the H1, it increases in the cash flow, it's basically networking capital. It's receivables, it's a little bit of swing on payables, and that's why we know in a way, because we have done this many times, that in the H2, we will reverse it. It's really, it's receivables and it's payables. Actually, inventory is even a little bit lower than we had in December. Lily, maybe you can do the bridge.
Yeah, and Sanjay, thank you for your question. Look, if you look at our 2024 result, H1, H2, we have exactly the same pattern, that networking capital outflow in the first half, and recover the position in the second half. As Michael also mentioned, we expect the full year 2025 to be broadly free cash flow neutral. That says, you know, we're expecting free cash flow positive in the second half of this year coming from a couple of factors. One is, you know, networking capital unwind. If you look at June versus December, we tend to have a higher debt to book in June versus December. We continue to work on our inventory and inventory structural reduction program. We have said our CapEx has higher spend in the first half of the year.
We expect the second half to be less than the first half, and overall 2025 to be slightly less than 2024 spend. With everything together, we will see a free cash flow broadly neutral position. Underneath that, we do expect to spend money on the restructuring program, and, you know, partly to do with our new program we just announced. There is a little bit of capital lease payment as well. That's the position for the year, Sanjay.
Thank you. That is very helpful and comprehensive.
My next one is on the, I think, for the oil relic, which I think in the coatings & construction has been the big drag for the price mix as well. Is it something, was it like an H1 phenomenon which you have started to see it recovering that is basically, can this reverse? Or this probably very well may persist in 2025? Just trying to understand if there is an element where it can reverse.
Yeah, on CCS division, I think the biggest delta we have in the first half is on energy solutions because last year, there was just much more drilling. We are mainly, we are not in the production predominantly. We are in the drilling space of the oil and gas business. Because the oil price was low, now at least it's a little bit more stabilized again. It was low, that's why there was less drilling. You have some reserve wells, and that's why you don't need to put them up, the service companies, which are our customers. I think we saw a very difficult situation in the first half. In June, already it started to recover. If you look now into July and August, also there are additional orders which we have not seen in the first half really.
I believe that this is coming back to a reasonable level, maybe not as pronounced as it was during last year, but I think we see a clear recovery over the last few months in the energy solution business. The other one that we had a delta was the coatings business. I think the coating season was much delayed, it was much less than last year. It was predominantly only in Southern Europe, in Italy, and in Spain. There's the other delta. On the other hand, if you look at CCS division, consumer materials is pretty much stable, also because it's a more consumer-geared business. Much, much more stable. Construction is actually even up in our case compared to the previous year. Because the energy solution is such a dominant situation, that's why we couldn't catch up on it. I believe that CCS division is coming back again.
I have said we had last year 12.3% EBITDA in the first half, and I think we will be on a good track, especially if energy comes back to get back to these levels again and then continue as the strategy. There's a lot of very good innovation projects. There are regional accounts in the U.S. and in Asia. I think there's a very, very clear plan and a very credible plan to get the division into growth mode again.
Thank you. I think the final one, just a bit more nuanced one on these energy solutions. Is this mainly Europe focused or, if you could provide some geographical mix, what's the split between the Europe-U.S.? Maybe no precise number, just trying to ascertain if it is U.S.-geared or Europe-geared.
Yeah, the energy solutions is basically the big service companies, our customers. It's a totally global business. Some of it goes into the North Sea, some goes into Saudi Arabia. It's a bit of everywhere, but everything is in a way controlled through our customers, which are the famous predominantly big three oil service companies.
Thank you. Very helpful.
Thank you. We will now take our final question from the phone line today from Stephanie Vincent from Bank of America. Please go ahead.
Hi, thank you very much. I have tons of questions, but I'll keep it pretty brief. If you are paying down the small amount of 2025 that you have outstanding, plus the RCF that you've drawn to pay those down, I calculate if you have broadly neutral free cash flow, you're going to get down to around GBP 100 million, let's call it GBP 140 million of cash, if I'm not mistaken. The business is typically run with a minimum of around 6% of sales cash, around GBP 120 million. You're getting roughly close to those levels. I realize that you've expanded the facility under the revolver. My very top question is, what sort of levels of cash are you comfortable holding? My next question has to do with some of your commentary about returning, I guess, to this kind of GBP 200 million of EBITDA to get to that 3x leverage metric.
I know that there's some free cash flow assumptions in there too. If you do get up to those levels, what sort of level of CapEx should we be expecting on the roughly, let's call it GBP 25 million of facilities? Should we expect that to also move up? What do you expect as well in terms of your working capital usage?
If you do go back up to that, like what sort of volatility and absolute levels or as a percentage of sales could we expect on that?
Yeah, I think on the, if I take your second question first, on the GBP 200 million CapEx, you don't need anything in addition. I think we have a very nice mix now between sustainability and gross capital, so we can cover this, and any upside position is covered because we have less sites. I think here GBP 200 million EBITDA is absolutely possible with the CapEx we have now. The GBP 80 million or as Sebastian has asked before, that even it can be brought down by GBP 10 million or GBP 20 million if we have additional divestments or other rationalization of our site footprint. Also, thinking net working capital, generally we have about a 10%, a good 10%. I think that's a ratio which is very sustainable for additional business. It depends a bit which is the nature of the business, but it should be slightly dilutive.
Also there you can go with a slightly lower net working capital percentage than we have now, but obviously there you need a little bit more. These are not sizable moves, and I wouldn't worry at all if we have the GBP 200 million EBITDA, that it's a very good thing for our company.
I'll take the first question. I would say our liquidity, as we mentioned on the call, at the end of June, after adjusting for the payout of the stub amount of the 2025 bond, is just under GBP 300 million, and you know we can run our business with less than GBP 100 million. You can see we still have plenty of liquidity in our pocket. I hope that answers your question.
Yeah, that's great. Thank you very much.
Thank you. If there are no further questions in the phone queue, with this, I'd like to hand the call back over to any webcast questions.
Very good, and good morning everyone. We have a few left that we haven't already addressed in the verbal questions, so I'll just run through some of those now. Can you please explain the underlying earnings growth assumptions needed to meet the step-down in covenants? How much depends on the cost out versus a market recovery?
Yeah, we have at year end, we still have 5.25, then we go to 4.75 and 4.25. All those covenants can be achieved without any growth, and that's why any growth is upside. We are very cautious on our market development or the assumptions for next year, probably also going into 2026, because it's just not prudent to believe now in market recoveries where we don't have evidence from. The simple answer is that we don't need any growth to manage those covenants. There's enough on cost reduction programs, what I have mentioned. There's enough of internal portfolio management on moving the margins up, like we have proven over the last actually three years. There is nothing of growth needed in a way, and the growth will come at one point in time, and that is upside.
In terms of the existing disposal programs, is there anything you can add on the timing and proceeds of those?
I think again, as I have said, we would have liked to have done this some time ago, but we don't do not good deals, and that's why I think also here we shouldn't speculate now how much it goes. I think there's a lot of focus on the divestment programs, also on the potentially additional divestment programs, only again if it has a very sizable impact on leverage and net debt. I wouldn't now speculate. It always needs to, and in these markets, even also divestments are not easy. I think we just go on. I can confirm these are active projects. We are talking to people, we are negotiating, but I wouldn't say now when exactly we do have a conclusion.
A couple of relatively quick questions, probably for Lily. Do you anticipate fully repaying the GBP 70 million outstanding on the RCF in the second half?
Yeah, by and large, so.
Could you comment on the guidance for one-off and exceptional items for 2025, you know the difference between the EBITDA and the EBITDA including special items, as it were?
Yeah, our special items, if you look at, there are non-cash items, there are cash items. The non-cash items are largely amortization of acquired intangibles, so I'll put that aside. From a cash element perspective within special items, first half we spend about GBP 9 million. I would expect the full year to be the high teens and GBP 20 million level.
Good, and then a slight clarification question, I guess, on the cost savings programs. Initially we're targeting GBP 25 million -GBP 30 million for 2025. Today reported GBP 17 million in the first half, as well as a further program of GBP 20 million -GBP 25 million in the CCS division and in SG&A costs. Can you please indicate the total savings left to go from both these programs in the next six months and going forward?
Yeah, to cover the next six months, look, next six months we're expecting, to Michael's point, around GBP 9 million to come through. This is the new program we talk about, and clearly we still have the old program left. We delivered GBP 17 million, I think, you know, run rate. We're still expecting about GBP 15 million there, but overall, if you recall, last couple of times we talk about a GBP 40 million-GBP 50 million program in the next year or so, and we're still thinking we get there. We have achieved a lot, and we still have a new program we developed, and we're about to deliver, so we're on target for the GBP 50 million.
Very good, and then last question I have here. Understand that overstocking in the glove market was COVID-driven. How do you expect the limited shelf life to impact overstocking timing-wise? Won't they have to be scrapped eventually? I guess more broadly it's probably worth talking about the restocking and cycling.
In NBR, I think in general the overstocking or the shelf life from COVID is not an issue anymore. I think this has been depleted. The shelf life for some people, they say three years, some people they say five years, but I think that's not an issue anymore. The NBR situation more broadly, and that's why there was a note of one of our large customers, one of the big players in Malaysia, and he expects now in the second half of this year increasing volumes. I think here we see the same because there was a lot of pre-buying, especially in the U.S. from Chinese gloves at the end of last year, which lasted well into the first half. I would say in the second half and also going forward in 2026, there's a nice potential for volume recovery. I think the margins will remain under pressure.
They might increase when supply-demand balance is a bit more out, but they will increase, but I don't expect, I expect the growth of the business coming mainly from the volumes rather than from increasing margins because the market is still, there's still an overcapacity situation. I think shelf life and so is not, or any COVID-related issues are not an issue anymore.
Can you comment on expectations for the receivables financing through the end of 2025, 2026?
Yeah, we continue to utilize our receivable financing facility, and this is a non-recourse facility, and this is our customer's credit versus our own credit, so it's actually cost-competitive. From that perspective, we intend to continue to utilize it as much as possible this year and also next year.
Are you open to looking at acquisition opportunities opportunistically? Is there anything that you're thinking about at this point?
Yeah, I mean in general the answer is in the way the obvious answer is no. With our balance sheet, you shouldn't look into acquisition opportunities, but even here if there are small opportunities which just simply do make sense and which are actually beneficial to our leverage, I think even then we should have a look at if there is the opportunity. Let's not forget a lot of companies these days are in difficult situations, and that's why there are deals possible which potentially we would have a look at, but again only if it is for the leverage positive situation and it has an immediate accretive impact on our business. I think these are the two conditions. Definitely nothing, anything larger that would be of course excluded.
Very good. That's all we have.
Thank you very much.
Thank you.