# Chief Executive Officer's review

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/LSE_ELM.L_2022/LSE_ELM.L_2022.mmd` · pages 9-15_

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Chief Executive Officer's review

# Focused strategy driving growth and margin expansion

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In 2022 we made significant progress towards our strategic and financial goals. In an inflationary and increasingly uncertain macroeconomic environment, Elementis delivered robust revenue growth and higher adjusted operating margins. This was driven by our portfolio of advantaged, high-value specialty products, augmented by new product launches and new business wins, and our continually improving operational efficiency. The sale of the Chromium business will reduce the volatility of our earnings and margins, and improve the sustainability profile of our business. Trading conditions remain subdued in many of our markets, but I am confident that continued application of our Innovation, Growth and Efficiency strategy will enable us to make further progress in 2023.

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## PERFORMANCE

Elementis delivered a strong financial performance in 2022, with revenue from continuing operations growing by 4% to \(736m and the adjusted operating margin increasing to 13.6% from 12.4% in the prior year. Continuing operations comprises the Coatings, Personal Care and Talc businesses \( ^{*} \) , all focused on our clear strategy of Innovation, Growth and Efficiency. Implementing this strategy, these businesses together launched 18 new products and generated almost \)60m from new business opportunities \( ^{**} \) , and made progress towards $10m of sustainable operating cost savings for delivery by 2023.

Including discontinued operations, Group revenue grew to \(921.4m from \)880.1m in 2021, and adjusted operating profit was $123.7m compared with $107.7m in the prior year.

Coatings, our largest business, performed well, delivering both higher sales and margins despite weaker trading conditions in some markets, especially during the latter part of the year. Sales grew strongly in the Americas region, with healthy decorative demand as well as higher sales of industrial coatings, especially in the first half. In EMEA, sales of industrial coatings were solid during the first half of the year. Sales were weaker in the decorative sector, as the post-COVID surge in demand receded, and European coatings markets overall weakened during the second half, as the macroeconomic environment deteriorated. Our sales in Asia are mainly industrial coatings, with China typically accounting for around 70% of our total regional sales, and this market was weak during the year due to the economic impact of COVID lockdowns. Coatings continued to successfully leverage its new product pipeline and global key account management programme to deliver significant sales and profit growth. In addition, continuing to focus on higher value products enabled us to increase the value of our product mix and to capture this in our pricing, delivering higher operating margins.

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Personal Care performed strongly during the year, with good sales growth and higher operating margins in both Cosmetics and AP Actives. Demand for colour cosmetics grew across all our regional markets, as COVID related social and travel restrictions were lifted. New product launches and conversion of targeted new business opportunities also delivered with sales. Sales growth in AP Actives was also driven by strong demand across all regions. Volume growth, along with product mix improvements and price rises that more than offset raw material and other cost increases, delivered substantially higher operating margins in Personal Care. Our new AP Actives plant in India was completed and commissioned on schedule, with customer qualification achieved and full commercial operation initiated shortly after the end of the year.

The Talc business struggled due to a combination of significant demand weakness in its principal end markets and substantially higher European energy costs. The weak financial performance of the business, combined with an increasing discount rate, contributed to a non-cash goodwill impairment of \(103m. More than 80% of Talc's sales are to customers in Europe, with the automotive sector being its largest end market sector. Significantly weaker demand in the plastics, coatings and technical ceramics market segments could be only partially offset by a higher value product mix and pricing actions. Sales were also negatively impacted by the loss of business in Russia and neighbouring countries due to the Russian invasion of Ukraine, as well as by a strike at Talc's major paper sector customer in the first half of 2022. In recent years, Talc had been successfully growing sales in China, but this area was affected by the COVID lockdowns there during 2022. Talc also faced substantial and fast rising energy costs as the year progressed with second half impact being particularly pronounced. As a result of these factors, Talc sales and margins were materially lower than in the prior year. At the end of the year, we merged the Talc and Coatings businesses to create the Performance Specialties division. This will enable acceleration of the significant revenue synergies that we have achieved and facilitate the delivery of additional operating cost savings in 2023 and beyond.

## PORTFOLIO

The divestment of the Chromium business was announced in November and completed in January 2023. Chromium had been part of Elementis since 2002 and enjoyed a strong competitive position in North America. However, the business increasingly sat outside our 'Innovation, Growth and Efficiency' strategic framework and our strategic review concluded that the interests of all stakeholders would be best served by a sale of the business. The enterprise value achieved was $170m and the total cash proceeds of $119m, after transfer of all US material environmental and other liabilities and transaction costs.

Our continuing portfolio of businesses have a compelling purpose and strategic rationale. Elementis is now a pure specialty chemicals company, focused on adding value by making our customers' formulations look, feel and perform better. This focus on advantaged, high value products will enable us to deliver higher quality earnings and margins, with lower volatility, and generate significant shareholder value. In addition, the Chromium operations accounted for a large portion of our environmental impact (e.g. 69% of the Group's greenhouse gas (GHG) Scope 1 and Scope 2 (location-based) emissions in 2022 were from our Chromium sites), and the divestment significantly enhances our corporate sustainability profile.

* Effective 1 January 2023, the results of the Coatings and Talc segments will be reported under a new segment called Performance Specialties, which reflects a change in the internal organisation structure used for management, internal reporting purposes and the allocation of strategic resources.

** Clearly defined share of wallet gains linked to product portfolio additions, marketing or sales efforts.

For continuing operations only. It is 55% when including the divested Chromium business revenue.

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## How we are embedding
sustainability into our business

## SUSTAINABILITY

Our aim is to develop high performance additives that deliver positive, sustainable outcomes for the environment and for society. To this end we seek to design products that use fewer resources and create less pollution. Our areas of focus include reducing GHG emissions with an ambition to reach Net Zero by 2050; water, waste and energy management; and product design for better lifecycle impacts.

Specific sustainability related applications benefits delivered by Elementis products include additives working at lower temperatures, which reduce customers' energy consumption; additives supporting formulation of low VOC paints, which create less air pollution; and the use of talc in lightweight plastics in vehicles, which improves their energy efficiency.

We continue to understand our carbon footprint better and the value-creating opportunities reducing it can unlock. We completed our first assessment of value chain (Scope 3) GHG emissions in 2022, and committing to adopt a science-based target via the Science Based Targets initiative, aligning our strategy to reduce GHG emissions across our operations and value chains with the 2015 Paris Agreement.

In 2022, for our continuing operations, 69% \( ^{2} \)  of our revenue came from natural or naturally-derived (as defined by ISO16128) chemistries, while we increased our purchased energy from renewable or low carbon sources to 77%, contributing to our 58% reduction in Scope 1 and 2 (market based) GHG emissions since 2019. Since 2019, we have reduced water withdrawal per tonne of product made by 18%, and waste sent to third parties per tonne of product made by 13% across our continuing operations.

We believe clear disclosure of our ESG data is important, and in 2022, we improved our climate rating at the Climate Disclosure Project (CDP) to B in 2022, and increased our EcoVadis Gold rating score compared with the prior year.

Scope 1 and 2 (market based) GHG reduction across our continuing operations

58% since 2019

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Read more p36-38

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# Chief Executive Officer's review continued

## SAFETY

Safety is fundamental to the success of Elementis and a core part of our culture. Our goal is to eliminate injuries completely and we continue to drive our TogetherSAFE campaign across the Group to achieve this. In 2022, we made progress on this Journey to Zero, reporting an improvement in our safety performance compared with the previous year, with 75% of our facilities reporting no injuries. The number of recorded employee injuries fell by 25% to 9, with the number of hand injuries falling to 3, from 6 in the prior year. We saw a positive trend in the use of 'Stop Work' authority. Our new Taloja anti-perspirant actives plant in India was completed and brought into production having recorded more than 1.56 million safe working hours.

## PEOPLE

In 2022, we took material action to strengthen our culture, and made good progress in living our Values, launching a new Code of Conduct and revitalising our approach to compliance and ethics, to maintain and improve employee engagement and commitment.

During the year we launched our Employee Value Proposition, 'Connect. Grow. Make a Difference', based on employee input, and supported the rollout with a series of workshops. We continued to drive Diversity, Equity and Inclusion across the Group, through a DE&I Leadership Council, training programmes and specialist external trainers, and employee resource groups, such as the global Women in Leadership group. We also held a series of events in October focusing on inclusion, followed up by the launch of an inclusion newsletter.

People are the bedrock on which our success depends, and the past three years have been challenging for everyone, firstly managing the impact of the COVID pandemic, then navigating our way out of this and learning to live with a 'new normal'. I would like to thank the whole Elementis team for their fortitude, adaptability and commitment during this period and look forward to together creating a successful future for the Company.

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"Trading conditions remain subdued in many of our markets, but energy prices are moderating from the peaks of last year. We have a strong pipeline of sales opportunities and are applying our Innovation, Growth and Efficiency strategy to drive further improvement. Despite the continued uncertainty in global demand, we remain confident that Elementis is well placed for future growth."
Code of Conduct Launch
Relaunch of our Code of Conduct and Ethics, entitled 'Integrity is our Specialty'.

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## OUTLOOK

The global macroeconomic environment weakened during the second half of 2022, particularly in Europe. This created tougher trading conditions in almost all of our markets. In China, while the year has started slowly, there remains a reasonable expectation for some demand improvement as the year progresses.

Elementis is well positioned to weather this global market uncertainty and to benefit as trading conditions improve. We have a portfolio of high quality businesses, implementing a strategy based on Innovation, Growth and Efficiency in order to develop and deliver distinctive, advantaged products and technologies. We have a strong pipeline of new products and new business opportunities.

Moreover, the sale of the Chromium business has enhanced our portfolio quality – reducing the volatility of our earnings, improving margins and transforming the sustainability profile of our business. Our streamlined operating structure with two segments, Personal Care and Performance Specialties, allows us to focus on attractive end markets and deliver further efficiencies as we integrate the Talc and Coatings businesses.

The balance sheet continues to strengthen, with net debt to EBITDA ratio approaching our medium-term leverage target, whilst our operations remain highly cash generative.

Elementis is now well placed for both improved returns and growth.

Paul Waterman
CEO