Elementis plc (ELM) Earnings Call Transcript & Summary

Hello, everyone. Good morning. I am James Curran, Director of Investor Relations at Elementis, and welcome to the 2020 Results Presentation. For those of you listening via the phone, please note you can find the slides on our website. As usual, please take note of the cautionary statement on Slide 2. And with that, I'll hand over to Elementis' CEO, Paul Waterman.

Good morning, and welcome to the Elementis 2020 Results Call. Apologies for starting a little bit later, but as you might suspect, I'm calling in from the United States. So thanks for taking the time to join us today. In terms of the agenda, I'll start with the highlights and business segment performance. Ralph will review the group financials, and then I will take you through our priorities and outlook for 2021. And following this, we'll be happy to take your questions. Turning to Slide 5. The key messages for this morning are straightforward. From a demand perspective, 2020 was very challenging, with both industrial and consumer markets impacted by COVID-19. Our response is comprehensive and swift, and we considered the needs of all our stakeholders. And our focus on cost savings and cash delivery has resulted in a $46 million reduction in net debt. In the face of this, we've continued to implement our strategy, focusing on innovation, growth and efficiency to ensure that we're well positioned for the future. Looking to 2021, our continued focus on self-help will be supported by an improved demand environment, building on the momentum from the second half of 2020. This will drive improved financial performance and reduce our leverage. I'll start with safety on Slide 6. At Elementis, we always put the health and safety of our employees first. In 2020, we had 9 recordable injuries, 2 lost time accidents and no reportable spills. While the recordable injuries are relatively minor, they're still painful, and we want to take action to prevent them from happening. COVID-19 remains a significant challenge, and I'm proud of how our people have responded. At our plants, we've implemented social distancing and significant hygiene protocols that have allowed us to continue to work safely and meet our customers' needs. Many of our sites also reached notable milestones. For instance, at Corpus Christi, with no recordable injuries for 17 years. Going forward, we'll continue to invest in training our people and maintaining our assets to further improve safety performance. To that end, we launched the TogetherSAFE program, which provides a framework for focused, continuous improvement that strengthens our safety culture and supports our journey to 0 injuries. We're also focused on delivering on our 2030 sustainability targets. Last July, we announced targets to reduce the environmental impact of our operations. Specifically, we will reduce greenhouse gas emissions by 25%, energy by 20% and reduce waste and water usage, both by 10%. These goals are based on a number of operational improvement opportunities that have clear sustainability and efficiency benefits. A few examples. At our Coatings plant in New Martinsville, West Virginia, we are now recycling [ tolene ]. This reduces both waste and raw material costs. At our Chromium plant in Castle Hayne, North Carolina, we're enhancing the installation of our kilns to save energy and reduce emissions. And at our Newbury Springs, California site, this year, we're implementing 100% renewable energy via solar panel installation. And whilst we make improvements to reduce our manufacturing emissions, it's also important to note the sustainability benefits of our products. In Personal Care, our hectorite clay is an attractive natural alternative to synthetics. In Talc, our products help to reduce the weight of vehicles and thus lower emissions. And in Coatings, our additives facilitate the transition from solvent to waterborne formulations, thus reducing environmental impact. While there is much to do to deliver on our sustainability aspirations, we're confident that our progress will accelerate going forward. Turning to our headline financial performance on Slide 8. 2020 was a very challenging year, and our financial performance is reflective of that, with sales and earnings down double digits on the prior year. However, I'm proud of the way our team responded and the proactive steps that were taken on cost and cash management to deal with the COVID-19 challenges. This focus enabled Elementis to reduce debt by $46 million in an extremely weak demand environment. Speaking to the shape of demand in 2020, while the year started normally, in Q2, we saw a clear volume trough as key value chains were impacted by industrial plant shutdowns and reduced demand in response to COVID-19 lockdowns. However, as the year progressed, volumes steadily improved across our industrial end markets, with Q4 finishing not far off the prior year period. Crucially, apart from Chromium, pricing across all of our businesses was rock solid. In the first quarter of 2021, this volume momentum has continued, which is encouraging. Turning to Slide 10. In responding to COVID-19, we've considered all of our stakeholders. Our top priority has been to do the right thing for our employees. Working remotely has not been easy, but it has been successful for us, enabled by material investments in digital capability that we've made over the last few years. In addition, we provided enhanced well-being and communication support to help our people to manage through these challenging times. For our shareholders, we've also taken decisive actions to manage through the pandemic. Early in 2020, we took the difficult decision to suspend the dividend. Our response actions also included reducing in-year cost by $10 million and further conserving cash by active working capital management and streamlining capital spending. While we have confidence in the cash-generative nature of our business, these actions, combined with the covenant relaxation secured through to end 2021, have provided an additional financial headroom required. And finally, we've continued to support our customers. Our customer service was reliable because our operations were resilient. Our global production sites operated well with no extended shutdowns or raw material shortages. And finally, we've continued to support our customers' innovation needs. Leveraging digital connectivity and strong customer relationships, we delivered training and innovation workshops to more than 10,000 customer employees around the world. These engagements have supported our strategic priorities, advanced innovation projects and generated incremental business opportunities. Importantly, in the face of COVID-19, we continued to implement our innovation, growth and efficiency strategy. On innovation, we launched 12 new products across Coatings and Personal Care, driving our revenue from new products from 12% to 14% of sales. We also leveraged open innovation to secure 2 key partnerships. And to support future innovation, we've built 2 Personal Care innovation labs in China and Brazil that will open in the next few months. Turning to growth. We completed the transformation of our Coatings business, and the benefits can be seen in 2020 margin improvement and earnings resilience. Across the group, we closed $30 million of new business, exceeding our targets, driven by wins across Coatings, Talc and Personal Care. Our expansion into skincare has continued to progress, and we have a strong new business pipeline. And in Talc, the expansion of the business outside of Europe has continued with sales up 18% in China. And in efficiency, we continue to make progress. We delivered $5 million of headcount-related savings, and we accelerated the delivery of our medium-term cost savings program with $10 million now being realized one year earlier in 2021. On working capital, we delivered an additional $7 million of targeted reduction, making $30 million of total savings since 2017. On Slide 12, I'd like to say a few more words about innovation at Elementis. We're focused on accelerating innovation delivery by taking a few specific actions. First, by creating distinctive technologies that deliver better performance and enhanced sustainability credentials. Products such as preservative-free NiSATs, high-efficacy active ingredients and developing talc as a sustainable barrier coating in food packaging are a few examples of this focus in action. Second, by pursuing open innovation partnerships that have the potential to strengthen our core businesses. We actioned 2 in 2020. In Personal Care with AQDOT, a supramolecular chem tech company in Cambridge, where we are leveraging their smart odor control and fragrance release systems in our market-leading APDO platform. In Coatings with NXTLEVVEL, where we are developing a portfolio of bio-based products based on levulinic acid that replace oil-based coalescing products. We're now gearing up for the launch of 2 new bio-based solvents for the industrial Coatings market. These 2 relationships bring exciting complementary technologies to our market-leading platforms. This progress, combined with our existing innovation pipeline, means we now expect 17% of our revenue to come from new products by 2025. Now let's take a look at the performance of our businesses by segment. Turning to Personal Care on Slide 14, revenue fell 9% on a like-for-like basis with weak market conditions for cosmetics, offsetting market share gains in AP actives. On a reported basis, revenue declined by 18% due to the sale of a dental gypsum plant in late 2019. The adjusted operating profit declined 20% to $34 million, primarily due to lower volumes in cosmetics, our highest margin business. Looking at Personal Care in more detail. Today, we are a business of scale which has grown via increased product penetration, geographic expansion and by leveraging favorable long-term trends, such as the move towards premium and natural ingredients. These drivers remain valid, and I'm confident that business will return to growth once conditions normalize. However, in 2020, our Cosmetics and APDO businesses were impacted by COVID-19. With movement restrictions, closing restaurants, theaters and gyms, people working from home, retailer constraints and air travel virtually shut down, consumers simply did not have the need or even the opportunity to buy and use cosmetics and anti-perspirants as they would normally. As a result, retail sales of Cosmetics fell over 20% and deodorants fell 8%. While this is an unfavorable short-term dynamic, we continue to make strategic progress to ensure we are well positioned for the reopening of our societies. In 2020, we launched 5 new products, including a new high efficacy AP active and several skincare products. We completed the development of 5 additional new products that we'll launch in 2021, while agreeing our AQDOT strategic innovation partnership. Representing under 20% of our Personal Care sales, growth in Asia is a strategic priority. Our new AP actives plant in India remains on track for a mid-2021 start-up. This will build on our global leadership position as we will have the most advantaged global supply chain, while providing better access to faster-growing Asian markets. In addition, we will improve our local presence in Asia with additional investment in capabilities that will enable direct customer management at a new Shanghai lab to open in China next month. In Coatings, on Slide 17, sales declined 7% versus prior year with steady pricing offset by weaker demand across industrial applications, such as automotive and protective coatings. In contrast, decorative coating demand was relatively robust, particularly in North America, as home renovation activity, combined with retail stores remaining open, led to category growth. Despite these market headwinds, earnings were resilient, while operating margins rose by nearly 100 basis points to 16%. This margin improvement is ultimately an indicator of a higher quality business and reflects an improved product portfolio, a better underlying cost position and continued new business wins. These self-help actions mean we are now better positioned to deliver profitable growth and recovery. And this has been achieved during the year when industrial coatings, our main market, suffered considerably. Considering that Coatings represents nearly 50% of our earnings, this business will be key in supporting delivery of our medium-term operating margin targets. To drive further improvement in Coatings, we're focused on making strategic progress in 4 key areas: first, by leveraging our advantaged technology platforms to drive new business. Our objective is to continue to gain new business and market share in areas such as waterborne industrial additives, organic thixotropes and premium decorative additives. Across these businesses, our volumes grew 6% in 2020 and helped to deliver $15 million of new business, and we expect similar performance in 2021. Second, we're accelerating our innovation and improving our product quality through a combination of new product launches and open innovation. We'll launch 10 new products in 2021. Third, Southeast Asia is a large region with favorable demographics and very good growth potential. We are now investing to accelerate our growth. We're shifting to select direct account coverage while adding additional sales and technical resources to capitalize on this opportunity. And finally, our global key account management program has expanded to 7 accounts, adding a leading global adhesives and sealants player. This year, the program showed its value with revenue flat across these accounts in a very weak demand environment. So while it took some time and lots of effort to transform our Coatings business, it is now well positioned for future success. Turning to Talc on Slide 20, we continue to be very excited about our Talc business. They have strong fundamentals, compelling future growth opportunity, and it's a great fit. Nonetheless, in 2020, sales fell 13% versus prior year to $133 million due to weaker industrial end market demand. This was particularly the case for applications with automotive exposure, such as long-life plastics and technical ceramics. Sales to coating customers were resilient, rising 1% as we won business with new customers in new geographies and grew our revenue synergies since acquisition to $7 million. Operating profit fell 36% to $17 million, representing a margin of 13%, as stable pricing was offset by reduced volumes. Looking in more detail at Talc, Q2 was a clear demand trough as automotive plants shut down across the world in response to COVID-19. While this had a severe negative impact on demand, it was only a temporary issue. All our customers were maintained, pricing was unchanged and the business recovered strongly in the second half of 2020. In fact, Q4 volumes were above prior year, and our long-life plastics business experienced a record level of quarterly performance. Taking a step back, the fundamentals of the Talc business remain very strong. We're the #2 player in a growing market with only 2 players at global scale. We have a fully integrated value chain with global reach. The chain starts with long-life talc deposits in Finland, moves through unique processing and formulation capabilities in our global logistics hub in Amsterdam and is then supported by high levels of technical service that our customers value. And Talc follows the performance additive logic. It represents a small percentage of formulation costs but adds critical performance benefits to the finished product. As a result, customer loyalty remains strong. We also have material growth opportunities that we'll continue to execute against. There are 3 areas of strategic focus for growth: first, with over 80% of our business historically in Europe, there's significant opportunity to globalize Talc. In 2020, we won $10 million of new business in areas such as long-life plastics. We increased our market share in Asia, growing 18% in China. With Asia and the Americas representing under 20% of our sales, there's much more opportunity. To accelerate our progress, we've invested in local resources and technical capabilities. Second, we are increasing the speed of innovation by applying Elementis' specialty chemicals expertise in Talc. A few examples, we have over 30 projects with customers using our Talc for barrier coatings so that food packaging can be 100% recyclable. The development of high-grade ceramics for advanced gasoline particulate filters is an attractive opportunity, and we're in partnership with the market leader on this, targeting a 2022 launch. And pre-dispersed talc for coatings combines our disbursement technology with talc additives to create a great customer value proposition. Third, our delivery of $20 million to $25 million of revenue synergies by 2023 remains on track. Leveraging Elementis' global network and scale, we've now won new customers and new geographies and delivered $7 million of revenue synergies to date. Turning to Chromium on Slide 23. Revenue declined 14% to $147 million, reflecting weak volumes and softer pricing outside of North America. Demand from users in areas such as aerospace, automotive parts, industrial machinery plating and refractory cells, particularly in the second and third quarters as COVID-19 triggered plant shutdowns, reduced economic activity and our customers destocked. As a result, global capacity utilization of chromium chemicals fell and pricing declined in the rest of the world, negatively impacting margins, which finished at around 4%. Before moving on, it's worth expanding a bit on the business dynamics. First, as I mentioned, chromium industry utilization substantially declined. We estimate it was under 70% in 2020, the lowest point in over a decade and this negatively impacted unit margins for our business outside of North America. In contrast, our North American margins have been remarkably stable. Our Chromium business maintains significant competitive advantages. We're the only producer in North America, and we utilize a highly valued proprietary delivery system that materially reduces our customers' product handling, operational and safety risks. This has resulted in a very high and resilient market share. That said, North America experienced materially weaker volumes in 2020. And in combination with lower rest of world pricing, returns for the Chromium segment were at the lowest level since 2009. In the fourth quarter, we saw some early signs of improvement with a significant pickup in volume as demand returned to areas such as leather tanning and metal plating. This has continued into the first quarter this year. And if sustained, we should, in time, see pricing, margins and returns start to recur. Finally, energy performance was extremely weak in 2020. Revenue was $24 million, down 49% versus prior year. Due to COVID-19-related demand declines and excess supply, oil prices fell significantly in 2020. This, in combination with funding constraints for shale producers, resulted in a 50% fall in the rig count in North America. The significantly lower volumes and lower cost absorption, a loss of $6 million was recorded in the period. In response, we've restructured the business, announcing the closure of our Charleston plant in December and the consolidation of capacity at our St. Louis plant. This will ensure the business meets our profitability expectations, even if sales remain at 2020 levels. In addition, moving forward, we'll combine with the Energy and Coatings businesses for the purposes of external reporting. This simplifying step makes sense given the small size of the business and the fact that it shares a senior management and production network with Coatings. And with that, I'll hand over to Ralph.

Thanks so much, Paul, and hello, everyone. Turning to group revenue on Slide 27. Whilst this fell 14% on a reported basis, excluding the impact of disposals and ForEx, like-for-like revenue declined by 12%, driven principally by weaker volumes, which fell 9% due in part to a particularly weak second quarter. Pricing remained solid, and we saw a modest mix impact as sales of our higher-value products to areas such as cosmetics and industrial coatings were impacted by COVID-19. Looking at group adjusted operating profit on Slide 28, this declined by 34% on a reported basis and 33% on an underlying basis, with the revenue decline partially offset by cost savings. The main areas of cost savings in 2020 were $5 million of headcount-related cost actions and $10 million of COVID response savings. Now on the COVID response savings, with travel close to 0, with trade shows canceled, manufacturing costs aligned to the lower demand environment and lower variable incentivization, we saved $10 million in 2020, and we expect the vast majority of these costs to return in 2021 as conditions normalize and demand improves. Turning now to the underlying cost savings. We've got a track record of cost reduction that we intend to further build on. Over the last 3 years, we've delivered around $25 million of efficiencies. Starting from 2018, these have included plant efficiencies, procurement savings and more recently, the organizational restructuring we implemented at the end of 2019 with $5 million of benefits that flowed into 2020. In addition, we delivered $10 million of temporary COVID savings in 2020. But as I said, we expect these to reverse this year. In 2021, we aim to deliver a further $10 million of sustainable savings. This ambition is underpinned by the recent closure of our Charleston organic clay plant and consolidation of capacity at St. Louis. This step will ensure we have a lower fixed cost base and are more efficient, and it will mean we remain the only organic clay producer with a presence in all 3 continents. Looking forward, we will deliver an additional $10 million of supply chain savings by the end of 2023. This is a new ambition and the start-up of our new plant in India will be a key enabler. This plant will provide a highly cost-efficient production base as well as reduced tariff costs. In addition, there are additional savings opportunities in network optimization, procurement and continuous improvement projects that will underpin delivery. Turning now to working capital on Slide 30. This is an area where we've made good progress and one where we see additional opportunity going forward. In 2018, we delivered a $12 million underlying reduction with an incremental $11 million more in 2019. A large part of this is the result of reducing the complexity of our operations, primarily in Coatings. In 2018, we eliminated 1,900 SKUs from our Coatings portfolio, representing around 50% of the total at the start of the year, but this complexity had created excess inventory. We also implemented standardized service level agreements, which mean customers adhere to minimum order quantities and lead times. And in 2020, improved demand planning has led to an additional $7 million of reductions. That's about a collaborative focus across sales and manufacturing teams to enable us to produce the right products in the right amounts at the right time. As a result, we have now delivered $30 million by the end of 2020. Going forward, we see additional opportunity, particularly in the area of inventories, and we're now targeting an additional $10 million reduction by the end of 2023. Turning to CapEx. On CapEx, our spend in 2020 was $40 million, in line with our typical spend of $40 million to $45 million. And while control over the total spend is important, we've also made good progress on the mix. Today, we're allocating close to half of our CapEx to growth and productivity projects compared to just 25% a few years ago. This mix improvement has been enabled by changes to our portfolio, namely the disposal of assets such as Delden, Jersey City and Changxing, which together absorbed over $10 million of CapEx a year, nearly all of its spend on maintenance and compliance. Looking to 2021, we plan to spend $45 million to $50 million on CapEx, driven by 2 important projects, completing the new India plant and the Charleston-St. Louis consolidation will together account for around $20 million of spending in '21. Now beyond 2021, we expect CapEx spend of $40 million to $45 million annually. Turning now to cash flow. In 2020, we generated $112 million of operating cash flow, down on the prior year due to lower earnings. Operating cash conversion was, however, very strong at 137%, driven by tight CapEx management and a working capital inflow. The lower operating cash flow, interest and tax payments were in line with expectations and the prior year. On tax, it's worth noting, there will be a $20 million cash out in the first half of '21 due to the EU state aid ruling. This legal case impacts many companies. And whilst we expect the appeals to ultimately be successful and for the cash to be returned, it is a short-term headwind in '21. We did not pay dividends this year in order to provide financial headroom in response to COVID. One-off items of $12 million included restructuring costs and staffing reductions in 2019 and the efficiencies pursued in our supply chain. One item worth highlighting is currency. Given our revenue and earnings currency profile, we have around 1/3 of our gross debt in euros. Given the movement of the dollar against the euro in the second half of 2020, this resulted in a net $13 million currency translation impact that we've absorbed. Despite this, we have reduced our net debt by $46 million to $408 million representing a leverage ratio of 3.2x. Staying on leverage, Elementis is a highly cash-generative business. And as the graph shows, we have a long track record of healthy cash conversion and cash generation. This performance, combined with our cash-focused initiatives on costs, CapEx and working capital, give us confidence in our ability to maintain operating cash conversion above 90%, our medium-term target. As explained, we're confident of our ability to generate cash. So what are our capital allocation priorities going forward? First, we will invest organically to grow our business. Capital expenditure will be approximately 5% of sales, and we're focused on growth and productivity opportunities. Second, debt reduction is a major priority. We see a clear path to get to under 1.5x leverage, while simultaneously investing in growth. Third, on shareholder returns, we suspended dividend payments during 2020. Whilst regrettable, this was clearly the right thing to do given the COVID-related demand uncertainties. We recognize the value of dividends to our shareholders and intend to reinstate payments when significant progress has been made on reducing financial leverage on its current position. I will now hand back to Paul to wrap up. Over to you, Paul.

Thanks, Ralph. Turning to Slide 36, it's worth noting that Elementis today has an advantaged business portfolio. Each business holds a leadership position in its respective market. Each has distinctive advantaged assets that will retain sustainable competitive advantages over time, and each has the means to create future value for our shareholders. Our Personal Care, Coatings and Talc businesses each have good growth potential, supported by structural trends, while our Chromium business will recover as the economy recovers and be a strong cash generator for Elementis. For 2021, the outlook remains uncertain. What we can control and strongly influence is how well we execute our strategy. As you can see on Slide 37, there's tremendous self-help that comes with delivering on our innovation, growth and efficiency strategy, and we will be laser focused on this. We're off to a good start in the first quarter and expect a continued demand recovery in second half 2020 levels. That said, the strength and speed of the recovery will, of course, depend on how quickly we get past the pandemic. In November 2019, we communicated our strategy and how execution will deliver our medium-term performance objectives. First, we expect operating margins to improve to 17%. Second, we anticipate our already strong levels of operating cash conversion to remain over 90%. And finally, we expect our cash generation profile to take us to under 1.5x net debt to EBITDA. While this was only 15 months ago, it now seems much longer. The fact is we're absolutely committed to delivering on these financial outcomes. Focusing on our operating margin goal on Slide 39, the pathway to delivery over the next few years is very clear. First, we will continue to pursue the $100 million of revenue opportunities that we see across our Personal Care, Coatings and Talc businesses. As we leverage our new products to drive [ MDOs ], we'll continue to deliver $30 million of [ MDOs ] annually behind our growth initiatives. Second, we'll continue to deliver improved efficiency. We expect $10 million in 2021 and another $10 million by 2023. In addition, the continuous improvement capability that we've put in place will support further progress on incremental efficiency in the coming years. Third, a COVID demand recovery and normalization of economic activity over the next few years will be a helpful tailwind. The fact is that every one of our businesses suffered temporary demand headwinds due to the pandemic. Taken together, this gives us confidence in the future. So while 2020 was an incredibly challenging year for Elementis, we're confident that focused execution of our strategy will support delivery of our medium-term performance objectives. Thank you for listening. And now Ralph and I will be happy to take your questions.

[Operator Instructions] Our first question comes from Navina Rajan of Morgan Stanley.

Just a few from me. A few just on Chromium first. If I sort of look at sort of the organic growth for the second half on the numbers you gave, I get around a 16% decline in the second half so noticeably weaker sequentially. Can you just sort of split out why growth was so much weaker sequentially and why the recovery sort of get into how are your market shares doing outside of the U.S.? And then within that thing -- within that division, sort of chrome ore prices, South African chrome ore prices have moved notably higher since the beginning of the year. How much for 2021, albeit at a lag, do you think that will sort of support the recovery this year? And on utilization rates, what are you currently seeing for sodium dichromate? I have sort of a mid-cycle EBIT of $30 million to the division. How much -- how quickly do you think the division can sort of reach back to those levels? And just one on Personal Care, if I can sneak that in. On the sort of skincare pipeline, what's the actual contribution of that? How much do you see that sort of making up the new business opportunities or the new product targets that you outlined?

Okay. Thanks for the question. So I'm here in the United States and Ralph is in London. So we're going to do the best we can. It's a little clunkier than when we're both in the same room. But I'll start and Ralph, I think I'll talk to Chromium performance, if you can speak to the chrome ore prices and come back around on Personal Care. I think what we saw in Chromium performance in the back half of 2020 was pretty significant destocking related to the second quarter shutdowns for sure. And as a result, the utilization, we think, kind of fell to about 70%. In addition, in the Chromium business, pricing is more problematic in rest of world. And that, I think, had a pretty negative impact in our performance as a result of the rest of the world pricing being so weak due to the very, very low levels of utilization. We've -- I think I've seen in the fourth quarter some reordering, and that's continued. We think there is some restocking going on in the system. Quite honestly, I don't know how quickly we'll get back up to sort of that 80% to 85% level. It just depends on the speed of industrial demand recovery is what I would say. Ralph, do you want to take the question on ore prices and what we're seeing?

Yes. So thanks, Paul. Navina, so yes, in 2020, I mean, chrome ore was sort of flat to modestly down, I'd say, based on -- from what we saw -- what we are seeing in the course of '21, partly driven by some specific factors in South Africa and mining activities. We're seeing a slight uptick in chrome ore pricing. So it's relatively modest, but there is a slight uptick at the moment. I think that may contribute to some helpful momentum in terms of industry pricing. Equally, we hold because of our need for supply resilience quite strong stocks of chrome ore. So it will take quite a while for any significant price increase in raw materials to flow through to our costings based in the U.S. So I think we're fairly well protected over the coming months, but that chrome ore increase may contribute to some momentum in pricing in the industry.

I think the last thing I'd say, on Chromium, I recognize my answer might not be terribly satisfying because it isn't as exact as we would like. But I think if we look to history on Chromium, what you do see is, obviously, as this utilization tightens up, pricing reacts pretty well and the weather can change in the Chromium business quite quickly. On your Personal Care question, skincare, we continue to make inroads in skincare. We are targeting about $2 million of business. This year, we see the opportunity as being a $10 million opportunity, and that's over the next couple of years. The margins are 70% plus kind of contribution margins. They're very high value to the Personal Care business, Cosmetics business, and we'll continue to progress that. That's what I would say.

Our next question comes from Sebastian Bray from Berenberg.

I would have 3, please. The first is on the impact of metals pricing for the Talc segment. If I mark-to-market on what I think Elementis produces for nickel and cobalt, this is potentially a $3 million to $4 million tailwind at the EBIT for 2021. Is this correct? And is the company exposed to spot or has it locked in prices? My second question is on the derivative losses in financial costs of about $10 million. What do these refer to? And I'll pause there and come back with the third.

Okay. Thanks a lot, Sebastian. Ralph, do you mind taking those 2?

Yes, I'll take both of them. Sebastian, so on the other minerals, yes, I mean, last -- in 2020, our revenue from other minerals was down slightly because of low nickel pricing and some lower shipments. I would say it remains at around about 10% of Talc earnings, under 2% of group earnings. So it really isn't a big factor. We have got sort of committed supplies in 2021. And as you infer, the stronger pricing we've seen recently should provide something of an improvement for us in '21. But as I said, it remains around 10% of -- or just under 10% of Talc earnings. On the mark-to-market valuation of derivatives, I mean, Sebastian, we've got in place for risk management purposes some derivative financial instruments, which we have to mark-to-market. They're noncash items and the specific instrument we took out in 2019 comes back in 2023. So it's a noncash item that is just reflected in the adjusting items.

That is helpful. And the last question is just on Chromium more generally for the first 2 or 3 months of the year. Have spot prices, as far as you can track these for Chromium chemicals, let's take dichromate in particular, rallied strongly? And what is the type of lag that there usually is between spot and contract? Is it about 3 to 6 months?

Yes. Thanks, Sebastian, for that question. Ralph, doing this a little bit on recall, there certainly is a lag. And in terms of how quickly pricing kicks in and it ultimately depends upon how much chrome ore inventory our competitors will hold relative to ourselves. Our business is contracted up. It's about 60% of it. And so that creates a bit of a lag for us in terms of how quickly our prices will go up, especially -- I think that answers the question, but not sure what's on your mind.

How does -- I guess, the core of the question is, are the prices currently rallying quite nicely?

I would say not quite yet. I think what we would more likely anticipate would be kind of a steady progression as the year unfolds. And that's simply because, to the first question, I answered the global utilization rates just aren't that high right now.

Our next question comes from Andrew Stott from UBS.

I have 3, actually, albeit they're quite short. First one is, can you give an idea of what Q1 looks like year-on-year, both in terms of sales and profitability just to give us a marker for the start to the year? The second question was on Personal Care margin. So looking ahead to this year, you've obviously got the start-up of the AP actives site in India, mid-21 was the slide. Is that going to mean that actually your operational leverage is going to be lower as you absorb the ramp-up costs with that site? And then last question is on cash conversion. So you said you still think you can get to that 90%. I'm just wondering if that is actually at risk this year, though, because there's a couple of things to think about, I guess. You've got a big working capital, Paul, if you assume recovery is pretty robust. And also, you've got this $20 million payment that you've already made to HMRC. As I understand it, you may not get that back. That's on appeal, but it's not a guarantee. So I'd appreciate your thoughts on that.

Andrew, happy to answer those. Ralph, I'll take the first one, if that's okay. And you could speak to the Personal Care margins and the cash conversion. So Andrew, I think what we're seeing in the first quarter is, as we wrote, it's a pretty encouraging start across our businesses. And what I mean when I say that is we're seeing a continuation, I think, of the industrial demand trends of the fourth quarter in Coatings, Talc and Chromium. I think the economy kind of just starts to get on a little bit more solid ground. Having said that, I think we're just a little bit cautious for a couple of reasons: first, kind of the macro point is that we can't quite see how much is demand recovery versus how much is restocking. And I'm pretty confident that a good deal is restocking because in the second and third quarter, even into the fourth quarter, across a number of these businesses as well as Personal Care actually, pretty significantly, Personal Care, there was quite a lot of destocking. So we just have to get a little more line of sight, I think, to what happens there in terms of demand recovery. The second thing is this impact in demand recovery. Obviously, the slow pace of European recovery is a worry. The semiconductor shortages that we're seeing in automotive. The world is starting to figure out that they are not quickly or easily resolved. Obviously, 11%, 12% of our business is automotive-related. And then on Personal Care, this whole question about how quickly social isolation restrictions are lifted. We feel really confident that the Personal Care business takes off once that happens, but it is still an open question about how soon that happens. So first quarter is really encouraging, but I think we're also a little bit cautious to see how this year plays out. We -- ultimately, our feeling has been all along that 2021 will be a transition year. You're going to get some of the recovery back for sure. You're going to get the rest of it in 2022. Ralph, do you want to take the other 2?

Yes. So on Personal Care margins, Andrew, yes, there will be a slight extra cost due to the fact we'll have effected a double running of the India plant over the course of '21. And I think that may mean that in the second half of '21, we might see a slightly improved Personal Care margin versus first half because whilst you've got those extra costs, on the other hand, we should see the cosmetics part of the business with its particularly strong margins coming back more. So there's probably a sort of first half, second half effect on that. But overall, we're confident we can keep our operating margins in Personal Care, broadly speaking, at or around the levels we have accomplished in '19 and '20, maybe slightly lower in 2019. On the cash conversion point, yes, I mean the percentage ratio does move around. You saw a very strong performance last year. I think the wider point I make on cash is that we are expecting an improved level of earnings this year that will drive improved cash flow. We have got, clearly, with some revenue recovery. And bear in mind, we lost something like $100 million with COVID on the revenue side, and that recovery in revenue will require some working capital. We have got the CapEx going to $45 million, $50 million this year. The EU state aid, just to note that, that is an adjusting item. So it weren't included in our cash conversion count, but it obviously is a cash item. Taking all that together, we do expect a leverage reduction in '21. And more broadly, we are still very confident that we can get down to that 1.5 leverage target that we set at the end of 2019. So -- and that's, I think, primarily through earnings recovery. I mean, that's the earnings recovery, driving cash, paying down debt. Clearly, we've been very disciplined on CapEx and on other new capital allocations. So we do expect all the surplus cash from our earnings to drive down our levels of debt.

And Ralph, can I just follow-up on the last point on tax. If the claim is successful, can you get that repayment through this year or is it only going to come from next year?

Well, it's a pay-now-argue-later approach that HMRC have, unfortunately. Our best device at the moment is that it may take some time to go through the appeals. There's a -- we're making an appeal, but we understand there's other appeals as well going on. We understand it's unlikely to be this year, Andrew. I also would like it to be. And unlikely to be.

I think we've got time for one more, if there are any other questions.

I can confirm we have a question come from -- here from Chetan Udeshi from JPMorgan.

A couple of questions from my side. Can you remind us maybe how much was -- or what was the impact from the tariffs on Chinese, the raw material imports on the anti-perspirant business on an annual basis over the last 2 years? And how quickly will that reverse once the Indian plant starts out in second half of this year? And the second question...

I'm sorry. Can you repeat that first question? What is the question about AP actives in China?

I was just asking about the impact from tariffs on raw materials in the AP actives business last year...

Yes. Got it. Yes. Sorry.

Just a reminder of how much of a headwind that was? And how quickly will that reverse once the Indian plants -- sorry, Indian plant starts up later this year? And the second question was it seems like the raw material environment today is pretty inflationary in general, prices going up across the board. How are you thinking about any impact headwind from that across the group?

Okay. I think I can handle it, at least. But Ralph, chime in. On the tariff impact, Chetan, is around $3 million. And as soon as we are up and running and making what we think is going to be about 80% of our volumes in India, that will be mitigated. So I have to come back to you on the exact number for the last 2 years. But in our model, that's what is going to get -- what's going to come out as a result as well as a material reduction in our operational costs. So that starts up middle of this year, and we want to obviously qualify products and ramp that up as fast as possible. In terms of raw materials, we definitely are seeing -- we're definitely seeing inflation levels higher than what we had planned on certain raw materials. And Ralph, you can speak to that. But to get to the heart of the question, in terms of how we're managing it, what we do is monitor very, very, very closely. And we're able to recover those cost -- those unexpected costs via pricing with a view to defending our margins. And I think over time, I would tell you that it's never easy to take price increases. But having been doing this for 5 years, it's gotten, in a sense, easier and easier because the quality of our portfolio has gotten better and better, frankly. And so we monitor that very, very closely, and we respond, I think, very quickly. Ralph, do you want to add some color on the raw materials?

Yes. I mean some of the -- you're right to point this out, Chetan, some of the changes we're seeing like in acrylates and cost, we're seeing double-digit increases overall. And, I would say, Coatings is the most impacted segment at the moment, probably overall seen something like a 5% increase at the moment versus 2020, if you look at the basket of raw materials we have. And I would include in that container costs and freight costs, which are sort of going up mid-single digits at the moment as well. That said, looking at the pricing actions we've either already taken or have in place, we're very confident not only we're going to recover the sort of the dollar million impact of that raw material increase. But also because, as Paul alluded to, our portfolio of products is so strong, we should be able to maintain our sort of margin percentages. So I think that's the approach we're taking. And so far, that seems to be what's sticking.

Okay. Thanks very much for joining us today. I really appreciate it. From the Q&A and obviously, our presentation, it's kind of clear that the environment we're in has been challenging. But the first quarter is really -- is quite encouraging, and we are very, very excited about the new business, the new products and the continual evolution of getting costs out of our business that we can take. So we remain pretty optimistic. Thanks very much, everybody.