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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone. For those, I haven't had the chance to meet yet, my name is Michael Willome. I spent most of my professional life in speciality chemicals. I have worked and lived for many years in Asia, in North America, in Turkey, in Europe, and now I'm very happy to be here. I'm looking forward to meeting you in person in the coming weeks or months. It is a great pleasure to be with you from a maiden set of results, a very warm welcome for those who are in the room and also to everyone joining online. I'm conscious that it is a busy day and we are grateful for your time, so let's make a start.
In terms of today's agenda, I will begin with some highlights before handing over to Steve, who will provide a detailed overview of the financials. I will then come back to talk about some of my initial observations and a strong platform of profitable growth that I believe we have at Synthomer. I will wrap up with a summary and our views on outlook before we take your questions.
2021 was without doubt an exceptional year for Synthomer. Sales increased by 47% to £2.3 billion and EBITDA doubled to £522 million. This performance was both materially ahead of last year and very significantly improved in 2019 as well. This significant uplift in profitability was led by Performance Elastomers, with our NBR business saw unprecedented demand driven by the pandemic. But our results reflect strong growth in all areas of the business.
Functional Solutions was significantly up as we started to see the impact of our enhanced global positioning following the OMNOVA acquisition in 2020. Industrial Specialities also had a good year, benefiting from its leading market positions and speciality portfolio. And Acrylate Monomers, while it's not the core business was up year-on-year, completing a clean sweep.
It is very important to note in the high inflation environment, we successfully passed on the steep rise in raw material prices to our customers. Strong free cash flow and the equity placing that we did in October meant that our leverage dropped markedly by the year-end. Our balance sheet is well-positioned to accommodate the Adhesive Technologies acquisition and digest the normalized NBR margins. It is a priority for us to use our strong cash generation to bring the leverage to our targeted range to 1 times to 2 times EBITDA within 12 to 24 months on closing the transaction.
Today, we have announced that we are making a provision of £57.2 million in relation to the ongoing investigation by the European Commission. In June 2018, we told the market that the European Commission had initiated an investigation into past practices relating to the purchase of Styrene monomer by companies operating in the European Economic Area, including Synthomer. This provision is based on our understanding of the current facts and circumstances. The investigation is ongoing and due to confidentiality imposed on us by the commission, I'm afraid we cannot comment any further for now.
Our acquisition of Eastman Adhesive Resins business was an important strategic development for us last year, and it is something I'm very excited about. Not only does it add a new growth dimension to our existing platform, but it enhances our position in attractive end-markets where we already have a prominent position, most especially in building and construction and in packaging.
During the year, we launched our ESG Vision 2030, setting out 10 goals to drive forward our climate and diversity ambitions as we look to build on recent progress that we have made. And finally, the Board proposes a final dividend of £0.213 per share, in line with the group's dividend policy. This represents a total payment to our shareholders in July 2022 of £100 million.
One thing that struck me very early on was the strong sustainability story Synthomer has. It is stronger than many might think, and it is stronger in two ways. Firstly, the progress that we are making to reduce our own carbon footprint, 34% lower than we were in 2019, and that includes a significant reduction in 2021. This year, we will introduce science-based targets as we aim to decrease our Scope 3 emissions by 10% by 2030. Plans are in place to ensure that we make a significant improvement on this target already this year, 2022.
We are also closing our coal power station in the Czech Republic in Q1 2022, ending the use of coal at Synthomer. The Vision 2030 roadmap underlines our commitment to be net zero by 2050, with our environmental targets now inextricably linked to our financial performance. We are also making our culture more diverse and inclusive, increasing the gender diversity in senior leadership to 20%, with a target to increase that further in the next three years. We have also increased diversity on our Board and that will rise further this year. We recognize that there is a lot more to do, but we are making serious progress. It is a key priority for the business.
Secondly, the demand for more sustainable products has never been greater. As the market leader in water-based polymers, which have a lower environmental impact than solvent-based alternatives, the opportunity to take advantage of this trend is very significant indeed. This year, we were awarded the London Stock Exchange Green Economy Mark, given companies that derive more than 50% of their revenues from sustainable solutions.
Let me pause here and hand over to Steve, who is going through the financials in more detail.
Thank you, Michael. Good morning, everybody. Welcome to those in the room, and for those joining us online. As Michael has already said, 2021, our 50th year as a listed company, was something of a unique year for our business. The bridge on the top right hand part of this slide sets out the stark contrast in profitability between 2019, 2020 and 2021.
And now, we have delivered a doubling in the EBITDA in 2021 itself. As you are all aware, a significant part of the increase in the EBITDA was the result of the NBR contribution that came in the last 12 months. But we shouldn't ignore SBR either, which has made a meaningful step forward to the performance of the Performance Elastomers division, culminating in an increase in profitability of that division of £195 million EBITDA. Aside from PE, we saw strong contributions from Functional Solutions, where the EBITDA increased by £47.6 million and also a contribution from the Industrial Specialities, a further increase of £7.6 million (sic) [£7.8 million] (00:07:54) of EBITDA.
You'll also notice Acrylate Monomers, which we started to report separately back in 2019 due to its cyclicality had a very strong exceptional year, and contributed an increase in profitability of £37.6 million EBITDA and moved forward from a small loss in 2020.
Aside from the corporate costs, FX was a headwind for us this year, with sterling depreciating against our three principal trading currencies, the Malaysian ringgit, the US dollar and the European euro, and we'll see this later on in the presentation. The tax rate was broadly in line with last year at 22.5%, and a little bit lower than what we reported at the half year, which was just over 23%. The reason being the continued strong momentum in the European results that we saw in the second half of 2021. The strong increase in profits has meant that we have reported an increase in the earnings per share to £0.752, which is 160% ahead of the prior year. The increase in profits is partly offset by the increase in the weighted average number of shares, following the placing that we put in October 2021 ahead of the financing of the Adhesive Technologies transaction.
Finally, on this slide, I'm going to reflect on the differences between the group that was there in 2019 when we reported £178 million EBITDA and the group we have today. The 2019 EBITDA predates the COVID pandemic of course, but it also predates the OMNOVA acquisition, which came to us in April 2020. And of course predates the acquisition of the Adhesive Technologies transaction, which we expect to complete at the end of this month. It predates the NBR investment in the extra 60,000 tonnes expansion, which again comes online this month, and it also predates the investment in Functional Solutions, both our Roebuck and Worms sites.
So some quite marked changes, contrast with where we are in 2022 EBITDA that will reflect now the two transformational transactions that we have done being OMNOVA and Adhesive Technologies, both of which should contribute in excess of $100 million of EBITDA when they're fully integrated and the significant growth CapEx on NBR and Functional Solutions.
So what does all that mean for our business today? It means the group today is more diverse from a geographic perspective, more diverse from an end-market perspective, more specialized products from both acquisitions, contributing a higher average unit gross margin than the legacy Synthomer business and has more platforms for growth. And of course, as a culmination of that, is an order of magnitude bigger both in terms of revenue and EBITDA than it was in 2019.
So turning to each of the divisions, starting with Performance Elastomers. Performance Elastomers saw its EBITDA grow by 137% at constant currency to £320.7 million EBITDA. Alongside the exceptional demand for NBR that we've talked about, we also benefited from being able to utilize the extra 90,000 tonnes that we brought online at the backend of 2019 [indiscernible] (00:11:32) start of 2020, the JOB5 expansion that you've heard us talk about before.
NBR saw record volumes and unit margins in the first half of the year. The picture changed in the second half of the year as anticipated and as indicated at our interim results, with guidance of an excess of £500 million for the full year. When we've delivered £322 million in the half year, demonstrably indicating that second half was going to show some slowdown in our NBR business.
The Emergency Movement Control Order imposed by the Malaysian government impacted NBR customer growth capacity and production, and the demand was also impacted towards the latter end of the year by the overstocking that was there in the supply chain. And that notwithstanding the ongoing threat of new COVID variants in the latter part of the year. As a result, margins started to soften in the second half and also volumes returning to pre-COVID levels by January 2022.
Volumes were lower than the very high levels experienced in H1 to H2 2020 and H1 2021, and again returning to 2019 levels at the backend of 2021. As I said earlier, it's important to recognize that PE is not just about NBR, it's also how's the SBR business in that. And that contributed to the record performance that we had in 2021, partly reflecting the rationalization of the European network that we implemented at the start of the year. The closure of our Oulu site happened at the end of February and reduced the paper volumes in our business by 55,000 tonnes and took 100,000 tonnes of capacity out of the market. An improved market environment alongside the positive impact from OMNOVA contribution in that part of our business helped to drive stronger volume and improve the mix to stronger unit margins in the second half of 2021.
Turning to Functional Solutions. Functional Solutions' EBITDA itself grew – EBITDA grew by an impressive 50% constant currency to £139.2 million, aided by strong cost control, synergy realization, with all regions contributing to the growth. This reflected improvements across all end-markets that we served, as well as the expanded global position that we now have following the acquisition of OMNOVA. Volumes were up 10.9%, again partly reflecting the OMNOVA contribution on an annual basis, but also due to increased cross-selling opportunities as we brought the legacy businesses together. We also benefited, and I touched on it earlier, from the increasing capacity that we brought online in Roebuck and Worms in the USA and Germany.
Unit margins were up in the year, a combination of higher unit margins from OMNOVA and also the greater proportion of the speciality product portfolio that we have, where our margins are higher. We have successfully been moving our product portfolio towards the value-enhancing end of the range, and of course that brings with it higher margins. And we expect this trend to continue as we move forwards.
Finally, and as Michael mentioned at the start, we have seen a significant escalation in raw material prices during the course of 2021, where our – some of our main raw material prices, namely Butadiene and Styrene increased by more than 50% over the prior year. Positively, and as we've talked about before, we've been successful again in passing on the raw material cost increases through to our customers.
Turning to Industrial Specialities, the EBITDA here grew by 19% at constant currency to £47.6 million. As you are aware, our focus area is more on speciality niche areas, Speciality Additives, which supplies coatings, delivered a strong performance with good volume and unit margin improvement. We also saw a similar trend in Powder Coatings. Both coated fabrics and laminates and films, which came to us from the OMNOVA business, also delivered strong top line growth and on top of a solid year in 2020. Volumes were up nearly 27%, reflecting the rebound from the legacy businesses where their volumes were up over 10% and the first-time contribution from OMNOVA.
In terms of Acrylate Monomers, following a small loss last year 2020, the business saw a strong improvement in EBITDA in 2021 and reported an increase to £35.3 million. Volumes slightly lower, reflecting a change in product mix, as well as a challenged operational environment and raw material challenges. Notwithstanding the site – the Sokolov site transformation project, which contributed to a lower cost base for the site in the year, the return to profit was mainly driven by a substantial increase in unit margins, reflecting a significant increase in demand and a tight supply demand balance across Europe. Supply issues resulting from competitors mothballing sites and having [ph] FMs (00:17:09) also contributed to it, as well as logistical constraints to get product into the area. These conditions are expected to normalize as we go through 2022.
Talking cash flow on slide 14. Free cash flow, excluding working capital movements, more than doubled to £300 million, representing 58% of our EBITDA and continuing the strong historical cash flows of the group. Notwithstanding the investment in working capital for the full year, £82 million and you'll recall it was £160 million at the half year as a result of significant raw material price inflation that I've touched on already. The raw material prices stayed elevated towards the end of the year and although activity levels came off due to seasonality, we still have £80 million invested in working capital. That said, our rule of thumb holds true and we continue to see working capital at approximately 10% of sales.
CapEx is higher this year, partly reflecting the lower investment in 2020 in our part response to the COVID pandemic and partly reflecting our continued investment in our Malaysian NBR capacity coming online later this month, so that's the 60,000 tonnes you've heard of talk us before. Depending on the development of our NBR opportunities as we look forward, we are guiding CapEx to £130 million in 2022, and this includes an allowance for the Adhesive Technologies transaction again, which will complete at the end of this month.
Looking at the balance sheet and how we've set it up to accommodate the Adhesive Technologies acquisition, the strong free cash flow I've already touched on and the £203 million equity placing ahead of the transaction, has reduced our net debt to £114.2 million at the end of 2021. And that represents 0.3 times EBITDA leverage.
In line with guidance provided at the time of the acquisition, we see the leverage rising to 1.6 times at completion, so at the end of this month. Again, that was in line with the announcement that we made in October. But similarly consistent with the announcement we made in October with the debt and equity financing structure put in place at the time of signing, leverage is expected to rise during the course of 2022 as the well-trailed normalization of NBR occurs, resulting in leverage at the end of 2022 of circa 2.5 times and reducing from that point forward.
You will recall that our capital allocation policy, which targets normal course leverage of between 1 and 2 times, permits exceptional leverage, i.e. above 2 times in the event of M&A activity. And on the understanding that it will reduce back to the normal range between 1 times and 2 times within 12 to 24 months of the transaction occurring, and this is the plan.
Last slide for me on technical guidance, and I'm not going to dwell on it too much. This guidance there on the effective tax rate, which we continue to see in the range of 23% to 25%, depending on the geographic mix of profits and that's broadly aligned with our neutral – our natural tax rate across the group and absent any concessions from any of the main tax jurisdictions in which the group operates overseas.
Lastly, I draw your attention to the marked reduction in the defined benefit pension scheme liabilities. The liabilities reduced by 50%, circa 50% between the end of 2020 and 2021, from £221 million to £122 million at the end of the year. Material reduction not only reflects the contributions that we've made to those schemes during the course of 2021, but also improved asset returns and the rising discount rate under favorable experience on actuarial assumptions, so good news there.
With that, I'm going to hand you back now to Michael, who's going to talk about the strong platform for growth. Thanks, Michael.
Thank you very much, Steve. I want to spend the next few minutes talking about where I think Synthomer is today, highlight what I believe are the key attributes and why I'm excited to be here as the company's Chief Executive. I also want to talk a little more in detail about the NBR space before closing with an update on our outlook on 2022.
One of the things that excites me the most about the business is the strength and depth of our portfolio in across three, soon to be four, core divisions. Within Performance Elastomers, NBR is firmly established as an integral part of our business, with a leading position in a market that has a proven track record of growing 8% to 10% per annum. We have significant opportunity to leverage our leadership with further innovation and by investing in more capacity, providing the conditions, the location and the timing are right. Our SBR business is being successfully restructured, and today it is stable with improving levels of profitability.
In Functional Solutions, we are a top five player with strong geographical positioning to support our regional businesses and expand our coatings and construction growth platforms. This is where the sustainability of that I talked about before is especially compelling and where, of course, we are seeing the benefits from OMNOVA. OMNOVA has already proven itself to be an excellent deal for Synthomer and we have exciting opportunities to build on the progress that we have made this year with more cross-selling. As well as enhancing our portfolio, OMNOVA helped to address the gap that we had in North America, a key market for us and the region where I believe that we can grow strongly in the years ahead.
The Industrial Specialities business has a very attractive portfolio of speciality products and niche market positions. The decision to invest in more capacity has paid significant dividends because we have seen high capacity utilization demonstrating the strong market positions that we have. So here, too, I believe that there are exciting opportunities to grow.
Finally, our new Adhesive Technologies business adds to a new growth dimension in Synthomer. As we set out at the time of the transaction, it is exposed to attractive end markets with GDP plus growth fundamentals, several of which we already have a leading presence in. But the portfolio also takes us into more specialized, more global and higher growth segments. As a part of Synthomer, we are confident that this new division will be able to expand significantly. We also like the R&D capability and focus on innovation, something that I think we will be able to learn from in due course. We have talked a lot about NBR, but let me say a few more words about this topic.
Steve has highlighted the significant impact that the exceptional demand for NBR had on our EBITDA in the past two years. We have been able to take full advantage of this material increase in profits and cash flows to make investments that drive our future growth, more significantly the acquisition of Adhesive Resins.
The pandemic fueled the unique period of demands that we are unlikely to see again, but that doesn't make the NBR market any less attractive. As I said earlier, the underlying growth rate is 8% to 10% and we are a market leader. So we will continue to invest in this business to support further innovative growth. The market is likely to remain subdued over the coming months as the high inventory levels of rubber gloves are gradually used up, but as things stand, we expect conditions to have returned to normality in the second half of this year.
As you can see from the chart, glove demand has gone up every year. The bar chart tracks the number of pieces sold. This has fueled demand in NBR and natural rubber. It highlights that hygiene and food safety are global megatrends driving strong, sustainable demand for gloves and this is not going to go away.
The orange line illustrates Synthomer's margin profile over the same period of time. As you can see, it has been pretty stable. The slight escalation that we saw in 2015 was a result of Ebola. And then clearly, the sharp spike in 2020 and into 2022 was the result of COVID-19. You can see that whilst margins escalated very sharply, so they have also dropped very sharply, returning to normal levels. This has more to do with the pandemic rather than with the cyclicality in the business.
The dotted line represents the average margin. And as you can see, we have now returned to those average levels. However, over the medium-term, we see upside to this margin as the business provides innovation and growth potential to us.
So turning next to the priorities as I see them. The first one I want to talk about is that Synthomer could be more focused on our end markets. We have to think more through the lens of the consumers to enhance the value that we can bring to our customers. Synthomer has strong position in some very attractive end markets, health and protection, building and construction, coatings and shortly adhesives. By getting even closer to them, I think we will be well-positioned to unlock more growth.
Innovation must be at the heart of our business and I recognized a significant progress that has been made in this area over the last five years. In 2021, Synthomer generated 24% of its sales from patented and products launched in the last five years. We need to continue to invest in application development to drive innovation forward, again ensuring that its end-market and consumer-oriented. It also needs to support our continued progress towards being more specialized.
I want also to look at ways to enhance the use of our technology and digitization across the business as a way of engaging more frequently and more efficiently with our customers and being more collaborative in the way that we work within the organization.
I don't want to [ph] label sustainability (00:28:22), and I think that I have been clear already about the enormous opportunity I see here. We have to leverage our portfolio more to help our customers meet their own sustainability targets. Our new SyNovus Plus product in our NBR business is one such example. We will increase our focus on markets where we see an opportunity to leverage our sustainable technology. And at the same time, we will continue to work hard to accelerate Synthomer's own ambitions to reduce carbon emissions.
The second priority I would like to talk about is people. It is all too easy to say but our people are the greatest asset that we have. I want to look at ways to improve the speed of decision-making and increase accountability in the business. By being more agile, decentralized and flexible, we will become more efficient and more responsive to our customers. We will reorganize ourselves with appropriate levels of resources allocated according to the size of the market opportunity.
The leadership team is being reshaped with increased diversity and [ph] incentivize our performance (00:29:37). We will invest even more in talent development. Whilst I have been impressed by the way we have integrated acquired businesses, we need to increase the levels of collaboration across the businesses to make us a more joined-up, cohesive organization.
Thirdly, we will continue to look for ways to expand into new markets, both organically and inorganically. Inorganic growth will be especially focused on our Functional Solutions business and our new Adhesive Technologies platform, as well as looking into speciality adjacencies.
My geographic priorities include, but are not confined to North America and Asia, including China. We will allocate capital according to where we see opportunities to support our growth in attractive end markets with a focus on higher margin, more speciality, more sustainable and less cyclical areas. A critical KPI will be return on invested capital. Everything we do has to generate compelling returns.
And finally, business excellence, I have talked already about the end markets I want to prioritize. We will continue to progress the excellent start that we have made to recognize synergies from the OMNOVA acquisition. Whilst I think Synthomer has high manufacturing standards, we will continue to look for further improvements by reviewing the footprints that we have today and by looking for ways to use technology and digital channels and tools more than we do already. Commercial excellence is also a priority. I want to review our pricing strategy and sales systems to extract further benefits there.
Finally, as in any well-run business, we will continue to review all parts of the portfolio to ensure that we are well-positioned to grow the value of our company in each of the areas we are active in. As I have already said, I believe that I'm joining Synthomer at a very exciting point. There has been huge progress – a huge amount of progress of strategic and financial items in the business since 2015. The previous management team and Calum did an excellent job, helping to enforce Synthomer across four important areas.
First, by completing two strategically important acquisitions in the last two years, that have meaningfully enhanced our global position and scale. As such, Synthomer has evolved from being a predominantly European player to having a significant presence in the US and growing positions in Asia.
Second, we now have significantly enhanced proximity to an increased customer base and increased exposure to attractive end markets. Third, high levels of CapEx alongside a renewed focus on operational efficiency mean that Synthomer has well invested assets that are efficiently run.
And finally, as demonstrated by this year's financial performance, we have a very attractive portfolio across the three core businesses, all of which offer exciting opportunities for GDP plus growth. From the second quarter this year, we will have [indiscernible] (00:33:14) division where the growth perspectives are as compelling, if not more so. All that adds up to what we are calling a new Synthomer, and I'm confident that it has an exciting future.
I would like to wholeheartedly thank Calum and Steve for the work they have done for the company and for the way they have welcomed and introduced me to Synthomer.
So in summary, record levels of profitability in 2021 have enabled the group to make significant inorganic and organic investments to strengthen the platform for future growth and value creation. We are confident of being able to generate significant opportunities from our enlarged Functional Solutions business and our new Adhesive Technologies division, which will start to contribute from the second quarter of this year.
Looking ahead, as set out in our February trading statement, NBR margins have normalized. The unprecedented pandemic premium is entirely gone. And we expect high inventory levels in the global downstream channels in this part of the business to gradually be worked through during the first half of the year.
All other divisions have had an encouraging start to the year, and we are confident of continued strategic, commercial and operational progress in 2022. The Board remains confident that the benefits from recent acquisitions and a disciplined capital allocation focused on organic growth, inorganic growth and dividends will underpin growing sustainable profits and value creation in the coming years.
Let me stop here. Steve, and I would be very happy to take your questions.
Thank you...
Yes, Sebastian, please.
Hello, good morning. Sebastian Bray of Berenberg Bank. Thank you for taking my questions. I have two categories please. The first focus is on the graph showing the Nitrile gross margins and the gross unit margins at Synthomer. What does the capacity outlook on a two or three year view looks like, because the fear is that those margins might revert back to the level of 2014, if LG, Kumho and others start to add aggressively to the market as opposed to just stay normal? So if you could give us an outlook of what that capacity looks like?
My second is on the CapEx levels of the group. Am I right in saying that most of the businesses at Functional Solutions and Industrial Specialities are now running close to 100% utilization? And what scope is there for growing volumes ex-acquisition over the next two or three years? Do you need more CapEx to do this? Thank you.
Thank you very much, Sebastian. On your first questions, I would separate the question to a short-term and the long-term or mid-term outlook. I think short-term in the current situation of the destocking, which we said will go on into the – into this year, gradually coming back to normal during the second half of the year, we can see some overcapacity or underutilization. I have to say that we have seen this in the past as well. And if you look at our margin charts, the margins were stable even in times of overcapacity. So I would make – not make a natural link that overcapacity means reduced margins. I believe we have seen this in the past. It was not the case.
Looking at the broader picture, probably second half of this year going forward, we are studying and we have quite a good knowledge what happens in the markets, including in China. What we see is that we have a market that grows 8% to 10% per annum. We assume that we have about 2 million tonnes right now of demand. So that means that each year you need something between 160,000 tonnes and 200,000 tonnes of new capacity.
When we look forward in all the announced investment, we see this as a balanced market going forward. So we do not see any significant overcapacity in the mid-term, which I would call again starting second half of this year. We see it quite balanced. I have one thing which you have seen on one slide. You mentioned that there is limited visibility in China. We know all the players that contemplate investing that are investing, but we see sometimes a bit of an erratic behavior there because everybody sees the destocking and the problems in the markets that we are having now since the second half of last year. So there are some decisions of delaying it. It is sometimes a bit erratic. Some of the companies, especially in China, they are redirecting investments into SBR again instead of NBR. So that is the only thing which I think is now going on.
Some of the decisions to invest of our Kumho's and LG's, the most immediate competitors or the companies that are downstream our customers to invest upstream in the NBR space. Here, we see some of them are hesitating, some of them are delaying it, moving it out of them. But as I said, our company is committed to this business. We see mid-term a balanced capacity situation. We believe as a market leader with top innovation features and with the potential to grow our technology, our center of excellence in Asia in Malaysia is the ideal location to continue this leadership position.
So I think going forward after this destocking ends, we will come back to our leadership position, our innovation. And that's why I believe that those are the margins compared to where we are now, we'll have some further upsides again because of capacity we have and because of the innovation potential in this business.
Now, on your second question about CapEx levels. You are right and that is an important feature for I think every speciality chemicals business. We are very – running at very good capacity utilizations. I think our CapEx plans, and Steve lined it out, is relatively high this year for £130 million. We'll see how much of this we'll be using because a big chunk of it is geared towards the NBR investments where we do have some flexibility. So, I think we are absolutely in a position to support the IS business and the FS business to make the necessary capacity investments. As I have mentioned in my words, we will also look at the footprint. You can rationalize capacities there to have certain closures has been done. And Steve mentioned of Marl 3 of Oulu in Finland in the SBR space.
So I think we are quite well-positioned to support these businesses. And as I say, especially in speciality chemicals company, you need the high capacity utilization, but we will not allow that we cannot supply the market. So, I think here we are relatively flexible. We own this space. You don't need long, long lead times, you can add capacity in relatively short-term. So, I think we are absolutely positioned to capture those opportunities.
But as I said, capital allocation in a disciplined way where we get a return on the invested capital back. So, we will not invest into low margin businesses. We'll invest into again most speciality higher margins, less cyclicality areas where we see the future. So, I think having this disciplined allocation, having the balance sheet what we are having, I think we are in a good position to support the business [indiscernible] (00:41:04) again the attractive end markets that we want to be. So I think we are well-placed here.
Great. Kevin Fogarty from Numis. Three, if I could do. One just in terms of NBR stabilization, I just wondered if you could talk about sort of what you've seen year-to-date that gives you some sort of evidence of stabilization. Second one was on capital allocation. I just wondered given the outlook now, what does that do for your sort of desire for transformational M&A? How sort of staged might that be, I guess, as you roll forward?
And then just finally in terms of your key priorities outlined, you've talked about portfolio optimization. Does that sort of open the door for disposals as well, given the returns metrics you might use to measure businesses?
Thank you, Kevin. So on the NBR margins we have seen, let's say, from the third quarter of 2021, we have seen a relatively steep decline in the margins, you have seen it on the chart. Unprecedented upwards 4.5 fold upwards, sharply downwards. The most steepest decline we have seen in December and January. We see now in February, going into March, we see a stabilization of this. We have less of a decline; you can also see it on the chart. We have kind of a stop in the level of the average margins, if you go back to the last – to the last several years.
We have some indications from our customers, from our end customers, from our distributors, especially the smaller ones that it has coming to, I wouldn't say a stop, but it has – it is finding the bottom. These are early indications. As I said, the situation in December and in January was unfortunate, but we see now since the last six to eight weeks, we see kind of the market, the margins, the volumes, finding the bottom. But again let's not get too much excited. It's very clear that the problem of the destocking will continue for the next several months. I believe that only then the margins can come up. And us as an innovation lead, will get the premiums again that I believe we deserve in our offerings. So in a nutshell, early signs that it is stabilizing, early signs that the demand might go up again in the next couple of months.
Your second question on leverage and our appetite for M&A. I believe we are soon going to spend $1 million. So clearly that puts our leverage to 1.6 times, as Steve has pointed out, as we have pointed out at the time of the transaction in October. So I think we are very consistent here. This will go further up. We know all our cash outflows. We have decided to pay the dividend, [ph] a £100 million (00:44:06). You have seen the fine discussion on which I will not go further in, but you have a number for this.
We are confident that we have reasonable EBITDA levels for the months going forward. So I think we have a strong balance sheet as Steve has pointed out, and that means that in line, consistent with our strategy and I mentioned it a few times, inorganic growth remains part of the strategy. Now I would focus right now more on bolt-on acquisitions. We have an absolute appetite to look into bolt-on acquisitions. As I mentioned it, it is mainly in the space of the Functional Solutions, the construction and coatings and markets, it will be second in the space of Adhesive Technologies. Even so, you have to do first the closing on the division.
But as you know in FS, we do have some exposure to adhesives markets already, so we know these markets more or less. And thirdly, as mentioned, we are looking into speciality adjacencies. I think that is a third space, which is absolutely open. Again more speciality, less cyclicality, more sustainability. So these are the areas just from topics what we are looking at.
I think you should not expect a big transformational M&A in the next 12 to 18 months because obviously, it is our priority now to integrate the Eastman business. It is our priority to do this operationally properly, like we have done in all our acquisitions in the past and to get the synergies, hopefully, even a little bit more as it is also in the history of the company. So I think these are our priorities for now. And as I always say, if there is some magic opportunity in the market coming up, we'll be looking into it. We will always have opportunities to look into our balance sheet, but it's definitely not the priority and such a thing would mean that it is this unbelievable target that would 100% fit to our company.
And in a way, the leverage discussion now on the balance sheet and the M&A discussion brings me to your third question, what about portfolio management? I have said I think portfolio management for me, for the management team is a key standing issue, and is part of our job. I think portfolio management has two directions; inbound and outbound. I have no plans that we will make a strategy exercise within the next three months until June. I have no plans to divest business. We have no imminent M&A business inbound right now. Our focus, again, is to make money in an organic way. Our focus is to integrate the Eastman business. So there are no imminent plans, but we are watching the market carefully.
So the answer to your question is very clearly that divestments are not excluded, but as always, it has to make sense. It has to make sense for our return on invested capital, for our speciality profile and for the overarching targets we have in our company. But portfolio management is in and out, that is correct.
Thank you very much.
Yeah. More questions from the room. Yeah, Sebastian.
So just one more, can I ask about the confirmed Nitrile capacity increases? Because this – the 200 kilotonne figure that I believe is referenced in the slides, but it's not an exact date. Is it just fair to assume this is Malaysia and 2022? And likewise for this year, am I right in saying it's 60 kilotonnes from Malaysian expansion and 40 kilotonnes from the conversion of SBR in Italy? Is that a fair summary or?
I think the 60,000 tonnes that is our famous JOB6, we are completing this, we are bringing it online. That is the line where we have the highest productivity because we have the latest technology there we can produce in this line more capacity for our SyNovus Plus. That means our mix is positively affected because we get the premium on our SyNovus Plus offering. So, definitely we'll bring this on stream that is almost completed. We are now into technical commissioning. So, I think by end of March, early April, we will have it online. That's a 60,000 tonnes.
On the Italian part that you are mentioning, I think that is something which we are reviewing right now, because as I said, our capital allocations, they have to be the right sites that you have economies of scale, they have to be the right continent, the right location, and has to be the right timing. So I think that is something we are reviewing and we will decide in due course if we are going ahead with this project or not.
Right now, as you see the capacity utilization situation until the second half of this year, there's definitely no urgency for this. And again we will look where we put our capital, and potentially Italy is not the right location. But again, it is under review and we will see, but we will only make things that makes sense for us long-term. As I have mentioned in general, the capacity utilization for this year, there will be underutilization, there will be overcapacity until the destocking has ended but then mid-term after this period is over, we believe in a balanced – in a balanced situation.
That is helpful. And just as a final one, the CapEx level of – over the next two, three years; are we talking £140 million, £150 million for 2023 if your Nitrile plant in Malaysia goes ahead and approved? And just is it simply a question of timing why this hasn't been made official yet we are building XYZ or is there a consideration about either resizing or delaying the project to until there's visibility on the market situation? Thank you.
I mean here again the commitment to the NBR market for our side is clear, and that's why the projects in Asia but we also have projects in the US. I can say that we are in discussions with governments in the US and in Asia because a lot of countries these days post-pandemic they would like to localize the production of those gloves. So that is for us a unique opportunity. And if we could find agreements with those governments, which we don't know yet, it would obviously have a severe impact on the levels of CapEx that is required from our side. So I think that is also an angle we have to look at.
If you look at CapEx levels going forward, I believe they will be lower than [indiscernible] (00:50:48) have right now. I believe they will be back in the area like of last year £80 million to £90 million more, half of this being sustenance and safety. We will have these chunks if you would invest into a new NBR capacity. We have ordered long lead time items for this expansions. As we have announced I think one year ago [ph] three (00:51:12) or even longer. But having ordered these long time items it also gives you a bit of flexibility because it doesn't say where exactly you have to put them.
So I think here we do have some flexibility, we are looking into this projects. And again, as I have mentioned, we only invest if the conditions, which means the economies are right, if the timing is right and if the location is right. So I would say we are evaluating this situation, there's no rush for us right now to come to a final conclusion where we do this investment. Because right now, and for the foreseeable future, including this JOB6 60,000 tonnes, we are very well balanced to supply the markets.
Just to confirm it means we – you don't necessarily say this will go ahead in 2024 or is that just a [indiscernible] (00:52:05)?
I think that is safe to assume. We – I cannot tell you exactly when this is coming online. I know that usually you invest when the market is lower, that you are ready when the market is higher. We believe in this 8% to 10% market growth, but we will have to see because as I mentioned, there are a few items playing into this decision. Is it Malaysia? Is it the US? Is it other countries in Asia? So we have options here.
I just want to come to – I don't want to come to a decision which at the end plays out that it has been the wrong one. I think we want to be really sure that in terms of all those aspects, again also as the government angles that we do the right decision.
How long this will take? I think we are – it's a question of the next few months. We are doing these calculations. We are doing these reviews. And what I'm absolutely sure with our offering that we're having right now, we will not be in a position that we cannot supply the market in 2024. I think this capacity will be available. If it comes a new capacity potentially wherever that is, comes online a bit late. I think that's not a problem for us. But important is that these are sizeable investment amounts, and it's important to study this is the right project. Further questions?
Are there any questions from the operator?
Thank you. [Operator Instructions] We have a question from Matthew Yates from Banks of America. Please go ahead. Your line is now open.
Hi, gentlemen. Sorry, couldn't be there in person. I'd just like to ask a question about the start you've seen to 2022, and particularly in terms of volume growth in parts of the Functional Solutions division. Obviously, I guess it's in certain parts of your portfolio that has benefited from some of the so-called lockdown trades like DIY that you've called out. Are you seeing any change in the volume trajectory there in the order book and in early trading so far this year? Thank you.
Yeah. Thank you. Yeah. We have a clear answer on this. I mentioned that we had an encouraging start into all businesses, except well-known NBR situation. I have to say that it is mainly the stronger part of this encouraging start into 2022 is on the margin side and less on the volume side, but also on the volume side, what I have heard many times towards the end of last year that the do-it-yourself business is going down, we can actually not confirm this. There is less of an increase, less of a growth there, but there's absolutely no decline. And I would call [ph] it an E slight growth (00:55:12), so we cannot confirm these concerns about the do-it-yourself markets.
Generally I would call it, again as I said, there is volume growth. There is volume growth in our order books going forward, but the stronger item on the equation is on the margins right now and it is now in our hands as good management to balance exactly how much margin would we potentially give up to secure more volumes. But I think that is the natural game. We do not have kind of a used price over volume strategy. I think this in the long-term doesn't work. So we will not hold on to high margins if not needed but I think that is just our management, which in the past I have to say works extremely well. You have seen our pricing power.
And I have hardly seen this in my mind more than 20 years in chemicals where the FS division last year they've done on price pass on to our customers. I think that was an excellent job being done. Excellent. And I have no reasons to believe that we do have this position and that this will go on. I have no reasons to believe that we will have to give up and make too much of compromises there.
So short answer; encouraging start mainly driven by margins, very high margins also driven by volumes, but to a lesser degree order books full for the next three, four months. That's usually our visibility. The same is valid for the IS division. I can say also here capacity and again for us it's crucial that the sites are full, capacity situation remains very positive. And if you mention especially the DIY market, we do not see massive growth there but we do not see declines at all.
Thanks. And maybe just a follow up, your point to pricing power, which has proved to be pretty good recently. Potentially I guess there may be another need for another round of price increases. Can you just remind me across the FS and IS divisions, how much of your portfolio has sort of natural indexation clause built into contracts? How much is more bilateral negotiations? And are you seeing any pushback from customers in terms of digesting potentially another round of price increases over the coming months?
Yeah. Yeah. We have about 30% indexed formula pricing. Our 30% if you go over IS and FS divisions, is about 30%. So here there is little space to maneuver. So the large majority of 70% is kind of spot business or longer-term business, or un-contracted business or contracted business with open terms.
And as I said, I think I cannot give you a guidance how this is going to play up. I think we have to make sure that we find the right balance between keeping the volumes, keeping our sites full, keeping our market positions in these attractive end markets of coatings, adhesives, construction and how much of pricing power we will exercise. But definitely, I see no change to the fundamentals of last year. So, I believe if you had pricing power last year, you'll also have pricing power this year.
Thank you, Michael. And thank you, Stephen, as well for everything. Bye.
We have another question from Geoff Haire from UBS. Please go ahead.
Yeah. Good morning, everybody. I'm sorry, I couldn't be there. Just had one question just on the outlook. If I look at where the margins in Performance Elastomers were in the second half of 2019, that's roundabout a 14% EBITDA margin, if my numbers are right. What is – is there a potential that you may see that? And you say you're returning to the trading environment of the second half of 2019. Does that also comment on where the margins are going as well for the Performance Elastomers business?
I thank you for this question because that is really the comparison. The 2019 performance of the business and the 2019 margins for the business, I think we're all a bit blinded by the events which started in Q2 2020 and culminated in the middle of 2021. So the fair comparison really is going back to 2019, which is exactly what you are doing. We have now, I would say, 2019 and again you can see it in the chart. 2019 had margins, which are pretty much average margins over the last I think 10 years we have it in. Again, there's only this one spike in 2015; Ebola, but the rest was kind of consistent, stable margins. So we are back there basically in 2019 margins.
What I can say is that our expectations is that we will not reach the 2020 levels on the Performance Elastomer side because they were, as of Q2, highly influenced by exploding NBR margins. But we will expect to come in higher than 2019. And why is that? Because we do have more capacity on the ground, including the JOB6, we do have higher productivity because it is latest production technology. And most especially, thirdly, we do have our SyNovus Plus, we have our innovation offerings which we didn't have at the time in 2019.
So if you want to have a statement from me, I think we will come clearly ahead of 2019 and we will come below 2020 in the Performance Elastomers division on the PE side. And then also as we have mentioned today, and it's only 15% to 20% of the division. Also on the SBR side, we have made progress. We are clearly not there where we want to be. The business is clearly not accretive to the divisional or to the company's percentages of returns, but we have made clear focusing of the business, we have made site closures, we have [indiscernible] (01:01:35) we try to bet more on the attractive end markets because I think that is what guiding us. So we have made clear progress there, but definitely we are not yet there where we want to be. But even this business is going into the right direction.
But the main music obviously plays in the NBR business and there the situation is that I have mentioned with clear progress compared to 2019. For the three reasons I mentioned; capacity, innovation and production technology, more productive, better yields. Is that okay or?
Silence probably means okay.
Yeah.
Okay. And we have – we just have one other question come through the webcast from David Farrell at Jefferies. So could you give some comment Michael, on the data points that you're looking at as you build your confidence that the destocking is happening in the first half of this year on the Nitriles business?
I mean first, I would like to make a different comment actually. I would like to say that you saw on the chart of the new Synthomer, you saw that PE division again 80% let's say NBR, 20% SBR is 36% of our sales in terms of revenue. Now this is driven – these are – that's based in 2021 numbers with the super high fly sales and margins of the PE division. Probably going forward, the share of our PE division is more 30%. So I would like to highlight that 70% of our business is actually in a way the business we should talk about because it is 70% now.
We mentioned our leading positions, our super high attractive end markets in IS speciality portfolios and in Functional Solutions. So I would like – I speak so much about NBR and I know that we have to and I know that the impact of NBR is huge, and the sensitivity on our results basically every tonne makes a difference in our EBITDA. I fully recognize that. But I would still suggest that we also talk about the 70% of the business which is becoming more and more important, Adhesive Technologies, IS and Functional Solutions.
So the NBR, the NBR space now I think it is the margins are – as I said, the margins are coming, we believe they are stabilizing now. The destocking will last another – till the middle of the year. I mentioned that we have certain signs of finding the bottoms. I mentioned that smaller distributors, not yet the large ones, smaller distributors are reordering which we haven't seen now for a long time. So there are these signs in the markets. We are in intensive contact with our customers. We try to liaise with our end-consumers often government institutions. But we just have to say that there are warehouses in this world still full of medical gloves and this has to be worked through and this will take another several months until we are in kind of a normal supply/demand situation.
So I think, Steve, I don't know if you have more, but there's not much more we can say. The only thing is sometimes you are blamed of that we don't have the visibility, and I have to say we do sometimes not have the visibility because again this is not a cyclical business, that's a pandemic business. You go back in the chart, the famous chart that says it all, you go back like 10 years and the demand was all the time, we have a CAGR of 8% to 10% in the market. We have margins that are relatively stable. We have upside on the margins because of Synthomer's leading position in innovation, in production technology. So, I believe that this rebalancing will take – will come in. It is only driven by the pandemic and if this pandemic is gone and we have found again a balanced solution, I think then we can go on and then we can play our advantages, which I have mentioned before.
But none of us has seen a pandemic. None of us has seen an explosion of margins. I have never seen this in my 25 years or so in chemicals that margins went up by 4.5 times within months and came down within months to levels again 4.5 times below. So, I think this is just a unique situation which we all have to learn from. We have to try to map this in the future that we can see it, but we have to accept that there will be a certain uncertainty when exactly the destocking ends for the next coming few months. I think much more, I cannot say.
I can ensure you that we have extreme close intelligence on our competitors, what are they doing with capacities. We have very good intelligence together with our customers looking into the end consumers of the business, which I mentioned I think is something we should do more in Synthomer. So, I think that is the situation where we are right now. But again, we are a market leader in a fundamentally positive position to continue this market.
No more questions. No.
Well good. Okay.
That's it for questions. Yeah.
If there are no more questions, then I thank everybody for the interest, and I wish you a good day. Thank you very much.