Synthomer plc (SYNT) Earnings Call Transcript

Today, we'd like to focus on our Functional Solutions division and give you a more in-depth look at the platform we've created following the OMNOVA acquisition completed in April 2020. I'm joined today by Stephen Bennett, CFO of Synthomer; Rob Tupker, the President of Functional Solutions and a Synthomer executive team member; Marshall Moore, the Group Chief Technology Officer and President Americas and also a Synthomer executive team member. You will recall that Marshall joined us as part of the OMNOVA transaction in April and is based in Ohio in the U.S.A.; and last but not least, Robin Harrison, Vice President, Platform and Technology and External Innovation. Today's agenda will include a few introductory slides from myself, following which, Rob, Marshall and Robin will take you through the Functional Solutions deep dive. Steve will bring this all together from a funding perspective before I will summarize and take the Q&A at the end. I'm on Slide #4 now titled sustainable growth through strategic focus since 2015. When I arrived in Synthomer in 2015, we identified 6 key pillars to the strategic direction we wanted to take the company. These remain the key pillars of the strategy going forward, all of which are carried out under our strong Synthomer core values and group ESG commitments. Firstly, safety. Over the last 5 years, Synthomer has achieved an industry top-quartile safety, health and environmental record. This has always been our #1 priority, and we target 0 incidents on our assets and in our place of work. As we like to say, "We always have time to work safely." Secondly, manufacturing excellence. Upper-quartile manufacturing economics means well-invested assets with scale, technology and integration to raw material suppliers. In our business, customer proximity is likewise important, hence, the large number of globally distributed assets. Being able to run these assets at high utilization and reliability is what manufacturing excellence is all about. Organic growth. Synthomer has been able to grow organically year-on-year through capital investment into our asset base. We've added capacity through low-cost debottlenecks in both our Nitrile latex and Functional Solutions division. The benefits of these investments are now starting to be clear on our P&L. Innovation. Every successful differentiated chemical company have innovation at the center of their strategy. We invest circa GBP 40 million per annum into innovation, and we target 20% of our annual turnover to come from new products developed in the last 5 years. More examples of this to follow later this afternoon from Marshall and from Robin. Product differentiation. Differentiation of the products we sell leads to bespoke customer offerings and stable EBITDA margins. Synthomer sells into diverse end-market applications and is therefore both resilient, something that we've clearly seen during the COVID pandemic, and able to benefit from long-term customer relations. Last but not least, M&A. In addition to the organic growth agenda, M&A has played and will continue to play a major role in our ongoing strategy. At this time, we are concentrating on integrating OMNOVA and reducing our leverage to below 2x EBITDA. But as we have said that this is being achieved today at an accelerated pace. We have completed 4 acquisitions in 5 years, and we hope that the OMNOVA deal will indeed be the most successful of all of these. Slide #5, strong progress and positioned for further growth. The graph on the right-hand side of the slide shows the progress we've made over the last 5 years. And for the benefit of the discussion today, I've shown the 2020 company-guided EBITDA as reported in October trading statement. I've also showed the market consensus compiled by Teneo for 2021 but would note for everybody that this is not the company forecast. Over the period, we are delivering circa 13% CAGR through a balanced combination of organic and inorganic growth. The existing platform will continue to benefit from the historical investments made in 2017 through 2019, particularly in our Nitrile and Functional Solutions business. Likewise, we will benefit from the OMNOVA acquisition and the synergies, which are in the process of being delivered at this time. I've already mentioned the diversified markets of Synthomer. This has benefited us during the COVID-19 pandemic. Sales into our health and hygiene consumer care markets have been strong, while sales into our industrial markets, such as construction and coatings, have rebounded strongly and are today above the 2019 pre-COVID levels. We continue to see recovery in the oil and gas and automotive markets, but to date, these remain below levels seen in 2019. Rob is going to comment more on this during his presentation. Later in the presentation, Steve will discuss the leverage targets. But as announced at the October Q3 trading statement, we hope to be at a leverage of circa 2x EBITDA by the end of the year 2020. Slide #6, which is titled resilient business model with catalysts in place to drive growth. As previously mentioned, the strategy that has served us well in the last 5 years continues to be our focus going forward. Our sustainable water-based technology is an excellent ESG platform from which to grow the company. The Functional Solutions team are going to go into more detail on this shortly. We believe that following the acquisition of OMNOVA and the delivery of the cost synergies of GBP 40 million by the end of year 2022, along with the increased innovation and geographic reach that the deal brings, Synthomer are well placed in the coming years. This will be further supported by the recovery in due course of the strong technology-led position in oil and gas, again, one which was acquired through the OMNOVA transaction. Elsewhere around the group, we have further Nitrile capacity coming on during 2021. And as previously mentioned, we'll continue to benefit from our 2019 Functional Solution investments in both Germany and in the U.S. Finally, we are progressing with the SBR asset European consolidation, which we hope to be largely complete during 2021 and '22. Slide #7 titled robust investment case in line with global megatrends. The Synthomer investment case, which is in line with global megatrends, we feel is particularly compelling. We are a global differentiated chemical company with a growing portion of speciality chemicals being supplied into diverse end markets, making the company extremely resilient. We have strong organic and inorganic drivers supporting future growth. Our portfolio offers sustainable solutions to a global customer base, and we operate with a conservative and disciplined capital policy. On that note, I'd like to hand over to Rob to start the discussions around the Functional Solution division. Thank you.

Thank you, Calum. Hi, everybody. It's a great pleasure to be able to present the Functional Solutions business to you today. We are going to make this a little bit of a team effort. So first, I will give you some business background and an overview. I will then delve into OMNOVA and why believe -- we believe it's such a great fit for our business. And then I will put in front of you the case for growth, why we believe that Synthomer has a great key growth platform with the Functional Solutions business. I will then hand it over to Marshall and to Robin, who will do a section on innovation, and then I will wrap it up with a brief summary. So first, I would like to put Functional Solutions in the context of the broader Synthomer. So what you see here on this page are our 2019 numbers and you see Synthomer as a whole and you see in blue the FS portion. So in volume terms, we did about 33% of the total company; and in EBITDA terms, 37%, which, before the deduction of corporate costs, amounts to about GBP 70 million EBITDA. So we are a material contributor to Synthomer as a whole. Next, I wanted to briefly get into some history. So I'll show you here the last 10 years and some key milestones. 10 years ago, this company was still called Yule Catto with an activity in dispersions already, which now we call Functional Solutions. I'll get into the terminology a bit later on. And in 2011, the PolymerLatex business was acquired, also active in the dispersions area. 2012, the company was renamed Synthomer. And then in the last 5 years was really the period that things accelerated for FS under the tenure of Calum and Stephen. So 2016, the acquisition of the Hexion Performance Adhesives & Coatings division, a 30% growth for FS, an expansion in products and regions, and in particular, a first footprint and foothold in the U.S. As Calum already mentioned, over the last few years, we have also invested substantially in our plants, in particular, in Germany, Worms with 36,000 tonnes of additional capacity in the speciality grades and the same in Roebuck in the U.S.A., another 12 kt. So in total, almost 50,000 tonnes of additional capacity, which we're well on the way of filling. And by the end of '22, early 23, we expect those assets to be filled. Organizationally, we became Global Functional Solutions business on the 1st of January 2019, and that's really allowed us to take the best products and offerings from one region and put them into another. So it's really globalized our business. And then finally, the big acquisition, April this year, OMNOVA: 40% increase for us in FS; regional expansion in the U.S. and in China; increased grades; and an entry, Calum mentioned it, in oil and gas. And I'm going to talk more about these things later on. Just briefly in terms of numbers. In 2018, we generated an EBITDA of GBP 64 million. In 2019, it was GBP 70 million, the number I also showed on the prior slide. And on a pro forma basis for this year, 2020, we expect to end up somewhere between GBP 95 million and GBP 100 million. I say pro forma because we included OMNOVA all the way back to January 1 for this purpose. Okay. So on the next page, post acquisition, where does that leave us? How do we stand in relation to the market in total and to our competitors? So first thing to say is the total market is about GBP 12 billion. That's our addressable market based on the products and technologies we are today. In that, we are a top 5 supplier with leading positions in EMEA. When I say top 5 supplier, that means by volume, we think we are 5, in fact, and by value, probably #4. In EMEA, particularly strong, overall #2. But we are a leader in some coatings applications, and we're also #1 in textiles. So clearly, a strong position there. In the Americas, we are in the top 10. We did not have a position in the Americas until 5 years ago. But through the Hexion acquisition, we got one plant through OMNOVA and we now have 6. So by this time, we are actually a sizable player in the U.S. market. In Asia, we consider ourselves to be mid-tier. We are actually #6 amongst the global top players, but it's a very fragmented market with many local and regional players, especially in China. And talking about China, the nice part about the OMNOVA acquisition is that FS and Synthomer as a whole was pretty strong in Southeast Asia -- is strong in Southeast Asia. But thanks to OMNOVA, we now have 2 manufacturing facilities in China, so really established our presence there. On the next page, what I thought I'd do is explain where Functional Solutions fits in from an overall chemical value chain perspective. So what you see here on the left-hand side is we start with oil and gas; we get into monomers, polymers; and then finally, the applications for our customers. Synthomer is, first and foremost, a polymer company. And you see a number of acronyms there. I won't go through them. I think they will be in the legends when this gets distributed. But the main products we have are acrylics, vinylics, and we also have some SBR and NBR, so styrene butadiene resin and nitro butadiene resin. They are speciality applications. The larger volumes sit in our Performance Elastomer business. The common denominator about all these products is that they are dispersions. And very briefly, what is a dispersion? It is when you take one material, a polymer, in our case, and you finely distribute it into another material, in this case, water, in most cases; and sometimes, a solvent. So we are maybe slightly boastful, but we think correct when we say we have the broadest water-based dispersion portfolio in the industry, and that's one of our core strengths. The monomers that we buy to produce our polymers, we buy them on the market. So independently, we do have some internal manufacturing, in particular, in our plant in Sokolov, Czech Republic, and we have a few proprietary monomers from which we make proprietary polymers. But for the vast majority of materials, we buy them from a very wide supply base. And then, and that's kind of the key of what we do, once we've made our polymers, our differentiating factor is understanding which polymers go into which applications and how do we get the functionality that the customer is looking for. So if there's one message I would like you to take away from this slide is that we are an applications-driven business, and that's the basis for us to stand out. Okay. Now on the next page, I wanted to quickly show you what are these different applications that we are active in. And there are 5 main ones. This is also how we are organized internally as a business. We -- and I've listed them here in descending order by -- of volume. So starting with coatings, our biggest business, we supply binders into architectural coatings and industrial coatings. It's about 85% architectural, so for decorative purposes, and 15% industrial applications. Next is textiles. Don't think garments here but think technical textiles, where we supply binders that support the fibers, woven and nonwoven. They're going to a variety of application: insulation systems, decorative laminates and disposables, such as diapers. Third is construction. Here, we are basically an additive supplier. And you will see our products in cements, in repair mortar, in tile adhesives and also in waterproofing membranes. These are used, say, in bathrooms, in cellars or in swimming pools. So our products basically keep your cellar dry. The fourth one is adhesives. This is a relatively smaller business, 14%, but it's a really nice niche business that we have with a lot of speciality grades. We are in packaging, we are in tapes, speciality tapes, labels, contact adhesives and can sealings as well. And then finally, there's oil and gas, 3% by volume, more by value. And as you can see from the picture, we are really here when it comes to the oil value chain on the most upstream side of it. Where wells get drilled, our product gets sold. And I will talk a little bit more about oil and gas later on. Okay. So we are a B2B business. That is the core of what we do. However, as a consumer, you will get exposed to our products in a variety of ways. And I wanted to show here 5 different end markets where a consumer will be exposed to our products directly or indirectly. First, in construction and home improvement. I mentioned architectural coatings already, tile adhesives, construction tapes and also insulation systems. Insulation. If you think about the EU Green Deal, this really will stimulate, over the next years in Europe, a lot of refurbishments to make houses more energy-efficient, and our insulation systems play into that very nicely. Food and beverage. Bottle labels, can sealings, cheese coatings, sausage wrapping, a very wide variety of applications there. Next is home furnishing. We are both on the natural wood side with coatings and adhesives and also on the decorative laminate side as well as blackout for curtains as another example. Automotive, important as well. Underbody coatings, liquid-applied sound damping, automotive tapes, and our products even show up in engine gaskets. And then finally, I wanted to highlight here hygiene and personal care. We make opacifiers. They make products opaque, for example, in shampoos or liquid soaps; lamination adhesives for the packaging of perfume bottles; diapers and wipes, hygiene wipes, both durable and disposable. And if you think in the current day and age, the wipe business has a bright future, and we provide all kinds of functionality, softness, strength, hydrophilicity, hydrophobicity and so on. Okay. Just one more page on the end-market applications. So what you see here on the right-hand side is a picture of the outside of a home, and I will not go through all the different examples. But whether it is the garage, whether it is the car, the swimming pool or indeed the cladding of your house right under the plaster, you will find our products. And similarly, another example here, you see in the inside of a home various applications, coatings, labels and very concrete, a -- the gap sealant in your kitchen sink. Now when we say we are a Functional Solutions business, what functionality are we talking about? And I try to show that here on the left-hand side. Basically, there are 3 types of functionality that Functional Solutions brings. We bind, we bond and we coat. Binding means holding different materials together, for example, in a paint can, a sealant or a glass fiber. Secondly, bonding. This is where we get 2 different substrates to bond together, such as in tile adhesives or bottle labels. And thirdly, coating. Coating is really mainly -- our products have mainly a protective function. So if you think about agricultural seeds, they get coated with our product and that protects the seed. Sports services is another example or yarn sizing. If you -- before the weaving process, the yarn gets coated with our product to give it a protective quality. Then I would also like to make the point that a lot of our products end up in famous brands. Now our customers will not necessarily say who they buy their products from and we don't necessarily advertise that either. But we are there in many of these applications. So if you look at the top left, you see a diaper. We are in what is probably the most famous diaper brand in the world with some of our binders. On the top right, you see beverage cans, we supply can sealing. I mentioned it before, again, going in some of the major brands, you might even deduct from this picture what I'm talking about. In the bottom left, you see various paints. So whether it's a local brand or a regional brand or even a global brand, our products are often present there as binders. And then in the bottom right, a special example. What you see here, this is in the French market, you see a product, a paint can, as you can buy it in the DIY store. You see the brand name by the customer. But you also see a little logo there that says Hydro Pliolite. Well, Hydro Pliolite, that is our brand name. That's a Synthomer brand name. Why is it on there? Well, if the customer wants to use our binder, basically, they are required to use our brand name, but they also like to use our brand name because it's like a stamp of quality. It's what people recognize and they look out for. So I like to compare this with Intel Inside on your laptop. You may have a Dell laptop, but your Intel Inside logo tells you which microprocessor you get. This is the same idea, but then in our chemical industry. To be honest, we -- this is not the case for all our products in all our markets, but it's a good example of the sort of symbiotic relationship that we would like to have with our customers across the board. Next, I wanted to show some customers. We have a lot of them, more than 3,000 in total. But we are not particularly dependent on any one of them. Our largest customer represents about 2.5% of sales. And if you take the top 20 customers, they also represent about 20% of our sales. So a lot of important and very valued customers but not particularly dependent on 1 or 2 of them. Average relationship, 15 years. That's an estimate, of course, but it's probably pretty representative. We tend to work with our customers on a long-term basis. Okay. I'd now like to briefly move on and just show you a little bit how we have done in 2020 as a business. The fact that we have so many customers, so many end markets and products means that we're actually a pretty robust business. If there ever was a year where this got tested, then it would have been 2020. And I think we can say that we've gotten through this very -- this year very, very well. So what you see on the schematic on the right-hand side, you see the applications that we are in FS listed from least impacted by COVID all the way to most impacted. 80% of our business is on the least impacted side: nonwovens, adhesives and sealants, construction, paints and coatings. However, and Calum referred to it earlier, we also are in automotive, which was impacted, although it's now starting to come back strongly. And oil and gas. And in our case, because we are in the upstream end, that is taking some more time. We are optimistic that in '21 and '22, it will come back strongly, but it hasn't as yet. Paints and coatings, by the way, is a very interesting one. It got -- the industry, if you read the reports on the coatings industry, it got hit by about 20% or so in March and April, May time frame, but then it came back strongly. And we've seen that as well. And in fact, many people have decided that they go to the DIY store and improve their homes. With many people working from home, and many of you today may be working from home, you may decide that you want a lick of paint on your study or your terrace or whatever, and that's what many people have done. So there is even speculation that we have a new generation of DIY-ers coming out of this. Let's wait and see. But so far, the signals are definitely positive in this regard. I would like to thank also all the people in our factories. We have 18 factories in Functional Solutions, and they've really helped us tremendously over these last 12 months. And likewise, on the raw material side, I don't think we had a single slip up from a raw material that didn't get supplied in any of the lockdowns. So we got through it overall very well. Okay. I would like to now move on to talk a little bit more about OMNOVA. The businesses have come together. What you see on the right-hand side, if you can look there, 60% of OMNOVA went into Functional solutions, and that is split between what OMNOVA used to call CAST, which stands for coatings, adhesives and surface treatments; as well as oil and gas. Then on the left-hand side, you see Functional Solutions. I've already talked about these, coatings, adhesives, textiles and construction. And there's really 3 points I want to draw from this slide. Number one, there's a great geographic fit. Synthomer still, certainly in FS, by and large, a European-based business; OMNOVA, mostly a U.S.-based business. So great geographic fit. Number two, new areas for Synthomer. Surface treatment, oil and gas, these are additional capabilities we now have. And the third point is a little bit more subtle. You see coatings and adhesives and textiles coming together from both companies. That could lead you to believe that there's maybe a lot of overlap, a lot of redundancy. But if you look closer, a lot of these products are actually complementary. So we're basically simply able to offer more variety of offerings to our customers. What does that mean? We end up now with 18 plants. I mentioned the number before. 11 technical centers, many of these are application centers. And 240 technical staff, that's R&D, that's applications and tech service as well. And Marshall and Robin will talk more about that. 3,000 customers, I mentioned the number, and about 9,000 products in total. On this page here, next page, you see the geographic split. I mentioned the big gain for Synthomer in the Americas. In the dark blue, you see the OMNOVA contribution. 69% of our revenue now comes from legacy OMNOVA. In EMEA, it's 23% with a factory in France and also in Portugal. And then in Asia, 22% of our sales now coming from what used to be OMNOVA, and that's with 2 factories in China. And then on the right-hand side, you just see how is FS now in relation to the total Synthomer in terms of size. And you can see that both in the Americas and in EMEA, we are representing about 45% to 50% of the total business. In Asia, it's more like 20%, 25% because health and protection, the NBR glove business is much more substantial. Okay. And then one last stage on OMNOVA, and I would like to use that to talk about oil and gas. So we have many applications for our water-based chemistries, but the one that was almost completely eluding us was this application. Same chemistry, we can make these products in the same plants, but we were really hardly present in the oil and gas side. And we were looking quite enviously at OMNOVA for their capabilities, to be honest. Well, now that's part of our business, I'm pleased to say. And they bring some great products. So if you look at the schematic on the left, you see the drilling fluid additives. Basically, what our products do there is they provide fluid loss control, very important in the drilling process. And after drilling, you do the casing, and you need to cement the casing. And we provide additives in the cement to make it perform much better. So OMNOVA was and we now are really a leader in this particular area. Most of the business is onshore, about 2/3, and about 1/3 is offshore. And we're not into the fracking, the hydraulic fracturing piece of it. So it's more the traditional drilling side. Now we've referred to it a number of times, and Calum mentioned it. Clearly, we got a hit in 2020, but we definitely are optimistic. And we're fully prepared, from an asset point of view, for the upswing that we expect in '21 and '22. Okay. The third and last topic is the case for growth that I would like to go into now. So the first thing to say is we believe that we're well positioned, thanks to the global megatrends that Calum briefly showed before. Just want to quickly run through them. Accelerating urbanization. We have construction materials and architectural coatings that fit in there. Demographic and social change. Think about our products for diapers, but also our products in automotive and food and beverage. Climate change and sustainability. This topic for the whole of the chemical industry is a big challenge and a big opportunity as well. And I want to talk a little bit more about that. And then finally, the shifting economic power from West to East. I think the company, Synthomer, has done a very nice job anticipating that, certainly in Performance Elastomers with the various investments. But also the Asia innovation center will allow us in Functional Solutions to develop products in Asia for Asia. So just going a bit deeper into the topic of sustainability. As I said, it's a challenge and an opportunity for the chemical industry and certainly for ourselves as well. Here, I list 5 key areas that touch us. Number one, on the left, low VOC. VOC is volatile organic compounds and hazardous substance emission reduction. This is a key priority for many of our customers, and we are well positioned to help. First and foremost, because we can help shifting from solvent-based to water-based, but we also have other activities there. Number two, energy saving and carbon footprint reduction. Helping our customers save energy that is good for the environment, and it's also often good economically. So those 2 go hand-in-hand. Number three, biodegradability. That is a relatively new area in our field. You certainly do not want all your products to be biodegradable. You would not want a biodegradable paint on your wall, for example, but you might want them in other applications. Again, think about agricultural seeds. And Robin will talk a little bit more about that later on. Bio-based materials. Important here are bio-based monomers specifically. This is a very interesting area, a lot of development going on. Challenging to find monomers that are bio-based and make economic sense. But there's a lot of progress in that area, and we're working together with some external parties on that. And then finally, the circular economy. This is all about recycling. It's very interesting that a lot of the customers in the fast-moving consumer goods side are actually very interested in recycling, and we are working with them on that. Next, I wanted to talk about the role of regulations. And the point I'm making on this slide is that the regulatory environment really drives our industry not just to grow at GDP but at GDP+. If you see the world of dispersions, we are split between water-based and solvent-based globally, and it's about a split of 60-40 in the favor of water-based. In Asia, it's actually more 50-50. So there is more potential there. And generally, you do see a continued shift from water-based to -- sorry, from solvent-based to water-based rather. And you see that also reflected in the CAGRs. These are our estimates -- best estimates. But although solvent-based is still growing, water-based is clearly growing faster. And we're very well positioned to take advantage of that. I should also say that because of our history in Europe, we've worked for a long time with the -- on the -- with our customers on anticipating, sometimes reacting to, but ideally anticipating new regulations. So for example, in our industry, the move away from a surfactant called APO, which is an endocrine disruptor, was a big thing, and we were very proactive in that area. We're making products that are formaldehyde-free now. Biocide-free paints becomes an increasingly important trend, and I already mentioned low VOC. Last point to make here is that this is driven by the regulators, but what we see more and more is that customers themselves also want to be ahead, one step ahead of the regulator, and so we work with them in that area. My last point on growth relates to revenue synergies. I've talked to you quite a bit about different areas of opportunity. But this one is where we are very excited about. Calum referred already to our cost synergy target of $40 million by 2022. This is what we are committed to and are on track to deliver. We have not publicly stated a revenue synergy target. However, we are very much focused on that internally. And we are already, in fact, starting to generate some of those. I just wanted to give you a few examples here to give you a flavor of the type of things we're working on and why we're excited about this. So first, on the technology side, you see here mentioned intumescent coatings, and intumescent coating is a coating that goes on a steel frame. And in case of fire, it prevents the steel from overheating. We at Synthomer, we're a leader in the water-based technology there; and OMNOVA, on the solvent-based side. Now we bring those 2 together, we have an even stronger offering and can help customers who want to switch from solvent to water. Secondly, speciality tapes. Legacy Synthomer, very good in the adhesive part, so the material that sticks; and OMNOVA on the release coating, the other side of the tape. So basically a combined one-stop shop offering there. And then in textiles, Synthomer very strong woven application, binders for fibers, and OMNOVA on the nonwoven. So again, a nice complementary offering there. And then finally, in terms of regional drivers. First, oil and gas. I mentioned that this is really a strength that we have now acquired through OMNOVA with a fantastic team in Houston. However, now that we are Synthomer, we can offer a more global infrastructure. So highlighting, in particular, the Middle East, we have a strong presence there at Synthomer. We have a joint venture. We have a factory in Dammam. So now we can start looking at making products locally and increasing local content that will strengthen our position there. And then finally, North America and APAC. I mentioned it before, we have a lot more products to offer to a lot more customers that we can sell these products to. We have the infrastructure now, sales force, lab and plants, and we think that we can get accelerated growth in those regions. And with that, I would like to hand it over to Marshall.

Okay. Thanks very much, Rob, for that introduction. Very happy to speak to you all from the new Synthomer, America [indiscernible]. I'm going to take a few minutes now myself and probably Robin here to talk to you about how Synthomer is going to be driving innovation [indiscernible] differentiation through innovation. Go to the next slide. First, to talk to you about some of the investments that have been made in capability and development over the past few years related to some of the [indiscernible]. First, along the bottom, more organic-driven capability development, starting with investment in Harlow laboratories in 2015 to really strengthen capabilities there, entering some of those new applications like oil and gas memories, as Rob mentioned, microbiology and investment in the labs there. And then very happy to have just opened our new Asia Innovation Center in Malaysia, located close to one of our largest plants there. A large investment for a center that's going to give us a much stronger footprint in Asia or rating in talent very efficient research and development, which is not all of our [indiscernible]. Along the top are really the capabilities that were brought in through inorganic or acquisition. First, the acquisition of Hexion first introduced a research development site at the [indiscernible] region and also broadened capabilities in adhesives, especially contact adhesives, redispersible powders for construction applications, and then polyester power coating. Of course, in 2020, with the acquisition of OMNOVA, certainly getting a much larger footprint in North America for growth in the region with our technical center in Akron, Ohio, just south of here, and then just east of that the Mogadore process plant. Very well engineered, large mill plants that enables rapid introduction of new products as well as process innovation. Advanced material characterization techniques, like electromicroscopy provided to OMNOVA through the acquisition. And then, of course, as Rob talked about, technical confidence with very experienced personnel with experience in the oil field. Going to the next slide. Talk a little bit about this combination of OMNOVA and Synthomer, the 2 organizations. If you really think about it before the acquisition, you had 2 research and development teams in these markets competing against each other. Neither of those were really truly global with OMNOVA being very heavily weighted in the U.S., a good capability in Europe, a little in Asia, whereas Synthomer was very strong in Europe, growing presence in Asia, small presence in US. Both had agile innovation models, very customer intimate. So that similar approach, which made it very effective in bringing the teams together to get very quick integration [indiscernible]. And then those things were also mostly focused on incremental innovation of existing platforms that we got rapid customer-driven synergies. Through this integration, similar to what Rob talked about the areas of coatings and textiles, both companies with strong capability there. And coming together now, instead of competing against each other, working together to really sort out and go after the biggest opportunities. That will give us the opportunity to serve the better global partner as well as spread our resources around towards more opportunities. In the adhesives area, again, Synthomer had the strong capability on the adhesive side, where OMNOVA has got very strong competency of the lease coating. And you put those 2 together and you bring a stronger value proposition in terms of the solution to customers, and it's going to position us better there. And then the areas of construction and oil and gas, each company had its own competency [indiscernible] company. So with this, we're going to have a more effective and more efficient approach towards innovation to get ahead of those many trends, which Calum and Rob talked about. And then ultimately, with a new organization. it's a single organization now with 50% more resources, truly global footprint. And one of the things that this larger organization will allow us to do is establish a group that's not only working on incremental customer-driven innovation, but looking forward to more sustainable platforms that lets us get into new chemistries that really are going to bring more differentiation and more value to the customer. And then a key piece of this is integration of sustainability into our innovation -- management structure. I'll talk a little bit more about that on a later slide. Can we go to the next slide? Looking at the footprint, I've referred to this already. We had to bring the 2 together to 2 key companies. We have several locations, technical development, research development, applications and technical service. Then you want to bring the organizations together and really put together 4 mini centers of excellence for research and development, 3 of those serve the Functional Solutions business directly, one in each regions. So with Akron, Ohio in the United States, as I mentioned, is going to be very heavily focused on the Functional Solutions business as well as the other divisions. Marl in Germany continues to be probably the largest center for product innovation for Functional Solutions. And then the new Asian innovation center in Malaysia is going to be serving both Functional Solutions as well as our Performance Elastomers division. Harlow in the U.K. continues to be a key site for us, and it's where we're going to be working on some of those technology platforms that Robin Harrison is going to be talking to you about. And then many of the other locations and the smaller ones that are indicated there are really for co-location with customers in specific markets to do application development and service much more rapidly customer intimately. And a couple of those locations are pilot plants for doing the process innovation for efficiency at sustainable platform. Going to the next slide. So infographic here really just to show you that there are a number of elements that having a robust innovation framework for market-driven innovation. They've talked about the more customer intimate incremental innovations and then the longer-term platform development. And what we've done is really establish a new leadership team -- a new organization to drive that and remain from safety and environmental in our facilities as well as built into our products and factories. Intellectual property. There's been an increase over the past 2 to 3 years of patent filings and really leveraging intellectual property with [ESAB] and new program to make sure that we're going to get sustained return on our innovation through that capacity. Material characterization, advanced process innovation, I talked about. And then again, sustainability and product stewardship. Rob talked about regulatory drivers. Those can be opportunity for our business. And through our product stewardship, regulatory people [indiscernible]. And then again, a lot of these innovations coming through our new platform technology and external innovation team led by Robin Harrison. He's going to be talking to you in a minute about that, really giving us new platforms to get into new markets, applications and sustainable innovation. So summarizing what this new organization really means. Continuing our market-centric model that's driven by megatrends. We're going to create [indiscernible] for the product, well-balanced and business-driven portfolios and making sure that we're getting return on the investment for these innovations as we go through shorter and longer term. Focused discipline in the execution of projects and having a broad technology of capabilities, which we continue to invest in, continue to develop our new global footprint. It's been, again, that give us better capability to these products globally as well as working locally with customers in leveraging our new platform approach for new innovation. And with that, I'd like to turn it over to Robin Harrison, who is leading our new technology platforms group to talk to you about some of the more specific and exciting innovation.

Thank you very much, Marshall, and good afternoon to everybody on the call. So what I'd like to do on the first slide is just give an overview of what Marshall talked about, our new product development and platform program, to see what that looks like today. So if we look in the center there, the first thing that's really important here is that this is a collaborative program. Clearly, collaborative internally with our scientists and our applications teams, but most importantly, it's collaborative with our customers. We work very closely with our customers around the world, and our customer intimacy and geographic location allows us to do that to develop those differentiated polymer systems. But it's not just customers. Of course, we're working very hard with our suppliers to bring new things through, technology partners and, for example, our academics that we work through on some more fundamental research. If we take a look at the new product development, very clearly a business-driven portfolio of projects there. So we're working closely with the business teams and our customers to make sure the direction of our products coming through onto the market are the right ones for our customers and for the future. These are guided by strategic road maps that we work closely on, which have a multiyear view to what we need to develop. And what we'll see in a couple of slides' time is some examples of that. We'll see some real examples that's come out in the Functional Solutions area. But of course, we do recognize that we don't always have all of the technology in-house that we would immediately need, and that's where you bring in the new platform research. So as Marshall said, we did have that going on in the previous companies. But with the enlarged group and extra capability, we now have a dedicated team to bring that forward in the market. So just one example of that there. You can see on the left-hand slide -- side of the slide is a bio-based monomer platform, which we're working together with the University of Montpellier, one of our academic partners. So developing a core platform which can then be applied in multiple Functional Solutions businesses. So let's move on and look at some examples in the Functional Solutions area of innovations that we brought to the market in recent years. First thing to see here, we're actually innovating across multiple segments, in fact, all of the segments within the Functional Solutions business. So you see examples here in the adhesives area, in the coatings area. And actually what is a textile application for us but ends up in a construction environment. So these are well-established areas for the business, Rob's talked about them. But of course, we're always looking for new opportunities that are relevant in the market. So what we'll come to and in a bit more detail in a couple of slides' time is the example of binders for cells that go into electric vehicles, a fast-growing market that we're looking at. So breadth there in all of the areas. The second thing I would like to highlight are those environmental and sustainability credentials that we've talked about already a couple of times. So in the case of the adhesives, the Plextol Prime and the Hydro Pliolite in the coatings area, a shift from traditionally solvent-based systems into water-based systems and importantly, making sure you have the right performance characteristics as you make that switch. What you see with the SkyShield, a slightly different environmental credential there. First of all, when you look at using this material, it's actually quite energy-intensive when you apply the binder to the woven material. So what we've developed is a technology where you can lower the temperature. So that's energy savings and reduction in carbon footprint, but also at the same time, eliminating formaldehyde, which is a nasty material that you don't want into the environment. And then finally, of course, the electrification of vehicles. The ultimate goal there is an air quality one, and governments all over the world are moving to that to make sure that our air quality overall is much better. Let's look at a couple of examples in a little bit more detail. So first of all, the intumescent coatings. And again, just a reminder of the business context there, Rob has already talked about that, where Synthomer is the #1 in this particular segment. And we're also seeing this move from the traditional solvent-based into water-based where our technologies come together. So what does this product do? So you see in the middle there, the steel structure. So this is a coating, which then goes directly onto that steel coating -- metal coating and forms a protective layer. So it's a relatively thin coating, but what you're going to see in just a moment in demonstration is a video. What you'll see in the middle of the screen is a metal bar, which has the coating on it. And then we're going to bring in a blowtorch to simulate the fire. So if we could just run that. So what you're seeing is that comes in and starts burning. The initial thing you're seeing is charring of the coating. And then what you'll see is quite rapidly an expansion of the coating. And what that actually does is brings in an insulating layer. So if we could switch back to the slide, please. An example there in the middle, not quite this chart. But what you see is that thick foam-like structure and that's what's preventing the fire getting to the underlying metal structure. So that protects the structure. It allows people to get out and prevents damage. So a very important application. And as I say, in this particular product here, what we see is a product that is today water-based where it's traditionally been a solvent-based system. As the next example, around batteries. Business context here should be clear. Anybody who was in the U.K. today will have seen the British Prime Minister making an announcement concerning electric vehicles in the U.K., a target of 2030. So 10 years away to eliminate diesel and petrol cars being sold in the U.K. It's not just England and the U.K. that's doing that, it's actually much more broader as a trend. And we will see very significant growth of this particular area over the next few years, and we're in there at this moment in time. So what does our product do? You can see a picture on the screen on the left-hand side of a cell, it looks what you would typically find in a torch cell, for example. Geometry is slightly different in a car, of course. So it's a wound structure, which is a multilayer. So our product goes into one of the electrodes, the anode. You can see the other picture there. And what we're doing is binding the active material from the battery that holds the charge, which is a graphite-type material, to the substrate, which in this case is a copper foil. Now with a fairly small amount of material, what you need to be able to do is bind that active material to the foil. So there's a couple of things you need to worry about there is laying it down as a thin film and getting the quality. When you start winding this up, it has to go through various mechanical stresses. So it needs to maintain its strength and bonding there. And of course, when you are charging and discharging the actual battery in use, you will all see some mechanical stresses on that unit. So very important to get all of those things right in the system. So today, we have 2 products which are commercially sold into the market and actually an active development program with customers, but also with other supply chain partners to bring in new innovations in this particular area. So what I've covered there are just some examples of what we have on the market and recently launched. Now what I'm looking at on this slide is what's coming forward. So again, very collaborative R&D here with our customers, but I'll exemplify in a moment also with customers who are further down the value chain. And what we're really looking here at is sustainable polymer solutions, which are driven by the megatrends that you can see on the screen. So the first example of bottle adhesives. So our product is what bonds the aesthetic label onto the bottle. So we clearly have to have all of the right properties to apply that and bond it to the actual bottle and the label. But at the end of life, what you then wish to do is recycle that round and recover and revalorize the plastic bottle. Now there are processes available to do that today, but they tend to be hot water baths at fairly elevated temperature, and therefore, actually very energy-intensive. So we're looking at doing developments where right at the end in the recovery step we have a lower-energy solution and, therefore, improving the carbon footprint. So an understanding of that entire value chain is absolutely essential. Rob has already talked about biodegradability and compostability. Now we would say that we don't wish to see things like lister on there and in certain consumer applications, unfortunately, that's the case. So solutions there, we would like to see in certain areas. But there are other areas where you would deliberately actually put something onto the environment where you would want it to degrade. And Rob already gave the example of agricultural seed coatings. So having a platform there that can be applied to various different areas, a key driver going forward. And then finally, an example around bio-based materials. So if you look at the typical wipe you would find around the home, they tend to be cellulosic materials, the plant-based fibers that brought in. But they have to be bonded and coated together. The materials that go in there typically are hydrocarbon-based. So what we're looking there as part of our bio derivative program is looking at binders that can coat onto that, but then have a very high bio-based content, okay? Then the whole system has that high bio content. And of course, if you start looking at platforms together, you could start thinking about bringing the biodegradability, for example, into those wipes. So that's what we look at in our platform approach. So as a final wrap-up here, what Marshall and I have shown you is the FS business delivering those innovations to the market. We do that with that very close collaboration with our customers and our value chain partners, an absolutely essential part of our model. We're not just investing in those current product developments, but all those -- also those platforms for the future. And with the new capability that we have within the expanded organization and some very good practices, we are very effectively delivering them to the market. So thank you very much indeed, and I will now hand across to Rob. Thank you.

Thank you, Robin. I would really like to just summarize it with one page now, the key messages that hopefully you've heard over the last hour or so. Number one, we are a global top 5 water-based dispersions provider with various leadership positions in regions and product ranges. And we have the ambition to become a top 3 player. We think, based on organic and inorganic growth, that is very much in the realm of the possible. Number two, we've shown a resilient performance based on diversified end markets, customer base and products, 2020 is probably as a case in point. Then about growth, 2 points really to be successful in growth, you need to have good positions in good industries. Well, we think we have a good position, and hopefully, you've heard something about that in the last hour. We have a broad portfolio, customer intimacy and responsiveness, strong local presence and platform-driven innovation. That is what's giving us a competitive edge. Second part of that, good position. We have to be in a good industry. Well, we think we are. We are -- the markets are growing at higher than GDP. GDP, given the general industry. But then the megatrends and in particular, sustainability is getting us to GDP plus market growth. And we think that we have already, over many years, developed a track record in the area of sustainability. And then the final point, revenue synergies. We believe, now that OMNOVA is fully integrated, that there's a lot of opportunity out there that we are already actively pursuing, and we're very hopeful that, that will give us an additional accelerated growth. And with that, I would like to hand it over to Steve, who will tell us how we're going to fund all this growth. Steve?

Okay. Good afternoon, everybody. Good morning for those joining from the U.S. Welcome to all those online. I've got 4 slides this afternoon, talking about funding for growth. The 4 slides briefly comprise historical view of the group's resilient and growing EBITDA and cash flow generation. Comments on the expected strong free cash flow in 2020. I look back at the group's investments that we've made in growth CapEx and acquisitions, and importantly, how they will fund future growth. And then a few points on the refinancing earlier this year, and the significant liquidity and covenant headroom that this provides to fund the growth. Okay. First slide. The first slide demonstrates the resilience in our EBITDA profitability over the last 6 years from the GBP 114 million that we had in 2014 to the GBP 232 million that we have guided to in 2020, and that was given at the time of the October trading update. And secondly, over the same period, the robust conversion of this EBITDA to free cash flow, okay? So the top-left graph shows the EBITDA and its growth over the last 6 years despite some changing economic conditions and volatile raw material price environment. Over the 6-year period, the group's unit gross margin per tonne has gradually improved, with new product innovation, process improvement and, of course, acquisitions. Over the same time period, the group has traded through periods of marked raw material price movements, and has demonstrated that these movements can be passed on to the customers through formula pricing or monthly discussion on pricing, resulting in the average group unit gross margin remaining reasonably stable over this period. The chart on the right shows the conversion of our EBITDA into free cash flow, again demonstrating that if we exclude the discretionary growth CapEx, the group has converted on average over this period, about 60% of its EBITDA into free cash flow. In other words, an average of 60% of the EBITDA has been made available to invest in the growth of the group to repay indebtedness and to fund dividends, a testament to the strong underlying cash flows of the Synthomer Group. Finally, on the bottom left, we've given you an indication of the split of the group's CapEx between discretionary growth CapEx and the underlying SHE and sustenance CapEx. The chart shows a significant investment in growth CapEx that we preannounced at the October 2016 Capital Markets Day, and which I will come back to in a couple of slides' time. And also, as I said, the underlying SHE and sustenance CapEx. It perhaps also shows the impact of the proactive and affirmative action we took at the start of 2020 in the -- at the onset of COVID to pair back the CapEx for this year to between GBP 50 million and GBP 55 million, done to preserve liquidity and covenant headroom in uncertain times, recognizing the pro forma CapEx for 2019 for the enlarged group, i.e., Synthomer and OMNOVA together, was out of the order of GBP 90 million. Next slide. To underscore the point on the group's ongoing strong free cash flow, I've provided here an indication of the forecast 2020 free cash flow. 2020 is forecast to be another strong year of free cash flow, and coupled with the group's step change in EBITDA profitability resulting from the acquisition of OMNOVA, and equally, the investments in the growth CapEx delivering, particularly in our MBR business, the group is expecting pro forma leverage of the group to be in the region of 2x EBITDA at the end of the current financial year. Or less than 2x EBITDA if you include the OMNOVA synergies to be delivered in the future years. The chart bridges the 2020 EBITDA guided to GBP 232 million to an indicative free cash flow for 2020 of GBP 150 million. As I've already mentioned, the company has already guided to what the CapEx number people should expect to see this year at between GBP 50 million and GBP 55 million, and again, significantly lower than the pro forma CapEx that the combined group spent in the previous year. We guided at the time of the interim statement to a full year interest cost of about GBP 30 million, we did that in August. And of course, with the bond interest payable semiannually in arrears on the 1st of January, so in this case, 1st of January, 2021, the actual cash cost this year will approximately have half that amount. Cash tax being the second brick is broadly in line with 22% of the effective tax rate on underlying profit before tax. And you'll recall that 22% was the effective tax rate we used at the interim statement. Similarly, with pensions, in addition to the ongoing U.K., pension deficit recovery payments of GBP 16 million that we've talked about many times before, we inherited a U.S. deficit recovery payment of $6 million with the acquisition of OMNOVA. And again, that information was provided at the time of the interim statement. I would like to add, for the avoidance of doubt, that both the U.K. and the U.S. teams that we're talking about here are close to new entrants and close to future accrual. We've commented in the past on our rule of thumb on working capital, and it represents about 10% of sales, and this rule of thumb applies equally well to the enlarged group as it did to Synthomer before it. Whilst trading activity levels have returned to more normal levels in the second half of the year, raw material prices have retained their lower prices that we've seen last year. The group, therefore, is expected to benefit from an inflow from working capital in the full year, and the green brick there shows that expectation. So where does this leave us? With EBITDA guidance for the full year of GBP 232 million, we expect the full year free cash flow of about GBP 150 million. So looking at the net debt at the end of the year, bearing in mind, we've got a EUR 520 million bond and a $260 million term loan, our indebtedness will ultimately depend on where the FX rates go between now and the end of the year. However, at today's FX rates, the indebtedness is expected to be about GBP 500 million. So as already said at the start, pro forma for full year of OMNOVA EBITDA gives a pro forma leverage of about 2x. And if you include the synergies to be delivered in next years, 2021 and 2022, that reduces to less than 2x. The next slide, investing in growth CapEx and acquisitions. This slide sets out the investments the group has made in organic growth CapEx, capacity expansion and inorganic acquisitions since 2016. The key takeaways from this slide are, the group has invested in growing the business since 2015, and a very significant part of this investment has, in fact, gone into our Functional Solutions business, both in terms of growth CapEx and in terms of acquisitions, as you can see there. Developing our innovation platform, our higher-margin differentiated product offering and our end market and geographic diversification to build a truly global differentiated chemical business. The group has also invested in its Performance Elastomers business and Industrial Specialties business, of course. But in the former case, in particular in our MBR facilities that have been much talked about, and an acquisition there in SBR. Investments which have been made and largely paid for at this point underpin future growth. Given the benefits of the OMNOVA acquisition, synergies, innovation, scale and global footprint are to be delivered in the coming years. And the investments in new capacity are filled in the coming months and years, resulting in more differentiated products and lower unit costs on some of our world-scale sites. The investments, equally as important, have been made within the framework of our conservative capital allocation policy, respectful of leverage guidance, investment returns and dividends. We remain resolutely committed to delivering on this policy and fully appreciate the importance of delivering on it will mean for building trust with our investors to pave the way for future capital market fundraising events to fund the future organic and inorganic investments. One final slide from me, which in summary says that with the acquisition bridge refinancing completed and the group's ongoing strong free cash flow, the group is well positioned to execute on its strategy to invest in future organic growth and, in due course, return to M&A and acquire more differentiated chemical companies. Our balance sheet is strong with all facilities committed through until at least July 2024. And having just 1 financial leverage covenant, that is the net debt-to-EBITDA covenant that I touched on before, set up 4.25x for the current year, reducing to 4x for 2021; 3.5x, for 2022; and 3.25x thereafter. The expected liquidity is significant with facilities well in excess of GBP 1 billion. And as I talked about earlier, net indebtedness at the end of December, expected to be in the region of GBP 500 million. The group is delivering on its conservative capital allocation policy. And in relation to the leveraging profile set out at the time of the OMNOVA acquisition is making good progress towards returning the business to less than 2x levered within 12 months of the acquisition, well ahead of the 12 to 24 months indicated at that time. As before, the group remains ambitious to continue to grow both organically and inorganically, opportunities to invest in a new world-scale MBR asset being a casing point. And we believe that Synthomer with its global differentiated chemicals platform, its resilient and growing EBITDA and free cash flow and its strong balance sheet is well placed to deliver on this ambition. Thank you very much. I'll now hand back to Calum.

Thank you, Stephen. Before I show my 1 slide, I just like to say thank you to Rob and to Marshall. Apologies that the sand wasn't as good as we -- as it was in the test run, by the way. But from -- on Marshall, but I also like to say thank you to Stephen and to Robin as well. So before we go to Q&A, just 1 sort of slide to bring it all together really for you, which I have here. Apologies for showing this graph again on the right-hand side, but it is actually something we're quite proud of in the progress we've made over the 5 years. And clearly, our goal is to repeat that in the next 5 years and do the same again. So that's why we feel we've got some good growth drivers here that we've been talking about. And just to sort of summarize some of those, I mean, clear and consistent strategy delivering strong performance. I think where we started 5 years ago, we continue on that same path with the view to continuing to grow the business, invest organically and inorganically. I hope that throughout the last presentations that you've seen from the team that you will see that the functional solution platform is a key growth one for us, one in which we are a global leader with some very, very good technology, a good pipeline of new products and also a lot of investment that's gone into this business, a lot of which is yet to be fully delivered into the P&L. And as you can see from some of the other discussions, a lot of new ideas of other things that we can do and expand these businesses. The third item here is the global megatrends driving demand across diversified end markets. One thing I would say is that certainly, over the last 3 to 5 years, the trends within the chemical business and the global megatrends have massively shifted and changed. But good to see that Synthomer is a business, which really that has benefited and one that it will continue to benefit going forward, particularly with some of our new products and some of our environmentally friendly starting points. An increasing portion of differentiated products, that's the R&D, that's the innovation, that's the technical service, that's the sales teams that are traveling out to the 5,000 customers that we have globally. And it's the sites which are located very close to our customers. So we try to be very customer focused, as Rob said in his presentation, application focused, customer focused, and to make bespoke products which we can deliver to our customers. Strong financial position from which to fund organic and inorganic investment. If we're going to repeat what we have on the right-hand side of this graph here today, we've got to have a very strong financial position. You can see that we've been very pleased that we've been able to accelerate the rate at which we can deleverage post the OMNOVA acquisition. And clearly, we're best part of the year ahead of schedule. A lot of that down to COVID, and the fact that during the beginning of the COVID crisis, we took those actions that we needed to take in order to preserve liquidity and preserve cash, whether that was CapEx, whether it was fixed cost or whether it was our focused investment sides. And we were able to come out of that difficult period in April and May quite strongly with the diverse product portfolio offering that we've got. As a result of that, we find ourselves at the end of 2020 hopefully at less than 2x or 2x levered, and that will open the door for us to do further investment. I'd go on to say that having acquired OMNOVA as well, but also within the rest of the portfolio, we still have a number of organic growth projects that we'd like to do. So we will look at that as we go forward, in line with our capital policy, and we'll look at that competition for capital of internal versus external. But as we've shown in the last 5 years, I suspect the next 5 years will likewise be a combination of both. Last point here is multiple catalysts to drive the future growth. I think between the colleagues in the presentations today, we've sort of highlighted that, and we've highlighted it on a number of our areas and our product areas, not just in Functional Solutions, but also in some of the other markets that we are operating, in Industrial Specialties and also in Performance Elastomers. So with that, I think I would like to turn it over now to Q&A. I think if I take the questions, and then I can delegate those to the appropriate member of the team. And if there are any difficult ones, that puts me in a strong position because I'm in a position to delegate.

[Operator Instructions] We have a question from Alex Stewart from Barclays.

Hello. Very interesting slides. And it's not that I want to detract from the content of your investor event, but I was particularly interested in the working -- the free cash flow bridge slide. When you talk about the net working capital inflow of what looks to be about GBP 40 million or GBP 50 million in 2020. That's I think, considerably higher than what you've talked about in the past. Could you just clarify whether that's perhaps slightly changing your stance from working capital for this year? Or whether I potentially misread the chart, would be really helpful. And then I'll go back in the queue for the other questions.

Stephen?

Yes. Alex. So no change in stance. I think the inflow at the half year was about GBP 10 million. And it was predicated on that point of having lower activity and some free cash flow coming out of the OMNOVA transaction, which, of course, completed on the 1st of April, so there's a bit of inflow from there. I think where we've got to at the end of the year is that there is the seasonal reduction in activity levels, as there always is in our business. And it's that seasonal reduction in activity levels, coupled with the fact that the raw material prices at the end of 2020 are now likely to be lower, certainly are today than the end of 2019, is resulting in that free cash flow. And I think If you look at the raw material prices, there's probably 10% or 20% below last year, Alex. And our sales is about GBP 2 billion on a pro forma basis. And if you do the math, then you sort of get to a GBP 40 million and change inflow, and that's what we're expecting to see, if the raw material prices stay where they are today and activity levels drop off towards the back end of the year.

That's really helpful. And maybe if I may just ask the question on the rest of your content. Some of your competitors in the dispersions segment, particularly in Europe, have talked about wanting to make acquisitions and grow their own businesses, it seems to be a hot area for investments. Are you seeing more competition for these assets in the market? Are you seeing valuation multiples for assets that are coming to the market being more reasonable than they were maybe 2 years ago? Some commentary on that would be extremely helpful because it's clearly an attractive area of growth for you.

I think, Alex, I'll take that one. I think the M&A market today, certainly globally, really not just in Europe, is still quite strong. I think multiples, if anything, are increasing to some degree, but certainly stable. And I think this area in Functional Solutions is seen as a nice technology-driven specialty chemical. It's got significant innovation into it as well. So it is quite an attractive area. Clearly, doing our OMNOVA deal at the beginning of this year, the timing was good. I think we were able to integrate it during lockdown. And you can see from the presentation, it's integrated well. Rob, I'm sure we'll maybe give him an opportunity to talk. But there are always other acquisitions we can look at, which are in this area or which are complementary to this area. But I just wanted to emphasize what I said in the presentation as well is our priority has been this year to integrate OMNOVA and then to subsequently get the leverage down below 2x. And then we'll look at the capital available, both on internal investments, and we have a number of internal investments that we can potentially do having brought OMNOVA into the portfolio versus the external M&A market. But you're right in your comment that it's a very hot area because it's a high-quality business. Rob, do you want to add anything?

Yes. No, absolutely, we are interested to continue to grow in this area, and we made it clear in the summary. I think also we have the ambition to become a top 3 player. And that will require a combination of organic and also inorganic growth. You have to wait for the right opportunity, exactly as Calum points out. There are certain areas of interest for us. We are strong in Europe, in particular. But in North America, there's still a lot of opportunity there, and so is Asia. And the Asian market is still rather fragmented. So we do think over the next years, there will be more industry consolidation. And that definitely will give opportunities, and we will certainly be on the lookout for that.

Thank you, Rob. Thanks, Alex. I hope that answers the question.

The next question comes from Sebastian Bray from Berenberg.

When it comes to M&A, given all of the work that has been done over the last few years, I'm interested in seeing how Synthomer defines itself in the future? Is it in terms of its inputs as a water-based polymer group? Or if it saw different chemistries servicing the same end markets on a big scale, so let's say, one similar to OMNOVA, would it be prepared to step outside those value chains? And I'm thinking, in particular, of the relatively low percentage of industrial coatings relative to decorative and Functional Solutions, would there be some scope for potentially turning Synthomer into a broader scope specialty chemicals group as opposed to simply a world-leading water-based polymers company?

Thanks, Sebastian. I'll take that one. I think the first thing I would say is, if I cast the mine back to really what we've done so far, we've done a number of what I would call bolt-on acquisitions. And then we've done the OMNOVA acquisition, which was clearly a step change for us. And let -- Hexion and OMNOVA were in the similar market. So what we decided to do in the first instance was absolutely to go into the same businesses that we're currently in to increase our geographic presence to become a bigger global player, but also to increase our technology base and some of our R&D pipelines, but also selling the same products into different applications. And Rob talked quite extensively about the attractive sectors that he's managed to access now through the additional innovation and new products that came through OMNOVA. I'd also say that whilst you do that, the synergies that are associated with such a transaction are much greater than the step-out synergies that you would get. You take our OMNOVA acquisition, we effectively acquired a $70 million EBITDA -- trailing EBITDA business. And we have upgraded our synergies now to $40 million to be delivered over 3 years, and that we're delivering $20 million run rate by the end of 2020. So when we paid sub-10x EBITDA for the business, and then subsequently had that big uplift on EBITDA, you can see clearly the attractiveness of going into that consolidation deal, which has done well for us and will continue to do well for us. When you go into the more adjacent or the more step-outs, and we're not against that, and we've constantly talked about it at some time as Synthomer continues to grow, we will do that. But I think you always have to say, at the end of the day, we're going to do what we're good at. And what we're good at is we buy specialty chemicals, so we don't want to go upstream. We want to go into the product areas where we are buying raw materials. We're using clever R&D, we're using technology, and then we're using technical sales to go out and sell specialty further added-value products. So firstly, that would be something that would be a prerequisite of any other transaction we would do. Secondly, there needs to be some synergies in there, and the synergies, we don't want them just to be confined to management overheads and group functions. We also want to look at synergies associated either with raw materials or with customers or with end markets. So when we do an acquisition, clearly, it needs to be very strategic and very logical as to why we're doing it. And you and I have talked quite a few times about this. And as you know, We have a list of things of companies, not companies that just opportunistically come to market, but companies that we feel are complementary in one way or another to Synthomer. And I think you then have to go out and explore those, and we were fortunate enough to get one of our top targets when we acquired OMNOVA, and we will be disciplined in that respect that we will not go out there and acquire anything which doesn't make strategic long-term sense, and a business that fits well today within a publicly listed company. So therefore, we're not looking for volatility, we're not looking for cyclical earnings in that respect. So the answer is a bit of a long answer. But the answer to your question is, both of those are attractive. Where we can do consolidation deals and grow within areas that we are already well established, that is highly attractive. But we would also consider going forward in the longer term, and again, hasten to add in line with our capital policy, we would consider doing some step-outs, but into strategic products.

If I may just add a twist on that question. Do you think that there are any assets that could become potentially available with a water-based polymer background of equivalent scale to OMNOVA?

There are such products around. And as you get bigger and bigger, you clearly need to look at competition issues in terms of market shares. But there are such products around. And you certainly saw in Rob's presentation that our position within some of these markets, whether it's U.S., whether it's Europe or whether it's in Asia, is still, in some cases, quite modest. So it gives us room to grow in there. And whether we add larger companies, the size of OMNOVA, or indeed, whether we add smaller companies but growing our positions in certain geographies or certain products is an option that we have. And what we tend to try and do in this area is that Robin is managing of his own P&L and his own business. They lead the work there to identify those targets, to come up with the products and the customers and the chemistries that fit with his business in the best way, and then bring them back and we discuss them on the executive team targets. So I think the answer to your question is there are larger companies, but there are also smaller, what I would call bolt-on companies that would be very attractive to us, too.

The next question on the phone line is from Kevin Fogarty from Numis.

Just 2, if I could do. Obviously, this afternoon, we heard a lot about innovation and sustainability. And I just wondered, in those markets where you do have an existing strong position, what do you think that innovation and sustainability focus does to your competitive position, i.e., sort of what are the competition doing? And just secondly, if I could just go back to the Functional Solutions M&A piece. If you were to think about bolt-on there, what would drive the sort of inorganic element of Functional Solutions strategy, please?

Rob, do you want to pick that up?

Okay. Yes. Well, I think there are many companies that are working on sustainability, and we are one of them because we have a long history and track record in Europe. I think we are definitely very well positioned. But there are others also in the European market. I think if you look at other regions, you tend to see that sustainability historically has not been quite a priority area. So I think we're definitely one of the leading companies, I wouldn't claim we're the only ones, but I think we're definitely in a good position in comparison to the competition. And again, a lot to do with our history in the European continent in particular. For bolt-ons, there's many different areas. I hope -- I try to convey that we're particularly interested in the specialty end of the spectrum. We are already moving there more and more. But that's where I think the best qualities of -- in terms of innovation, new product development, they come to their right, and that's where we have the best opportunities for growth. So we're scanning the market constantly. We're looking at these type of options. And I mentioned from a regional perspective, I have some preferences. We are already quite present here in Europe, but in some of the other regions, we're playing still a smaller role. So I look at it through the lens of the regional dimension. But then also from a technology point of view, and again, particularly on the specialty end of the spectrum. But I have to compete with my colleagues and bring it to the exec and Calum and try to make the case, but that's what I'm trying to do.

We have some questions come through on the chat. Please let me know if you want me to read this out again. GBP 500 net debt and leverage of 2x at 2020 to end is before IFRS 16 leases on the balance sheet?

If that's -- the calculation we're doing in accordance with the bank covenants excludes IFRS 16 adjustment, i.e. it's a frozen gap before IFRS 16 was introduced. Correct.

Is there a ROCE target for the group, which we should keep in mind when thinking about any future organic and M&A ambitions?

Stephen, I'll let you go first.

Yes. Thank you. The answer to that is not explicitly given. We do have, as we've talked about quite a lot during the presentation, a capital allocation policy. And what that does when we are looking at investments, particularly organic investments, of which we'd have a series as you've heard of this afternoon, we are looking for things that payback in less than 5 years and an IRR of greater than 12%. The investments that we have done, whether it be Nitriles or in the Functional Solutions area, we are comfortably within that capital allocation policy. And as Calum alluded to earlier, with the addition of OMNOVA into the fold, there are more opportunities. We know when the time is right and the capital is available to deploy them on the investment, in line with the capital allocation policy. But an externally specified return of capital employed, there is not, no.

Can you give any color on demand post the trading update last month?

I mean I'll pick that up. Generally around the group, the strong demand that we saw and that we reported in the October trading statement has continued. So we are comfortable that we are in line with our expectations.

That's all the questions at the moment. [Operator Instructions]

If there are no more questions coming through -- sorry, I just hear there might be 1 more question coming through.

We've got a follow-up from Sebastian Bray from Berenberg.

If you -- could I ask a question on the margins of these different daughter areas of construction, coatings, adhesives and so on, in oil and gas. I guess we can get an idea by looking at the legacy OMNOVA accounts, but could you talk about the relative profitability of these areas? And which of them tend to involve a higher degree of customization?

Yes. Please, Rob.

Okay. We can look at it sort of by business applications, Sebastian. But I think a better way is to look at within these -- each of these areas how differentiated a particular product is. I think I mentioned when I did the overview, when I talked about the adhesives business as an example, that we have a lot of specialty products there that go into niche markets with more differentiation. So I guess you can derive from that, that is definitely one of the more attractive areas that we are in. Oil and gas, again, I mentioned we have, through OMNOVA, really a leadership position. And again, I think, very, very attractive from that point of view. But when you talk about the other areas, coatings and construction and textiles, it depends. There are niches there as well, and there are areas that lend -- sort of stand a little bit more towards the semi-commodity end. But overall, it's always our intent to get the mix right and certainly drive it slowly but surely more towards the higher margin end.