Elementis plc (ELM) Earnings Call Transcript & Summary

Hello, and welcome to the Elementis Update Conference Call. My name is Alex, and I'll be coordinating the call today [Operator Instructions] I'll now hand over to your host, Paul Waterman, CEO, to begin. Paul, please go ahead.

Thanks very much, Alex. Good afternoon, everyone, and thank you for joining the call. As you know, we launched a strategic review of the Chromium business in April this year. Our objective was to determine whether the full potential Chromium could best be delivered as part of Elementis or alternatively by way of a partial or full divestment. We evaluated all the options against what was in the best interest of our stakeholders, including our employees, customers and shareholders. The review took 6 months, and it's concluded today with the announcement that we've agreed to sell the Chromium business to the Yildirim Group. Yildirim is a large global industrial group with substantial mining interest, including a strong position in Chromium. We're confident they'll take the business forward in the best interest of both customers and employees. The transaction crystallizes an enterprise value for the Chromium business of $170 million, which is 7.3x EBITDA delivered in the 12 months to the 30th of June of this year. The sale is subject to U.S. regulatory approval, which we expect to receive before the end of the first quarter of next year. In a moment, Ralph will take you through the details of the transaction and its financial impact. But the transaction is important beyond the financial impact, it has a materially positive effect on the shape of Elementis going forward. For the past 3 years, our strategy has been to drive innovation, growth and efficiency in the specialty chemical space. We focused on launching advantaged, high-value new products to drive revenue growth and margin expansion. While Chromium is a good business with a strong market position, it increasingly sat outside of the strategic framework. Today's sale, therefore, completes our transition into a pure specialty chemical company, but also significantly improves our ESG profile. In a moment, I'll describe what that means for Elementis in more detail, but first, I'll ask Ralph to take you through the transaction details. Ralph?

Thanks very much indeed, Paul. So just turning to the slide headed transaction details. As Paul just indicated, the transaction establishes an enterprise value of $170 million for the Chromium business or 7.3x the EBITDA in the 12 months to the 30th of June. A total of $43 million of liabilities are being transferred to the new owner, which puts an equity value on the business of $127 million. We've agreed with the buyer to transfer value of $35 million of environmental liabilities that incorporate both the $21.6 million of liabilities that were disclosed in our '21 annual report as well as additional potential environmental considerations that enable us to ensure a substantially clean exit from Chromium in the U.S. We also transferred around $3 million of U.S. pension liabilities and approximately $5 million of other operational liabilities, mainly associated with the Castle Hayne site. Again, our intention here is to ensure a clean break. There will be approximately $8 million of transaction costs. This means that our net cash proceeds from the sale will be $119 million, subject to customary working capital and other closing adjustments. The transaction will result in a gain on disposal, which gives rise to a tax charge of around $12 million, mainly reflecting the carrying value of the Chromium business with the U.S. tax. The cash tax will be payable in 2023. There are 2 other items I want to mention. First is that around $7 million of costs for services that were previously provided and allocated to the Chromium business will now revert to the Group. These mainly involve services such as IT, HR, procurement and supply chain systems and services. These costs will be reduced as quickly as possible, and I would expect the majority of them to be phased out by the end of full year in 2023. Second, I want to flag that the assets and liabilities of the former U.K. Chromium business are excluded from the sale. These comprise the Eaglescliffe site in County Durham, where operations ceased in 2009. Remediation work at this 480-acre site is now almost complete, and the focus is shifting to potential regeneration opportunities where we're exploring a number of options. Our current view is that the modest annual maintenance costs at Eaglescliffe, as well as the completion of the remediation are fully covered by a $29 million provision included in the $34.8 million of central cost provisions disclosed in our 2021 annual report. Turning to the next slide. If I could turn now to the impact of the transaction on the financial shape of the Group. First, the cash proceeds will be used to reduce our net debt in line with the capital allocation priorities that we set out previously. The table on this slide shows pro forma numbers after reflecting the Chromium transaction, looking at both the 2021 full year numbers and at the 12 months to the end of June this year. As you can see, the Chromium numbers are actually very similar over both of these 12-month periods, sales of $171 million and adjusted operating profit of $14 million. Backing these Chromium numbers out of the overall Group numbers for the 2 periods shows that the transaction would have improved our margins by around 1 percentage point. That's 0.9% in '21 and 1.2% in the 12-months to the end of June this year. So pro forma, excluding Chromium, the Group margin would have been 13.0% in '21 and 14.2% in the 12-months to 30th of June this year. As well as offering improved returns, the portfolio, excluding Chromium is demonstrating strong revenue growth. As we pointed out in the announcement today, in the 12-months to the 30th of June this year, the portfolio comprising Personal Care, Coatings and Talc delivered underlying revenue growth of 14%. Looking at the effect of the transaction on our net debt and leverage ratio, again, for both '21 and for the 12-months to 30th of June '22, the pro forma numbers for both of these periods show a reduction in our net debt to EBITDA of 0.4x. At the end of 2021, pro forma leverage would have been 2.2x rather than the 2.6x we reported and at 30th of June this year, it would have been 2.0x rather than the 2.4x reported. So the transaction takes us significantly closer to our leverage target of 1.5x EBITDA. I'll now pass you back to Paul to discuss the shape of the Group going forward.

Thank you, Ralph. Selling Chromium will complete Elementis' transition into a pure specialty chemical business that's well positioned to deliver higher quality earnings with faster growth, improved margins and reduced exposure to commodity cycles. The numbers Ralph showed a moment ago demonstrate progress towards that shape. Elementis will remain a cash-generative business, but will no longer carry the risks to future CapEx and cash flow associated with any legacy environmental issues in the U.S. Chromium business. The proceeds from the sale further strengthened our balance sheet, taking our leverage significantly closer to where we want it to be, making debt no longer an issue of concern. And something else that is important; without Chromium, Elementis becomes a more sustainable business, which is key to our long-term success. Chromium accounted for 73% of our greenhouse gas emissions and limiting those brings Elementis closer towards the sustainable future we're aiming for. Since 2019, our activities have been aligned with our strategy of innovation, growth and efficiency. And we've continued to build on the advantaged competitive positions established across our portfolio. Our Personal Care, Coatings and Talc businesses have developed a strong pipeline of new products, new business opportunities and key account relationships that will support continued organic sales growth and margin expansion. In May of next year, we'll hold a Capital Markets Day where we'll provide an update on our go-forward strategy. In closing, we strongly believe this transaction is in the best interest of all Elementis stakeholders and represents a major step forward towards achieving our financial ambitions and generating attractive shareholder value as a pure specialty chemical business. Thank you. We're now happy to take your questions.

[Operator Instructions] Our first question for today comes from Kevin Fogarty from Numis.

I just want to -- if I could ask a question really on strategic direction. Obviously it's been an ambition for you -- for some people, I guess, to complete the sale of Chromium. Now that that is -- has been done or at least is imminent, what do you think it does for you as a management team in terms of delivering your ambitions to get the business to 17% adjusted EBIT margin, which you've outlined previously? And just a second sort of follow-on, I guess, in terms of the delivery of sort of consistent organic growth across the Group, how do you feel about that sort of trajectory now in the next Chromium environment?

Thanks, Kevin. Look, I think in terms of strategic direction, it is a bit of what I said in the sense that you have a very, very focused specialty chemicals business. The margin profile is better. I think the ability for organic growth to come through is stronger actually because Chromium was not a growth business, and of course the cyclicality and the environmental profile. But from a practical standpoint, obviously, getting the balance sheet sorted means that there's a faster return to dividend than it would have otherwise been. And yes, I mean, I just think that we see really good organic growth opportunities that come through much more easily, given that the shape of the Group is going to be, I think, more streamlined, frankly, than what it was. So it sort of is positive across many, many dimensions, frankly. And we're pleased to frank -- to be in that position. Ralph, I don't know if there's anything you want to add.

Yes, I think in terms of the overall operating margin, it both enhances our average sort of operating margin for the Group, but also what Chromium has had good years and has had less good years. And it takes away that volatility as well from the margin profile, Kevin. So I think you get the benefit of both better quality margins, but also more stable operating margins. And we certainly see our ability to make progress towards that 17% target very much intact.

And kind of just a little bit more. The 50, we've launched 15 to 20 new products a year for the past few years, generate about $50 million in new business, made good progress in the whole global key accounts space and all of that -- all of that has actually come from our specialties chemicals businesses. So it's that kind of momentum that I think we're going to be able to build on.

Our next question comes from David Farrell from Jefferies.

Congratulations on the transaction. Just kind of following on a little bit from Kevin's first question around strategic direction. Obviously transaction like this takes a lot of management time. I just wondered kind of what this meant now for perhaps the Talc business going forward? Is there kind of work that you can do there that you've got more time to do to try and get those margins back to where they need to be? And then kind of 2, kind of more housekeeping questions. Firstly, you may talk through now where you're seeing the interest charge for the next year. Obviously this proceeds will go towards paying down the debt. So where do you think kind of interest will land next year? And then specifically what are the U.S. regulatory approvals that need to be achieved?

I'll take the front end of that question and margins, Ralph, you could take the second part. I think -- certainly, we're going to have more time. We've invested quite a bit of time to eventuate this transaction. I think in terms of the Talc situation, I think that the operating leverage on Talc has been reduced pretty substantially due to volumes. So if you look at, obviously, the Russia-Ukraine situation, we lost business over there for sure. But I think the other knock-on effect has been energy prices have just skyrocketed. And we've needed to recover those via pricing. And obviously there's always a lag effect to doing that. The other thing that we see in Europe because Talc is predominantly a European-based business, auto is down 30% over the past 3 years. That's a massive decline. So I think the macroeconomic factors are important in terms of how they impact the business. But along the way, I mean, we've generated $25 million in revenue synergies, which is beyond the target we committed. We've been seeing significant synergy with our Coatings business, and we continue to close quite a lot of new business even in the face of such a pretty dire macro environment. So we think that the margin structure, the margins will turn around on Talc. But we're going to -- I think we're going to have to get past some pretty difficult macroeconomic conditions first for that to happen. Ralph, do you want to take the second part of that question?

Yes. In terms of -- Dave, in terms of the interest charge, I mean, if you take the headline number, we're quoting 119 net cash proceeds and take off the tax, the cash tax arise in our disposal. You get down to just over $100 million, 100 and something like that. If you took a -- we'll probably pay down principally the RCF elements of our debt profile. I think if you took the sort of site in shuffle around 4% on that, that will give you the approximate impact on the interest expense for 2023. In terms of your question on the U.S. regulatory approvals, our diligence on this, we think that they should be pretty rapid. The regulatory environment in terms of merger control, we think should result in a fairly quick process through [indiscernible]. So not anticipating any significant obstacles in terms of regulatory approvals.

Our next question comes from Chetan Udeshi from JPMorgan.

Just following on to the -- following on with the previous question, maybe this is for Ralph. Ralph, can you pay down your debt immediately because I thought your debt maturity was something like 2 to 4 years out? So it feels like you think you have the ability to pay down debt and that will reduce -- that will bring down the interest costs already next year. Is that a right understanding? And the second question more, again, probably for Ralph. Is EBITDA a good proxy for or maybe EBIT a good proxy for free cash flow of Chromium on an annual basis, roughly?

Yes. So on the second question first, I think it's not a bad proxy. We have typically around $10 million of depreciation and $10 million of CapEx. So that's not a bad proxy. In terms of your question about the debt, yes, we're going to be able to pay down the net debt, as I said, to the earlier answer, we've got about -- we've got an RCF and we got a term-loan, we'll pay down an element of the RCF. We've got a facility of $375 million of the RCF, which is comprised of around $60 million in -- with a term to '24 and $315 million to '25. We're drawn on the RCF above $100 million at the moment. So that's the first place we would go to pay down the debt. But yes, it is very much the case, we can pay it off, yes.

And maybe while we have you guys on the call, do you mind sharing any latest trends that you might be seeing in terms of business? Any major changes from the last time we might have spoken?

I mean, obviously, the call really isn't for that. But I think that the way the business is performing isn't different than what we've communicated previously, and we'll provide an update early in the New Year.

[Operator Instructions] Our next question comes from Alycia Samsudin from Berenberg.

I apologize if you've answered this question already. I was slightly late to join. I'm just wondering about whether you would consider buying back stock? Is that something that you would consider?

Yes. Alycia, I think that the priority is to pay down debt and get the balance sheet where we want it to be. That's what we've communicated, and that's what we continue to believe.

We have no further questions for today. So I'll hand back to Paul Waterman for any further remarks.

Thanks, Alex. Look, thanks, everybody for attending, and I look forward to speaking to you all soon.

Thank you for joining today's call. You may now disconnect your lines.