Elementis plc (ELM) Earnings Call Transcript & Summary

Good morning, and thank you for taking the time to join us today. It's great to be here. And for those of you who don't know me, I'm Luc van Ravenstein, I took over as CEO of Elementis at the end of April. I know this business well. It's been part of my life for the last 13 years and I've run both divisions and I'm passionate about this business and confident in the value we can create for all our stakeholders. In terms of the agenda, I will start with the highlights and then will hand over to Ralph to cover the financials and segment performance. I'll then take you through to our plans for the future and then we can move on to some Q&A. Starting with the overview of H1. We delivered strong financial performance despite a soft demand environment and we're on track to deliver full year expectations. We increased profits and margins. And an important milestone in the period was the sale of the Talc business, which we completed in May. And this helped us to accelerate the delivery of our CMD targets a year ahead of plan. And lastly, I'm excited to announce the launch of our new Elevate Elementis strategy and medium-term financial targets that will take Elementis to the next level and more on that later. So turning to the first half financials on Slide 5. Revenues were resilient at $308 million. Operating profit was up 6% and margins increased to 21% and these margins are already sector leading. Adjusted earnings per share increased 19% and we have continued to delever with net debt to EBITDA at 0.9x. So a very strong balance sheet to support our growth and returns. And we have declared an interim dividend of $0.013 per share, up 18% from last year. My first priority in the new job was to get the Talc sale done and in May we announced the simultaneous signing and completion of the sale to IMI Fabi for $121 million with cash proceeds of $55 million and we were delighted. I mean it was a clean break with all assets and liabilities fully transferred to IMI allowing us to move on and look at the future. We also started our first share buyback program of $50 million using the net proceeds. With the Talc business sold, we have accelerated the delivery of our 2026 financial targets as you can see here. Our operating margin is currently 21% compared to our target of 19% plus. On operating cash conversion, we're currently at 94% compared to our 90% target. And lastly, on ROCE, we're currently delivering 28%. Now these financials put us among the top of our peer group and that's a fantastic basis to build on. Let me now hand you over to Ralph to cover the highlights from the first half.

Thanks very much, Luc, and good morning, everyone. Before I cover the financials, I wanted to touch on our sustainability progress. On environment, I'm delighted to share that following the sale of the Chromium and Talc businesses, our carbon intensity has reduced significantly. Our Scope 1 and 2 greenhouse gas emissions intensity has reduced by 70% over the last 6 years. We were pleased to have had our science-based targets validated for Scope 1, 2 and 3 in the first half and we're committed to reducing Scope 1 and 2 emissions by 59% by 2034 and Scope 3 emissions by 35% over this time frame. We're making good progress towards our target of achieving 0 greenhouse gas emissions by 2050. On people, our Fit for the Future restructuring program has completed whilst employee engagement has improved, a positive result given all the changes in the business. And finally, moving on to safety. We're committed to becoming a 0 injury business and we continue to invest in building a strong proactive safety culture. Regrettably, during the first half of the year, we had 3 recordable incidents compared to 1 last year. As a result of this, we doubled the number of audits and inspections across our sites to reinforce safe behaviors and identify improvement opportunities. Moving on to the financials and starting with group revenue. In a soft demand environment, revenue was down 1% on a constant currency basis to $308 million. FX headwinds were approximately $2 million and volumes were down $2 million with Coatings down 6% and Personal Care up 4%. Price effects were positive and we were up $5 million. Adverse mix impact was $7 million. This was partly related to product mix in Cosmetics whilst in Coatings there was an impact from lower demand from industrial and construction applications. Moving on to group operating profit. This rose by 6% on a reported basis or 7% on a constant currency basis to $65 million driven by self-help and pricing actions. The price/mix impact net of inflation was $4 million and we delivered $8 million of cost savings in the period and we're on track to achieve the targeted $12 million cost savings this year, part of the $30 million cost program we announced with the 2023 CMD financial targets and I'll cover this in more detail later. Turning next to our segmental performance and starting with Personal Care. Sales were ahead 2% on a constant currency basis to $116 million driven by growth in both our Cosmetics and AP Actives businesses. Adjusted operating profit was up 19% on a constant currency basis to $40 million reflecting improved volumes and pricing alongside cost savings, including the impact of the closure of the Middletown AP Actives plant in U.S.A. We also saw around $2 million of oneoff benefits related to higher volumes and favorable cost absorption. As a result, the adjusted operating profit margin was up at 34% compared to 29% last year, a 460 basis points improvement. In terms of operational highlights from our Personal Care business. In color cosmetics, we launched 2 new hectorite products based on a new gel technology that is 100% natural and it gives formulators more flexibility due to its efficacy and stability benefits. Overall demand was weaker in color cosmetics in Asia in the first half due to the impact of tariffs. We do continue to see a growing demand for natural products and skinification. In skin care, the biggest trend remains sustainability and replacing nonbiodegradable polymers with natural thickeners. That's driving sales in the HYDROCLAY range, which is up more than 40% compared to last year. During the second half, we expect to launch our new natural film former. Finally, on AP Actives, a significant highlight for the period was the launch of our non-metal sweat control antiperspirant and deodorant active Deoluxe at the In-cosmetics Global trade fair in Amsterdam in April. Right after the launch, we received a tremendous amount of sample requests and there's a lot of excitement about this product. Lastly, our high-efficacy AP Actives range is up 13% and now represents 50% of AP actives. Moving next to our Coatings business. We delivered a resilient performance in a soft global demand environment with revenues down 4% on a constant currency basis to $192 million. We had some operating challenges at our St. Louis site in the U.S. that affected volumes in the first half. We are now addressing these. Adjusted operating profit and margins were $35 million and 18.2%, respectively. In terms of highlights starting with architectural coatings, we developed a new thickener for ultra-low VOC paints. This was developed together with a key customer and we're now rolling it out globally. Our bio-based and powdered NiSAT range is performing well. We're capturing the demand for sustainable products there. In industrial coatings while the automotive market remains weak, we are seeing continued strong demand in marine and protective coatings. We launched THIXATROL 5050W, our latest innovation for waterborne automotive coatings, which has seen a lot of traction with Chinese EV manufacturers. And it's not just in coatings, our products perform well. We have other exciting adjacencies, which Luc will talk about later. Turning next to our cash flow profile. Working capital outflow was as usual reflecting normal seasonality alongside some modest stock builds to support new business gains. The CapEx run rate is slightly behind last year. We currently expect CapEx to be around $20 million for the full year. That's around 3% of sales. And as Luc mentioned, the sale of the Talc business generated $53 million. Of this amount, we used $8 million until the end of June to purchase shares as part of our first share buyback program. Net cash flow was $32 million. This cash flow has helped continue our net debt and leverage track record, which you can see here. From the difficult times in 2020 when our leverage was 3.2x, we really have repaired the balance sheet and significantly strengthened our position. Turning now to cost savings. As indicated in our March results, the delivery of our targeted $30 million annual cost savings is continuing to progress faster than expected. Having delivered $8 million of cost savings in the first half, a large part of which relates to the completion of our Fit for the Future restructuring program, we're on track to deliver the targeted final $12 million of cost savings for the full year. We remain focused on improving our operational performance and efficiency levels and this will continue to be a feature of the business as Luc will discuss shortly. Moving on to our capital allocation priorities. Our capital intensity has reduced significantly and we currently expect to spend around 3% to 4% of sales annually over the medium term from around 6% historically. Our focus will be on investing in growth and productivity. We have options for bolt-on acquisitions whilst all the time taking a disciplined approach to maintaining balance sheet strength. On dividends, our policy is to pursue a payout ratio of around 30% of adjusted earnings and our strong cash generation gives us future shareholder return optionality. This is in the context of preserving balance sheet strength. We will look to maintain leverage over time at around 1x net debt to EBITDA. And lastly, on pensions, I'm pleased to share that our U.K. pension scheme is well funded and the assets are now significantly derisked. So with that, let me hand back to Luc to cover our strategic update and introduce you to our Elevate Elementis agenda.

Thank you, Ralph. This is a very exciting time for Elementis. We're at an inflection point here. We are ready to elevate Elementis. Let me begin by introducing you to the new Elementis. With Talc and Chromium sold, which were both quite commoditized and capital-intensive businesses, we're now a pure-play specialty additives leader in large and growing markets and that's a great place to be in because additives are a small part of formulations, but are critical to performance so think high margins. And Elementis has a unique position today with 3 winning differentiators: rheology, hectorite and formulation solutions. We'll talk more about these 3 advantages that make our business really stand out. So this is the new Elementis. We've now got the portfolio we need and we're ready for growth. I've been at Elementis long enough to know what makes this company really special, but also some of the challenges that have been holding us back, and we have a big opportunity right here in front of us. And this is not about venturing into businesses that we don't know about. This is about focusing on the things that make us really special and doing them really well and our plan is not complicated. We have 3 simple strategic priorities. First, in terms of top line growth, we haven't grown fast enough and of course markets have been challenging lately, but the distractions in Talc haven't helped. So my first priority is to accelerate growth. Secondly, our service delivery as a specialty additive supplier has to be topnotch to win new business and win it faster and today we're good, but we can do better. We want to be best-in-class. We want to be the first choice for our customers. And finally, we have an opportunity to simplify and streamline the way we work. We're building a simpler and leaner Elementis and delivering on those 3 priorities will drive value creation. And our new ambitions are mid-single-digit growth through the cycle, adjusted operating profit margins of 23% plus, 3-year operating cash conversion greater than 90% and ROCE greater than 30%. And the team and I are focused on delivering and executing on this agenda. I'm going to be spending most of my time today talking about growth and this growth will come from the areas that make Elementis truly special, our winning differentiators. Starting with hectorite; it’s natural, very pure and it's unique. It's used in many personal care and coatings formulations because it delivers superior rheology. And we've grown hectorite nicely over the last years. As you can see here, it's around 1/4 of our sales today and a higher proportion of our margin. Next, rheology. We have the broadest portfolio in the industry. Rheology sales, including hectorite, are about 2/3 of our business today and this is what makes formulations work. It stabilizes ingredients in a paint can. It also makes it flow from the brush and it builds a network that's needed to cover a wall. And here, Elementis is the global leader. Finally, formulation solutions. This is our expertise. We've built it up over years and this is everything we do. It's about how we deliver value to our customers day in, day out. Now by focusing on these 3 differentiators, we will deliver mid-single-digit revenue through the cycle. I'm going to look at each of them in turn now. Starting with hectorite. It has so many benefits. It delivers premium flow for coatings, it delivers a luxurious skin feel for cosmetics and it is natural. So it aligns perfectly with sustainability trends and we own the world's only high-grade mine giving us a unique competitive advantage. But this is not just about an amazing asset. Over the years we've developed the value chain for our plants, our labs and with our customers who can in turn offer consumers exciting new products. And our growth from hectorite actually had been good mid- to high single digit, but we can do much more here and let me tell you how. First, we're driving deeper penetration into Personal Care and Coatings. Hectorite can replace other rheology modifiers like synthetics for example in skin care, it's more efficient and natural. I'll give you a little example of that shortly. Second, we're moving up the value chain. We're developing preformulated hectorite solutions that can offer our customers easier-to-use products. So we're building 3-in-1 systems that combine rheology control with other functional additives. We've started this, but we're going to do much more of this. And finally, hectorite's unique properties opens doors well beyond personal care and coatings and some exciting examples are in replacing PFAS or forever chemicals in powder coatings or improving the efficiency of fire retardants. We're just scratching the surface with hectorite here. So we're doubling down on hectorite. This is a true gem in our portfolio and a massive opportunity and we are confident that hectorite will deliver double-digit growth through the cycle. Now as I mentioned, Elementis is global leader in rheology and with operations on every continent, we are well positioned to serve customers worldwide and our teams have decades of experience here and that goes well beyond hectorite. Anybody having a rheology issue, whether it's L'Oréal or Sherwin-Williams, they will come to Elementis. And our strategy to grow rheology is clear and is focused. First, we'll gain market share regionally by leveraging our global presence and that's a big opportunity not least in the current trade environment. Just to give you an example, in Asia where we today have relatively small market share, we have a great manufacturing setup and actually today we're expanding our site in Anji, China with local demand increasing. But we also want to expand into adjacent markets. Today, we mostly serve personal care and coatings, but our technologies are a great fit for, for example, agrochemicals, construction, other large markets. There's about $4 billion of white space in the rheology market out there and we're going to go after it. So this is very exciting. Okay. Slide 26, Formulation Solutions. This is about how we translate our expertise into tailored solutions for our customers. We don't just sell additives. Our teams develop paint concepts and personal care formulations that can readily be adopted by our customers. And paints and cosmetic formulations are continuously changing because of regulation, sustainability or performance. And these are complex systems. There are millions of different ones out there. So for us, having this expertise is a huge enabler for growth, and we want to do more of this. So how are we going to do this? First, innovation. We will be scaling up our R&D investment from about 2% to 3% of sales. And we're looking for fast delivery and high-impact projects. We're building a new applications lab and dedicated hectorite center of excellence in Portugal. Our goal is to grow innovation-driven sales from 15% to 20%. And these innovation sales, on average, generate margins that are about 10% above the rest. On bolt-on M&A, for me, this is about looking for technologies that would be a great fit in our toolbox, I think complementary additives that we can plug into our hectorite formulations or natural synthetic rheology. But we're highly disciplined and selective here, though. Our growth does not depend on M&A. Finally, we want to further enhance our customer intimacy. We want to call on more customers directly, also the smaller and local champions. This is where we can bring a lot of value and fast. But we also learn a lot. Let me bring this to life with a little example. This key sun care customer was looking to replace synthetic thickeners. And because of our deep understanding of rheology and how to formulate sun care products, we developed a new hectorite-based formulation with excellent UV protection. And it also gives a great sensory feel. This is a big success. It was launched recently, and we've brought some bottles for you today to take on your vacation. Try it out. It feels great. All right. And to make the most of this growth agenda that we just discussed, we need to be the best supplier to our customers. We want to be best-in-class in terms of service levels. We're a premium additive supplier. So that's what our customers expect from us, right? Getting there is not rocket science. The way I look at this is about mindset. It's about attention to detail. This is not a volume business. This is a value business. And we have an opportunity here in front of us to improve our on-time and full performance. We're about 20% below best-in-class, and I know we can get there. And secondly, we have a big opportunity to debottlenecking one of our biggest sites, actually St. Louis, where we make organoclays. There's a 30% opportunity by unlocking the capacity. That's a big upside. We've actually been dealing with some backlogs there. And I've made some leadership changes recently and brought back some experience, so we're seeing the first results. But in the end, what all of this is about, it's about customer focus. And this has to be ingrained in each and every Elementis employee. And in some areas, we might have lost that a little bit over the last years. It's not just for colleagues that are in sales or in customer service. For us, as a leadership team or if you're in HR or IT, how do our decisions and our actions, how do they impact and help our customers. And I've built relationship with customers across the business over the years, and I will continue to foster them clearly. So what we're doing here will bring us closer to our customers and reinforce our position as their trusted partner of choice. And this is a mindset thing, which brings me to the next topic. So we just discussed how we're going to deliver sustainable growth, but there's also a significant opportunity to simplify Elementis, make it a leader company. We've identified an additional $10 million of cost savings to be delivered over the remainder of this year and next. And this amount is net of the increased R&D spend I just discussed. It's really important to execute this, certainly given the challenging demand environment we're in. And these savings will come from 2 areas. First, on overheads. We're streamlining our cost base by creating a flatter but also more efficient culture -- structure, I should say. And also, we're eliminating stranded costs associated with the Talc business. We'll be consolidating and reducing support offices and renegotiating tolling agreements. And the team and I have started this. For example, we're saving $1 million starting this year on offices. We're taking things out like IT applications that we really didn't need another $1 million of savings. So this is important. But beyond cost savings, real priority for me is to make Elementis a more dynamic and nimble company. That means stopping activities that have no clear value, but also about delegating decisions to the front line. If a plant manager orders a pump, I don't want that plant manager to have to go through all kinds of approval processes with me involved and say, I want that person to order the pump. They'll know it better than me. And like this, we will become a more responsive and frankly, more fun place to work and one that is better positioned to deliver our growth strategy. It's also about smarter working. I don't want salespeople to be running around doing forecasts when AI can do that better. So Elementis will be simpler and leaner and a place more rewarding to work and to do business with. So that's our Elevate Elementis agenda. 3 strategic simple priorities to drive value for all of our stakeholders, not least our shareholders. So that's it. To recap, we've delivered a strong first half. We're on track for the full year. And with the sale of Talc, our CMD targets have been delivered early. And we're now a pure-play specialty additives business. We've set out today our Elevate Elementis agenda. And I want to ask you to come with us on this journey. We have a plan, and we're very focused on delivering. And I'll keep you updated on our progress as we take the business to the next level. Thank you so much for listening. And with that said, Ralph and I will be happy to take your questions. Thank you. We'll hand out the microphones, if you don't mind introducing yourself, Kevin.

So Kevin Fogarty from Deutsche Numis. If I could kick off with 2, please. And just to, I guess, add some sort of credibility to the targets outlined today on the sort of growth target, could you give us some snapshot of kind of how parts of the portfolio have historically grown to sort of, I guess, sort of give some believability to the objective that you've outlined today? And does that objective require any more kind of rationalization within the portfolio? And secondly, just in terms of the margin objective outlined today, again, could you sort of help us a little bit of a snapshot as to how much of the portfolio is kind of at or above that that objective and maybe a sense of the R&D resource that now is kind of supporting that objective, perhaps sort of given sort of Talc out of the business and any resources that may have been freed up, I guess, to support that?

Thank you for those questions. I'll give it a shot and then might dial a friend if needed. But first of all, on our portfolio, Kevin, and our growth agenda, this is about focus and about focus on what we know we're great at, things that make Elementis special. And to give you an example, hectorite, rheology, we just discussed, hectorite is about 25% of our portfolio, rheology 2/3. We have grown those businesses nicely over the last years, high to mid-single digits. So clearly, this is about focus, and we know we can grow in those areas. In terms of our margin potential and how we're going to deliver that. Well, first of all, we discussed about our cost savings that will be a big benefit to our margin delivery. But also those parts of the portfolio that we are growing, hectorite and also rheology are accretive to our margins, as you can imagine. So that will help the mix. And perhaps thirdly, to your question around R&D and how we're going to grow all of this business. Look, today, we spent only 2% of our revenue in R&D. That's relatively little. And the additional percent, give or take, $6 million that we look to invest in R&D, this will be focused on those areas that we just discussed. I want to build a center of excellence for hectorite. I want people in our R&D teams, but also on the road with customers to be obsessing about where else can I sell this thing that makes Elementis so special. And frankly, today, and you're right, I mean, we've been a little bit distracted, right, by the rest of our portfolio, but Talc, which we just sold. So this is also about pivoting R&D efforts, pivoting capital, but most importantly, pivoting all of our attention to what makes us really, really special. And by doing so, I'm convinced we can deliver what we just discussed.

Vanessa Jeffriess from Jefferies. Just a follow-up on the growth target. I don't want to ask you to give divisional targets, but maybe if you can just talk a bit about the divisional dynamics of growth and particularly how it pertains to hectorite because I guess there's probably a lot more room in Coatings to grow hectorite given it represents a lower proportion.

Thank you, Vanessa, for that question. And indeed, hectorite is a lower part of the Coatings business than it is for Personal Care. In Personal Care, almost half of our business is composed of hectorite or hectorite blends, whereas in Coatings, the penetration is a bit lower. It's perhaps 20% or less. So there's a lot of space to grow in the Coatings business with hectorite. I absolutely agree with that. However, what I would say is that we discussed about 3 angles to grow hectorite, one of them being going forward upward in the value chain, which is about can we add additives to hectorite to our hectorite blends or our gels to move forward to more preformulated products. That's very important for Personal Care. So I do see as we grow hectorite strongly also to the Personal Care products and business to benefit from that significantly. So I do think that Personal Care or actually from a hectorite perspective, might grow a little bit faster than Coatings. But as I said, we're obsessing about where we can grow it. It is also beyond Coatings and Personal Care, right? We've just launched products into, for example, fire retardants that have taken off, and we've received the first orders into construction additives into agrochemicals. So for hectorite, there is a big space beyond the 2 businesses that we just discussed.

And then you've had a really good performance in Coatings given the kind of updates that we've seen from your peers. Can you just let us know how you're thinking about the second half and if you expect that to deteriorate?

Well, the market out there has been pretty tough, right, in Coatings, as you say. And we're happy that we've been pretty resilient in terms of our margins, and we've been holding up pretty well. In terms of the second half, typically, our Coatings business is about 52% first half, 48% second half. We expect that to be a little bit tighter, i.e., closer to 50-50 or 51-49. We do have some nice new business in the pipeline that we're starting to deliver. So -- but this is not about markets. I spend a lot of time with customers, understand what's going on there. They don't necessarily see the market to recover very quickly, but we do have some nice new business in the pipeline and do see a resilient second half delivery from Coatings as well. Yes. Are there any questions on the phone line? If there are, please, if you could state your name?

Yes. We…

Yes.