# LETTER FROM THE
EXECUTIVE CHAIRMAN

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_ESI_2020/NYSE_ESI_2020.mmd` · pages 3-9_

---

LETTER FROM THE
EXECUTIVE CHAIRMAN

DEAR FELLOW SHAREHOLDERS,

Our company had a defining year in 2020. In the face of unprecedented disruptions to our end-markets and operations from the COVID-19 pandemic, we reported record financial results since the launch of Element Solutions. While protecting the health of our operators and ensuring reliable supply of our products to numerous essential industries, we managed to grow our net sales and free cash flow, expand our adjusted EBITDA margins, complete an acquisition and declare our first dividend. Element Solutions and its predecessor companies have long talked about the resilience of our variable cost, asset-light business model. This year we demonstrated the quality of that model and the quality of our leadership team. This performance and resilience are not automatic. They are the product of strong leaders and dedicated people around the world. I could not be more proud of our organization.

As Executive Chairman, I remain focused on three primary topics: people, culture and capital allocation. We are seeing great outcomes in all three of these areas. Our leadership team has coalesced and is effectively driving the organization towards ambitious, long-term objectives. The company has made significant strides in employee development and training, improved communication channels and enhanced our health and safety focus. We also added great new talent at many levels in the organization. The culture of the company is as strong as it has ever been and is evidenced by higher retention rates and highly successful recruitment efforts. People are happier and more motivated at ESI than ever before. 2020 was a year that tested the organization and the team came together like never before to deliver for customers, shareholders and, importantly, for each other.

Our consistent, strong cash flow generation offers many capital allocation opportunities to deliver long-term shareholder value. With ESI, we are committed to prudently and opportunistically deploying this cash in ways that we believe offer attractive risk-adjusted returns. In 2020 we did exactly that. First, we repurchased $56 million of our stock at an average price below $10 per share—which when added to the 2019 amount, means we have repurchased more than 17% of our outstanding shares since we launched ESI. We also acquired an exciting growth business at a single-digit adjusted EBITDA multiple, refinanced our senior unsecured notes—reducing

<--- Page Split --->

![](images/4_0.jpg)

![](images/4_1.jpg)

SIR MARTIN E. FRANKLIN
Executive Chairman

our overall annualized interest expense by over 20% and instituted a dividend that we expect to grow over time. We did all of this while de-levering our balance sheet by almost half a turn of net leverage, with our net debt to adjusted EBITDA ratio ending the year below 3.0x for the first time since we acquired MacDermid. While the mix of capital deployment may change over time, our focus on driving shareholder value will not.

We have been pleased to see this performance and our outlook recognized by the investment community, driving our share price up by 52% in 2020 and our multiple on adjusted EBITDA closer to those of our peers. However, we continue to trade at a relative discount on free cash flow metrics, while our business converts earnings to cash flow at a rate that is unique among our peers. As we continue to drive cash flow and seek to deploy it in value enhancing ways, we are confident further recognition will follow.

Over my business career, I have seen organizations encounter unexpected challenges in many forms. While 2020 threw new challenges our way, the result for great businesses is almost always the same—they come out stronger on the other side. The amount of progress this organization has made over the past few years, built on top of its very solid foundation, is outstanding to see and exciting to be a part of. This progress is reflected not only internally but also with how our markets and customers are responding to our new growth-oriented approach.

I want to thank all our employees, partners and shareholders once again for supporting Element Solutions on its journey to be the best-in-class specialty chemicals company in our industry.

Faithfully yours,

![](images/4_2.jpg)

Sir Martin E. Franklin

<--- Page Split --->

![](images/5_0.jpg)

# LETTER FROM THE
CHIEF EXECUTIVE OFFICER

DEAR FELLOW SHAREHOLDERS,

A sentence from my annual letter last year summarizes the takeaway of this one:

"It would have been far easier to launch Element Solutions into more docile seas, but the choppy environment allowed us to demonstrate who we are and what we are capable of."

I wish I could say this was a prediction, but, as for most of us, what 2020 held in store was a surprise. While our markets had headwinds in 2019, the challenges of 2020 made the choppiness of the '19 seas seem like a windless day. Yet 2020 was a record year since the launch of Element Solutions. We took the challenges in stride, developed our pandemic playbook, pivoted when we needed to and delivered outstanding results. There were silver linings for us.

We begin, however, by recognizing the toll this past year took on our global community. The pandemic and the civil strife of the summer of 2020 have brought to the fore divides that we must all play a role in addressing. These events touched each of us, and we feel deeply for those who have suffered and continue to today. In that context, the dichotomy between our record results and the health and socioeconomic crises of 2020 is stark. The suffering and difficulty we experienced makes the resilience and persistence of our team in 2020 that much more meaningful. We are immensely grateful to our global team that delivered for the company, our customers and each other this past year. The learnings from 2020 will remain with Element Solutions.

A company's performance over time can be seen as the mathematical product of its people and its culture. The culture can amplify or undermine the quality of the people. Our company has a culture of accepting challenges, commitment, teamwork, strong decision-making and care, and we have great people who embody it. This was never more true than in 2020 where we can draw a straight line from the exceptional efforts of our colleagues to our exceptional financial outcomes. By the time our facilities were deemed "essential" in our various locations, we were already running with a high-level of health and safety protocols designed to allow for continued production in a safe setting. That allowed our facilities generally to remain open throughout the year. Because our IT organization had rolled out new video telecommunications applications in 2019, the shift of work from our offices to our homes was seamless. The innovation activity from our labs continued effectively, with our people working on split shifts, both early and late, to ensure new product development and technical service responsiveness remained on track. This adaptability of our work force to a dynamic environment and the level of personal sacrifice to support the company, specifically, are the sources of our strong results.

There are many examples of great sacrifice. A group of more than 30 Malaysian chemical operators made sacrifices to live away from their families for five months in a hotel in Singapore to support our facilities there when the border closed. The lead of our Assembly facility in Shenzen did the same for several three-month stints. The manufacturing teams in the US and Europe went on alternating furloughs when volumes dropped precipitously in April through June. To help us preserve cash flow, colleagues in the most impacted businesses took reduced salaries for several months, as did our senior leadership team. These compensation sacrifices are modest in the context of our more than 2,000 essential workers who put themselves on the front lines to keep our facilities and customers operating. All of this while countless of us were caring for sick family members or grieving lost loved ones.

In early summer, factories in the West reopened, and our volumes increased steadily to meet surging demand. We reached record sales months since the launch of ESI in November and again in December. This pivot once again required nimbleness from our organization. The supply chain, in particular, had to shift rapidly from furlough and cost control to overtime production, in some cases while shorthanded due to precautionary COVID-19 protocols.

<--- Page Split --->

Against this backdrop, it would not have been surprising to see metrics around worker safety or quality deteriorate. In fact, they improved. Our safety statistics were better year-over-year, as was our perfect order performance, which is our primary quality metric.

All the while, we continued to chip away at major global system and process improvements, including acquisition integration, tax planning, and shared service implementation, among others. With such a challenging set of short-term dynamics, it would have been easy to deprioritize the long term. Similarly, we could have cut R&D spending or permanently reduced our workforce when we tightened our belts at the COVID-trough. We did not. We continued delivering on our projects and investing throughout the year, maintaining our prior year spending levels in both R&D and capex and notably delivering on our commitment to preserve our employee base through the COVID-19 production-related shutdowns. We do not trade the long term for the short term.

In 2020, we were pushed out of our comfort zone and forced to build new capabilities while navigating dynamic, drastically different operating conditions in real time. In this regard, our company was doing the same things that each of us as individuals was forced to do. This is the silver lining of COVID for the world and for our company. What was initially far outside our comfort zone is now a new zone of competency. While no one will look back at 2020 fondly, we exited this year stronger and with much to be proud of.

Our financial results are an output of the effort we made this year and in the years leading up to it. For this reason, I waited to mention the exceptional figures until we covered the exceptional effort. We grew net sales, adjusted EBITDA, adjusted EPS and free cash flow for the year—all despite a second quarter during which net sales fell 15%. We demonstrated the resilience of our variable cost operating model and stable cash flow profile, preserving margins throughout the year and generating robust cash flow every quarter. Free cash flow on an adjusted basis grew 5% to $249 million in 2020.

When we launched Element Solutions in February 2019, we espoused a strategy balancing operational excellence and prudent capital allocation: running our high-quality businesses better every year and deploying the strong cash flows they generate in long-term value enhancing ways. Surely, our results in 2020 chalk up as a win for operational excellence.

In 2020, we deployed approximately \(115 million of our \)249 million in free cash. We repurchased \(56 million of our shares at an average price of \)9.74. We would have repurchased shares more aggressively, but, out of principle, we did not buy our own shares when our people were furloughed or on reduced salaries. While this might have been a missed capital allocation opportunity in the short-term, we believe that the long-term downside of a disenfranchised team is far worse than this potential gain. We deployed \(46 million to refinance our outstanding bonds in August, which will save us \)16 million in interest a year, a 35% return, while extending our maturities by two years. The balance sheet is as healthy as it has ever been. Our leverage ratio declined in 2020 from 3.2X adjusted EBITDA at the beginning of the year to 2.9x at year end. This is the power of our cash generative model, and, with no material maturities until 2026, our balance sheet provides substantial capacity for continued prudent capital allocation within our objective of keeping leverage below 3.5x adjusted EBITDA.

The balance of our capital deployment went to two small acquisitions in 2020. First, in Q1, we acquired a new environmentally oriented technology in our offshore business. Our products in this segment are already market leaders, but we believe this technology makes them better. It offers benchmark technical performance with industry-leading environmental attributes. In an industry under constant regulatory pressure, we believe this product to be far and away the best to come to market. We are only now commercializing it but with great expectations. In July, we acquired DMP Corporation, which formed the core of our new MacDermid Envio Solutions business. This is a business singly focused on improving our customers' environmental footprints by treating their wastewater. It is a small business with big ambition. The issues of water usage and waste discharge are increasingly challenging our customers, and we intend to be their solutions provider. In doing so, we would not only grow MacDermid Envio Solutions, but also our mindshare and market share in our chemistry businesses. Together, these acquisitions represented a little over $15 million in purchase price and have the potential to add more than $100 million to our top line in the next three to four years, generating extremely attractive returns on our capital deployed. Notably, both share a theme—sustainability.

Enabling Sustainability, one of the five pillars of our strategy, is the theme of our 2020 Annual Report. The intersection between sustainability and profitability is well-trafficked in our business. We have been developing products to improve our customers' environmental footprints for years. It is good business and good for the planet. We released our initial ESG report in February 2021, which was our first effort to aggregate and shed light on our sustainability initiatives, emissions data and social and governance activity. The data is favorable. As an asset-light formulator, our greenhouse gas (GHG) emission rate is lower than many of our peers in the chemicals industry. Transparency is the first step. Targets to improve come next. Expect them later this year.

Just like it would have been easy to deprioritize the important for the urgent in our business—which we did not—the global community could have lost focus on sustainability in 2020 in the midst of the urgency of the global pandemic. Certainly, it did not. Stakeholder engagement around this topic increased steadily through 2020, and we are glad for that. This momentum is good for the world, and it is good for Element Solutions. The more customers care about the environment, the more likely they are to choose to work with us. We believe we are leading the charge in our industries to provide sustainable solutions for our customers.

As we look to 2021, the sea is not quite docile, but we feel the wind at our backs. The high-end electronics market has continuing momentum and our more industrially exposed businesses are poised to return to or exceed 2019 levels. Currency is a tailwind for the first time in a long time, and our team has coalesced in a way that only navigating a crisis together can catalyze. Earnings should grow organically, and we are focused on compounding that growth through capital allocation while preserving our healthy balance sheet. Our motto for this year "Winning Now, Winning Later" is borrowed from David Cote's excellent book of that title. Our short-term results, products of the resilience we have demonstrated and the investments we have made over the past several years, should be records for Element Solutions, while we continue to lay the groundwork for future success through prudent, focused investment and talent development. Our people have bought into our vision and are living our culture daily. I could not be more grateful to my colleagues for their dedication and performance through this challenging moment. Together we have our hands firmly on the helm and our eyes on the long-term horizon. It is very bright.

![](images/6_0.jpg)

Benjamin Gliklich

March 1, 2021