Elementis plc (ELM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the 2024 Annual General Meeting of Elementis plc, which I will refer to as the company. Thank you for taking the time to participate in the meeting today. I'm delighted to be able to meet with some of our shareholders in-person. In accordance with Article 65 of the company's Articles of Association, I will preside as the Chair of this meeting. We are conducting this meeting as a hybrid meeting which shareholders are participating either in-person or electronically in accordance with the company's constitution. It's now just after 10 a.m., and as we have a quorum, I declare the meeting duly constituted and open. May I remind you that this is a secure meeting and that this meeting is being recorded. Please ensure that your mobile telephones are turned off so as not to disturb the proceedings of the meeting. There are no planned fire alarm drills expected during the duration of our meeting today. However, if the alarm is raised, and we need to adjourn the meeting, that will be dealt with at that time. I am joined by the other members of your Board. Sitting next to me is Anna Lawrence, Group General Counsel and Company Secretary; your CEO, Paul Waterman; your CFO, Ralph Hewins; Trui Schoolenberg, our Senior Independent Director; Steve Good, who served on the Board for 9.5 years and is not seeking reelection today; Christine Soden, Chair of the Audit Committee and Non-Executive Director for Workforce Engagement; Clement Woon, who will assume the Chair of the Remuneration Committee at the conclusion of this meeting, taking over from Steve Good; Dorothee Deuring; and our newest members to the Board, Maria Ciliberti and Heejae Chae, who are seeking election for the first time today. [ Charlotte Hart ], representing our external auditor, Deloitte, is also attending the meeting and is happy to answer any questions you have specifically for her on the audit of the group financial statements. Members who have not yet done so are invited to submit their questions using the Lumi portal, the link to which has been previously shared, and which was opened for questions at 9:00 this morning. [Operator Instructions] Questions can be submitted until the end of the CEO's presentation, which will follow shortly, and we will answer any questions before progressing to formal matters. A trading update was announced through the stock exchange earlier this morning. I have nothing further to add to that statement. Before we proceed to the formal business of today's meeting, I will first hand over to Paul who'll make a short presentation, after which we will take questions from the floor and via the meeting platform before moving on to the formal business of the meeting. And with that, Paul, over to you.

Thanks, John. Hello, and thank you for joining us today. We published our first quarter update this morning, so I'll cover the key highlights, followed by a summary of the strategic update in the 2023 financial year, including the progress on our 2023 CMD objectives and new financial targets. This morning, we published a trading update for the 3 months ended 31st March 2021. I'm pleased to say that Elementis delivered a good first quarter performance with higher revenue and profit compared to the prior year period and a material improvement in operating margin. Sales in Personal Care were flat on a strong prior year. We saw continued growth in cosmetics, which was offset by a slower start in AP Actives, as we expected, due to phasing of orders in the period. Performance Specialties delivered an improved performance driven by Coatings, where we saw double-digit revenue growth compared to the prior year period. Talc had a challenging quarter due to continued weak demand, which was further exacerbated by a national strike in Finland. This saw closure of ports and railway freight traffic in and out of the country throughout March and resulted in higher logistics costs that reduced sales in the quarter. But overall, good performance and a good start to the 2024 financial year for Elementis. We continue to make progress on our November 2023 Capital Markets Day objectives and are on track to deliver $12 million of cost savings this year, with the remaining $18 million next year. We launched 5 new products and delivered $13 million of new business in the first quarter. Whilst we've not seen a positive step change in the demand environment, we're confident that our self-help initiatives will help us deliver profit growth and margin improvement in line with expectations. As you can see, 2024 financial year has started well, building on a resilient 2023 performance. I won't cover the last year's results, but I would like to highlight the strategic progress we made in 2023. On innovation, we launched 12 new products, and our revenues from innovation sales continued to grow between 14% of total revenue in 2023. In addition, we worked on 28 joint development projects to key customers where we collaborated with them to solve their toughest formulation challenges. Our continued focus on innovation is driving growth. We delivered $51 million of new business, with over half coming from the 7 growth platforms that we discussed at our Capital Markets Day. Our Personal Care business in Asia grew 10% as we benefited from multiyear investment in sales and technology capabilities in this region. While we are growing, we're also improving our sustainability profile. In 2023, we generated 68% of our revenues from products classified as natural or naturally derived. Our third strategic pillar is efficiency. We delivered $10 million of cost efficiency in 2023. This completed the $25 million cost efficiency program that we announced in 2021. Last November, at our Capital Markets Day, we announced 2 new efficiency programs that will deliver $30 million of savings by 2025. A key enabler of this delivery is our Fit for the Future global restructuring, which will simplify and streamline Elementis. Finally, we completed a multiyear project to consolidate our ERP platforms to a single JD Edwards enterprise resource planning system, which will create opportunities for further efficiency and process effectiveness. In 2023, we also made good progress against our three-pillar sustainability framework. On the environment, we continue to make progress on our greenhouse gas emission reduction targets. Our Scope 1 and 2 emissions declined by 7% in 2023. For the first time, we verified our Scope 3 emissions. We met 2 of 4 2030 targets as water usage and Scope 1 and 2 emissions reduction hit our goal. However, we have more work to do on waste and energy reduction. In addition, we're on track to publish our science-based emission target by early 2025. On people, I'm pleased to report that our senior leadership gender diversity increased 37%, a 10 percentage point increase versus 2020. In the 2023 FTSE Women Leaders Review, Elementis was ranked #1 for female representation in the chemical sector. The Fit for the Future global restructuring I mentioned earlier impacts around 25% of functional roles as we eliminate and shift roles to implement our new organization structure. We will execute ongoing communication and engagement initiatives to support our employees through the change. Last year, voluntary attrition reduced to 9% from 11% in the prior year. We also took action to further improve our responsible business practices. We aligned our supply chain standards to a new business partner code of conduct. We implemented a new third-party risk screening platform for both suppliers and customers to mitigate compliance risks. And to ensure that Elementis' culture of compliance is strengthened, we held our first global ethics and compliance week focused on empowering the engagement of our employees across the business. Finally, we were pleased to receive external recognition for our progress as Elementis has received an EcoVadis Gold rating for the third consecutive year. Moving on to our capital allocation priorities. At the start of 2023, we completed the sale of our Chromium business for $170 million. Proceeds from the sale helped us reduce our leverage to 1.4x net debt to EBITDA at the end of 2023 from 2.6x at the start of the year. Our balance sheet is now in a much better position, and we will continue to focus on further deleveraging alongside a disciplined capital allocation approach. Going forward, we expect annual CapEx to be around $40 million annually, focusing on growth and productivity projects. In March, we set out our new dividend policy focused on a sustainable and progressive dividend. We reinstated the ordinary dividend, recommending a final 2023 dividend of $0.021 per share. Going forward, our intention is to pay a progressive ordinary dividend with a payout ratio of around 30% of adjusted earnings. As our debt reduces, we see scope for future additional returns of surplus capital by appropriate mechanisms. As I mentioned last November, we announced 2 new efficiency programs that will deliver $30 million of savings by 2025. First, the Fit for the Future organizational restructuring, which involves elimination of 190 roles, mainly in the U.S.A. and Western Europe, the closure of our Cologne, Germany office and the outsourcing of our finance transactional processes to India; finally, we'll open a new technology and service center in the third quarter in Porto, Portugal. We're on track to create a simpler, streamlined Elementis while strengthening the capabilities required to successfully implement our strategy. $7 million of cost savings will be achieved this year with an additional $13 million to be delivered in 2025. The second key area is procurement and supply chain efficiencies that will deliver an additional $10 million of savings by 2025. This will be split evenly, $5 million this year and $5 million next year. The recently announced consolidation of our AP Actives plant is an important enabler of this. However, we'll also continue to expand our portfolio of continuous improvement projects. In addition, in procurement, the digitizing and standardizing RFI and RFQ processes will underpin further progress. Driving ongoing efficiency improvement is an element of strength, and we'll continue to leverage it for the next few years. Alongside the efficiency programs, we also announced a $90 million above-market revenue growth by 2026. This will be achieved through 7 growth platforms where we'll drive further new product innovation and secure material new business. At the end of 2023, we were working on 28 joint customer development projects. We generated $51 million of new business, over half of which came from these growth platforms. Going forward, we'll build on this momentum by launching over 50 products and generating $145 million of new business by 2026. Now please note, this is the gross potential that will underpin delivery of $90 million of above-market revenue growth that we're targeting by 2026. It's the combination of revenue growth and efficiency delivery that will ensure we deliver our 2026 financial targets. First, our operating profit margin will improve from 15% in 2023 to 19%-plus in 2026. We've assumed 100% of the delivery is based on self-help with no change in underlying demand. Should the demand improve, we believe our operating profit margin will exceed 19%. Second, our average 3-year operating cash conversion will exceed 90%. The latest 3-year average was 77%. However, in 2023, we delivered a cash conversion of 106%, and we expect to make further progress going forward. And third, our return on capital employed will exceed 20%, up from 15% in 2023. While earnings growth will support this improvement, we'll also continue to rigorously evaluate our portfolio to ensure successful delivery our programs. Thank you for your attention. Back to you, John.

Thanks very much, Paul. I will now proceed to the formal business of the meeting. The notice which contained this meeting and set out the resolutions to be proposed was made available to all persons entitled to receive it on 26th of March last. I'll take the notice as read. As Chair of the meeting, I will read questions submitted to the Lumi portal or pass to me via the secretarial team aloud and either answer the question myself or pass it to other members of the Board, as appropriate. As no questions have been submitted, we will now proceed to vote on the resolutions, which I will formally propose to the meeting. The full text of each of the resolutions is set out in the notice. Voting on each of the resolutions will be conducted on resolutions 1 to 16, inclusive, are proposed as ordinary resolutions and require a simple majority to be passed. Details of these resolutions are set out in the notice. I would take those details as read. Resolutions 17 to 20, inclusive, are proposed as special resolutions and require a majority of not less than 75% to vote in favor of the resolution. Details of these resolutions are set out in the notice, and I'll take those details as read. I would like to remind you that the Board unanimously supports each resolution proposed and recommends a vote in favor of all. It also will be added to the votes received prior to the meeting. I now invite all members who have not yet voted to do so, the poll will remain open until 5 minutes after the close of this meeting. For those using the meeting platform, please submit your votes via the electronic platform. Once you have voted, the option will change color and a confirmation message will appear to indicate your vote has been cast and received. Please note that there is no submit button. If you make a mistake or wish to change your vote, simply select the correct choice. If you wish to cancel your vote, select the cancer button. You'll be able to do this at any time whilst the poll remains open. For those in the room, poll cards will be made available to you prior to joining the meeting. If you do not have a poll card, please raise your hand and a poll card will be brought to you now. As set out in the notice, the results of the voting will be announced through a regulatory information service and will also be published on the company's website as soon as recently possible. That concludes the business of this meeting of the company, and I therefore declare the 2024 AGM closed. Thank you for participating in today's meeting.