# Strategic report

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/LSE_ELM.L_2021/LSE_ELM.L_2021.mmd` · pages 25-31_

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Strategic report
Strategy in action

"Solutions for market needs and trends"
Around 90% of Elementis' earnings are generated by Personal Care, Coatings and Talc. The value chains across these markets are similar, transforming natural resources into high value additives through distinctive science. Across these businesses we see clear medium term structural growth opportunities, representing in total over $100m of incremental revenue opportunities.

In Coatings, opportunities exist where our additives solve specific market needs with clear sustainability credentials, for instance waterborne industrial additives and premium decorative paints. Such growth areas represent roughly one third of our Coatings sales, and in 2021 they grew 37%, driven by $23m of new business wins. Products such as our castor wax based organic thixotropes for adhesives and sealants and non-ionic associative thickeners (NiSATs) for premium decorative paints saw notable

# Growth

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growth and market share gains. Geographic expansion is an important growth pillar in Coatings, and following recent sales and marketing hires in South East Asia, we grew 30% compared to the prior year.

In Personal Care, there are significant high margin growth opportunities. While Asia represents 40% of the personal care market, it represents under 20% of our sales, and our medium term aim is to double our cosmetics sales in the region. In 2021, we grew sales 44% in Asia versus the prior year, and to help drive future growth we made several targeted investments. We opened our first Personal Care technical service centre in Asia, located in Shanghai, and more than doubled our local sales and marketing team. Our new AP Actives plant in India will create a highly advantaged global supply chain, help us grow in the region and drive a material performance improvement in the business. The plant started up in the third quarter and will ramp up production over the next 12 months. In skin care, a new application for our hectortie clay, we aim to deliver $10m of incremental sales over the medium term. In 2021, we launched three products building out our product portfolio and helping deliver 41% skin care revenue growth.

In Talc, we are the second largest global producer, serving high value industrial applications. Our growth strategy is based on leveraging our global scope and scale, synergistically expanding into new geographies and market sectors. In 2021, we grew 24% in Asia and 62% in the Americas versus the prior year, driven by $13m of new business wins across long life plastics, technical ceramics and coatings applications. Despite this success, we remain materially underweight in these regions, with considerable runway for long term growth. We are on track for our goal of $20-25m of revenue synergies by 2023, with $16m realised to date. Sales of talc to coatings customers rose 8% in 2021, leveraging Elements' global key account network and strong presence in the coatings market. We have also continued to develop new products and applications. For example, barrier coating solutions for recyclable food packaging is showing encouraging early progress, with 27 production and pilot scale trials and a $5m new business pipeline.

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## Case Study – skin care

Historically, the focus of our Personal Care business has been oilbased colour cosmetics, such as lipsticks, mascaras and foundations. However, our key natural resource, hectortie clay, is perfectly suited to waterbased applications such as skin creams and lotions. To develop our presence in this sector of the $500m skin care rheology market, we recently launched a range of new products, including Bentone Hydroclay \( ^{™} \)  2100 and Bentone Luxe \( ^{®} \)  WN.

These products deliver compelling customer benefits. They provide great touch and feel, are cold processable so don't require heat activation, saving customers energy and emissions and, being 100% natural, are microplastic free and certified by key eco labelling standards.

Initial customer reaction has been strong and we have good growth momentum. In 2021, we grew our skin care sales 41% and with a new business pipeline of $14m we are well on the way to our medium term target of $10m incremental sales.

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New skin care product launches in 2021

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Skin care new business pipeline

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## Case Study – India AP Actives plant

In Q3 2021 our team in India overcame several obstacles, including COVID-19 lockdowns and monsoons, to commence production at our new manufacturing facility in Mumbai. This $20m investment is focused on the production of anti-perspirant actives; the ingredients that help to reduce sweat production and provide odour control.

The site is now undergoing a 12 month production ramp up and customer qualification period, and when complete will deliver multiple benefits. Firstly, it will create a cost advantaged and resilient global supply network, contributing significantly to our $10m of cost savings targeted for 2023. Secondly, it will position our business to serve the fast-growing markets in West Asia. And finally, as a closed water production system, it will create an environmentally friendly production site.

## ~$20m

Capital investment in new India plant

Q3 2021

India plant start-up

## "Improving our cost to serve and reducing our environmental impact"

We are always seeking to improve our organisation, drive ongoing efficiency gains and become more resilient. The 2021 demand rebound unleashed significant global supply chain challenges resulting in material cost inflation. We do not expect these pressures to abate in 2022 but, through a mixture of price actions, agile supply chain management and continued efficiency focus, we are confident of protecting and improving margins moving forward.

In 2021, as part of our medium term efficiency programme, we delivered \(10m of supply chain savings, offsetting \)10m of temporary cost savings made last year which have, as expected, returned to the business as the impact of COVID-19 has receded. A significant driver of our \(10m savings was the closure of our Charleston, West Virginia, production plant and consolidation of capacity at our St Louis, Missouri site. This improved efficiency and utilisation levels across our North American organolcy operations. Another notable milestone this year was the start-up of our anti-perspirant actives plant in India, which will be a significant enabler of an additional \)10m of savings by 2023. Following completion of the approximate 12 month production ramp up and customer qualification period, this will create a cost advantaged and resilient global supply position.

Sustainability and the reduction of our environmental footprint are at the forefront of all operations decisions, and this year we made considerable progress across our supply chain. Enhanced temperature controls in our talc operations reduced our energy consumption. Automatic sensors at our Newberry Spring processing plant increased production yields and reduced waste, while switching to water based quaternary amines (from solvent based) at our Anji site reduced both our costs and environmental impact. Throughout our operations, our global process excellence teams have identified over 60 projects that are beneficial from both an efficiency and environmental perspective. Their implementation will drive delivery of both our cost saving ambitions and our 2030 sustainability targets.

Another key enabler of our efficiency and simplification drive is our digital implementation programme. In 2021, our global standard business management software went live in Asia, bringing the region in line with Europe and the Americas and improving the flow of data across the organisation. We also started the roll out of fully online lead-to-order fulfilment cycles for customers. The onboarding of customers to digital ordering systems will continue in 2022 and it is already resulting in an improved customer experience, enhanced new business success and more efficient resource management.

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## Measuring our progress

## Adjusted operating cash flow ($m)

<table><tr><td>2021</td><td>76.0</td></tr><tr><td>2020</td><td>109.8</td></tr><tr><td>2019</td><td>154.8</td></tr><tr><td>2018</td><td>77.7</td></tr></table>

## Adjusted Group profit before tax ($m)

<table><tr><td>2021</td><td>77.0</td></tr><tr><td>2020</td><td>52.7</td></tr><tr><td>2019</td><td>93.5</td></tr><tr><td>2018</td><td>112.5</td></tr></table>

## Contribution margin (%)

<table><tr><td>2021</td><td>46</td></tr><tr><td>2020</td><td>45</td></tr><tr><td>2019</td><td>46</td></tr><tr><td>2018</td><td>46</td></tr></table>

## Adjusted operating profit/adjusted operating margin ($m)

<table><tr><td>2021</td><td>106.6</td></tr><tr><td>2020</td><td>81.6</td></tr><tr><td>2019</td><td>123.0</td></tr><tr><td>2018</td><td>132.6</td></tr></table>

## Average trade working capital to sales ratio (%)

<table><tr><td>2021</td><td>20</td></tr><tr><td>2020</td><td>24</td></tr><tr><td>2019</td><td>22</td></tr><tr><td>2018</td><td>21</td></tr></table>

## Definition

Adjusted operating cash flow is defined as the net cash flow from adjusted EBITDA plus changes in working capital, provisions and share based payments, less net capital expenditure.

## Performance

Further information can be found on page 58.

## Definition

Adjusted Group profit before tax is defined as the Group profit before tax on total operations (continuing and discontinued) after adjusting items, excluding adjusting items relating to tax.

## Performance

Further information can be found on pages 153-156.

## Definition

Contribution margin is defined as total revenue less all variable costs, divided by total revenue and expressed as a percentage.

## Performance

Further information can be found on page 193.

## Definition

Adjusted operating profit is the profit derived from the continuing operations of the business after adjusting items. Adjusted operating margin is the ratio of adjusted operating profit to total revenue.

## Performance

Further information can be found on page 194.

## Definition

The trade working capital to total revenue ratio is defined as the 12 month average trade working capital divided by total revenue, expressed as a percentage. Trade working capital comprises inventories, trade receivables and trade payables. It specifically excludes prepayments, capital or interest related receivables or payables, changes due to currency movements and items classified as other receivables and other payables.

## Performance

Further information can be found on page 194.

## Remuneration linkage

No direct linkage with remuneration.

## Link to Strategy

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## Remuneration linkage

Adjusted Group profit before tax is a key element of the bonus plan for the Executive Directors. Further information can be found within the Directors' Remuneration report on page 119.

## Link to Strategy

![](images/29_1.jpg)

## Remuneration linkage

No direct linkage with remuneration.

## Link to Strategy

![](images/29_2.jpg)

## Remuneration linkage

No direct linkage with remuneration.

## Link to Strategy

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## Remuneration linkage

Average trade working capital is a key element of the bonus plan for the Executive Directors. Further information can be found within the Directors' Remuneration report on page 119.

## Link to Strategy

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## Key to strategic priorities

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Innovation

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Growth

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Efficiency

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Non-financial KPIs

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Financial KPIs

## Adjusted return on operating capital employed (ROCE) (%)

<table><tr><td>2021</td><td>13</td></tr><tr><td>2020</td><td>10</td></tr><tr><td>2019</td><td>15</td></tr><tr><td>2018</td><td>15</td></tr></table>

## Definition

ROCE is defined as operating profit after adjusting items divided by operating capital employed, expressed as a percentage. Operating capital employed comprises fixed assets (excluding goodwill), working capital and operating provisions. Operating provisions include self-insurance and environmental provisions but exclude retirement benefit obligations.

## Performance

Further information can be found on page 194.

## Remuneration linkage

ROCE is an underpin for the long term incentive plan. ROCE including goodwill was 7.4% (2020: 5%).

## Link to Strategy

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## Total recordable incident rate (TRIR)

<table><tr><td>2021</td><td>0.90</td></tr><tr><td>2020</td><td>0.68</td></tr><tr><td>2019</td><td>0.48</td></tr><tr><td>2018</td><td>0.22</td></tr></table>

## Definition

We use the US Occupational Safety and Health Administration (OSHA) definition for recordable injuries and illnesses. TRIR is the total number of recordable incidents multiplied by 200,000 divided by total hours worked by all employees during the year.

## Performance

Further information can be found on page 32.

## Remuneration linkage

Non-financial targets within the Executive Directors' annual bonus structure typically include a component of individual objectives relating to safety performance. Refer to page 120.

## Link to Strategy

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## Total Lost time accidents (LTA)

<table><tr><td>2021</td><td>4</td></tr><tr><td>2020</td><td>3</td></tr><tr><td>2019</td><td>2</td></tr><tr><td>2018</td><td>2</td></tr></table>

## Environmental incidents

<table><tr><td>2021 \( ^{1} \)</td><td>0</td></tr><tr><td>2020</td><td>0</td></tr><tr><td>2019</td><td>0</td></tr><tr><td>2018</td><td>0</td></tr></table>

## Definition

An LTA is an injury or illness that requires time away from work not including the day of incident.*

* We have tightened this indicator. In prior years we reported only LTAs with three days or greater lost time.

## Performance

Further information can be found on page 32.

## Definition

We record and categorise environmental incidents into tiers based on the severity or actions taken by regulatory authorities. Tier 3 incidents are those that have a significant impact on the environment and require reporting to an external authority and where enforcement action is likely. Tier 2 incidents have a minor impact and require notification but are likely to result in minimal action by the authorities.

## Performance

Further information can be found on page 34.

## Remuneration linkage

Non-financial targets within the Executive Directors' annual bonus structure typically include a component of individual objectives relating to safety performance. Refer to page 120.

## Link to Strategy

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## Remuneration linkage

Non-financial targets within the Executive Directors' annual bonus structure include a component of individual objectives relating to safety performance. Refer to page 120.

## Link to Strategy

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## Sustainable business

At Elementis, we recognise the importance of creating value for all our stakeholders. Our contribution to a more sustainable society is also crucial for the resilience of our business. We are committed to actively addressing the negative impacts created by our operations and activities.

Globally, events in 2021 continued to highlight the importance of progressing the United Nations Sustainable Development Goals (UN SDGs) to address global challenges, including those related to inequality, climate change and responsible consumption and production. We continue to support the UN SDGs and are committed to maintaining responsible business operations which underpin these principles.

We also have opportunities to help our customers reduce their negative impacts through the products that we manufacture and sell to our customers. Many of our chemical products and performance additives extend the lifetime and durability of end-use products, minimising material and energy demands (see side panel).

## Linking our strategy to the SDGs

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Health & Safety,
page 32
Product stewardship,
page 33

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Water, page 36
Responsible
Mining, page 37

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Innovation, page 23
Efficiency, page 26
Product benefits,
page 23

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DE&I, page 38

Growth, page 24
Financial performance, pages 54-59
Employee wages, page 158

GHG, page 34
Energy, page 36

## 2021 Progress

In 2021 we have made good progress towards our 2030 environmental targets, as described in the following pages. We implemented the Task-Force for Climate-Related Financial Disclosure Framework (TCFD, page 42) to better understand our climate risks and opportunities. We strengthened our commitment to water stewardship, issuing a public statement outlining our plans. Our leadership team was strengthened by appointing our first Global Head of Sustainability tasked with taking forward our sustainable business agenda. We also launched new products with enhanced sustainability features (page 13). Our efforts have also resulted in improved third-party

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## Long-lasting products

Our Chromium chemical ingredients help extend durability of materials, for example high-performance metal products and construction wood.

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## Product efficiency

Our Coatings additives enable high performance paints to protect using one layer of paint instead of multiple layers.

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## Resource efficiency

Our talc additives strengthen the plastics used to light-weight vehicles, helping to increase vehicle range per charge or tank. Talc additives also help lower plastic content in packaging for liquid products.

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## Healthy society

Our natural additives ingredients enhance the function of personal care products and pharmaceutical applications.

## 2021 Sustainable business recognition

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2021: Gold
2020: Silver

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2021: B-2020: C

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## SUSTAINALYTICS

a Morningstar company

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2021: Medium
2020: High

2021: Constituent
2020: Constituent

sustainability assessments, including gaining EcoVadis gold (up from silver in 2020), putting us in the top 5% of EcoVadis company ratings and helping our diverse customer base understand our impacts and activities. We also remained a constituent of the FTSE4Good index.