# Strategic report

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/LSE_ELM.L_2021/LSE_ELM.L_2021.mmd` · pages 50-56_

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Strategic report
Stakeholder engagement continued

Key

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Innovation

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Growth

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Efficiency

## Investors

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## Why we value them

As owners of the Company, it is important to understand their perspectives on sustainable growth, capital efficiency and how the Company is run.

## How the Board engages

– Chairman and SID governance meetings

– Executive remuneration policy proposals and implementation

– Annual shareholder meetings

– Corporate brokers interactions with the Board

– Investor relations Board report

– Feedback from investors following results presentations

– Full year and half year results presentations, trading statements and press releases provide meaningful information on which investors can make informed investment decisions

## Regulatory authorities

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## Why we value them

Engagement with governments and local regulatory authorities helps to ensure we understand changing regulatory requirements and can maintain a constructive dialogue to meet these requirements.

## How the Board engages

The Board is kept informed of relevant governance, legal, regulatory and compliance matters, including data privacy.

## How the business engages

– We engage with our shareholders regularly and consult with our major shareholders on specific issues to understand their views. The CEO, CFO and Director of Investor Relations are the principal contacts for shareholder engagement

– ESG performance, supply chain, innovation, governance and financial related matters have been common themes in investor dialogue during the year which has been shared with the Board

– Virtual innovation seminar held for investors helps grow awareness and understanding of innovation capabilities

## 2021 highlights

– Over 150 investor meetings

– Attended 5 investor conferences

– Virtual innovation seminar for investors led by SVP Global Technology

– Virtual presentation for retail shareholders in partnership with ShareSoc

– First hybrid AGM delivered

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Read more on page 87

## How the business engages

– Direct engagement with regulatory authorities, including permit compliance, reporting breaches, annual technical submissions and regulatory guidance
– Establishing and maintaining key contact relationships with the Company's main regulators

– Active engagement with industry bodies

## 2021 highlights

– Company submission in response to UK Government consultation – 'Restoring trust in audit and corporate governance'

– Dialogue with Financial Reporting Council in response to a Thematic Review of IAS 37 Provisions, Contingent Liabilities and Contingent Assets – further information on page 100

– Zero notifiable data breaches

– FTSE Women Leaders Review on Boards submission

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## Communities and the environment

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## Why we value them

Engagement helps us to understand our impact on the wider society and the ways in which we can work together to make a valuable difference.

## How the Board engages

Oversight by the Board of corporate responsibility plans and reporting, including the review and approval of key corporate statements.

## How the business engages

– Environmental and social reporting on our website, including corporate responsibility, modern slavery, gender pay, water stewardship and carbon emissions

– Philanthropy and employee-matched funding for charity policy

– Local volunteering activities

– Carbon Disclosure Project (CDP), UN Global Compact communication on progress and EcoVadis submissions

– Local biodiversity initiatives such as recycling rainwater for banana plantations in Brazil

## 2021 highlights

– Water stewardship policy

– Volunteering and fundraising activities

Gold rating from EcoVadis and B- rating from CDP

– Responsible Chromium award – only chrome producer in the world to receive this award

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Read more on pages 34-37

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## Promoting the success of the Company

Our Directors have a duty under Section 172 of the Companies Act 2006 (s.172) to promote the success of the Company for the benefit of its members. In doing so, they must have regard to the interests of our employees, the business relationships with our suppliers and customers, the impact of our operations on the community and the environment, and the desirability of the Company maintaining a reputation for high standards of business conduct.

To be able to fulfil their duties when making decisions, it is essential that our Directors understand what matters to our stakeholders and, equally, that it is not always possible to provide positive outcomes for all stakeholders when considering the long term success of the Company.

Details of our stakeholder groups and how the business and the Board have engaged with them during the year are set out on pages 48-51.

The Board receives information on stakeholder engagement matters through regular reports and presentations from senior management throughout the year. All Board papers for principal Board decisions include a specific section on s.172 and stakeholder interests. In addition to s.172 duties, there are also other factors that are taken into account or may be considered relevant in the context of decision making, for example, pension scheme members or engagement with regulatory authorities. Directors bring additional value by sharing knowledge or insight gained from previous or current roles which enable a more holistic approach to the decision making environment.

Christine Soden, our designated Non-Executive Director for workforce engagement, ensures that the views and concerns of the workforce are brought to the Board and are taken into account. Further information on our approach to workforce engagement can be found on pages 85-86.
In the ordinary course of business, site visits and Board dinners also provide opportunities for direct engagement with employees, however, this has not been possible as a result of continued COVID-19 related travel restrictions. In addition, the Directors also engage directly with our investors (see page 87 for more detail) and our employees.

## How the Board fulfils its s.172 duties

<table><tr><td colspan="2">Board training</td></tr><tr><td colspan="2">Each of the Directors is aware of their duties and has received training on s.172</td></tr><tr><td colspan="2">Board information</td></tr><tr><td>Board papers include specific reference to s.172 and stakeholder interests</td><td>Board directly and indirectly engages with stakeholders</td></tr><tr><td colspan="2">Board strategic discussion</td></tr><tr><td>Board considers quality of information and seeks assurance where necessary</td><td>Chair facilitates board discussion ahead of formal debate</td></tr><tr><td colspan="2">Board decision</td></tr><tr><td>Company Secretary records all Board decisions</td><td>Board decisions are cascaded for implementation</td></tr></table>

<table><tr><td>S.172 duties</td><td>Read more</td><td>Pages</td></tr><tr><td rowspan="7">(a) Consequences of decisions in the long term</td><td>Our business model</td><td>18-19</td></tr><tr><td>Our strategic priorities</td><td>20-27</td></tr><tr><td>Principal risks and uncertainties</td><td>68-72</td></tr><tr><td>Viability statement and going concern</td><td>73</td></tr><tr><td>TCFD disclosures</td><td>42-47</td></tr><tr><td>Board activities</td><td>83</td></tr><tr><td rowspan="3">(b) Interests of employees</td><td>Non-financial information statement</td><td>41</td></tr><tr><td>Sustainable business - Our employees</td><td>38-40</td></tr><tr><td>Culture and values</td><td>84</td></tr><tr><td rowspan="3">(c) Fostering business relationships with suppliers, customers and others</td><td>Sustainable business</td><td>30-40</td></tr><tr><td>Operating review</td><td>60-63</td></tr><tr><td>Our strategic priorities</td><td>20-27</td></tr><tr><td rowspan="2">(d) Impact of operations on the community and the environment</td><td>Sustainable business - Managing our environmental impact</td><td>34-37</td></tr><tr><td>TCFD disclosures</td><td>42-47</td></tr><tr><td>(e) Maintaining high standards of business conduct</td><td>Sustainable business</td><td>30-40</td></tr><tr><td>(f) Acting fairly between members</td><td>Shareholder engagement</td><td>87</td></tr><tr><td></td><td>Voting rights</td><td>129</td></tr></table>

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## Matters considered by the Board

The following are some of the decisions made by the Board this year which demonstrate how colleague interests, the need to foster business relationship with other key stakeholders and other section 172 matters have been taken into account in discussions and decision-making:

## Decision

Renewable electricity procurement strategy (including a framework for delegation of authority)

The key stakeholders identified:

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## Suspension of dividends

The key stakeholders identified:

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## s.172 considerations

The ability to secure renewable energy for our key sites is a strategic focus for the company and is considered by the Board to be vital for the long term success of the Company.

The Board recognises the value of dividends to shareholders and made a difficult decision to continue the suspension of dividends during 2021.

## Supply chain resilience throughout 2021

The key stakeholders identified:

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## The Board's role

The Board's decision-making process was based on a longer term purpose driven objective to ensure that the business can deliver sustainable growth through innovative products that offer cleaner, better and sustainable performance. The reduction of energy used in the production or manufacture of products (i.e GHG Scope 3 emissions) will enable the Company to reduce supply chain emissions in the long-term as well as enabling the Company to achieve its sustainability targets. Sustainability features in our products and our operations are key topics of dialogue and engagement with investors, customers and employees. The Board considered management's proposal and used insight from stakeholder dialogue to conclude that there were no negative impacts for any one group of stakeholders. The agility to contract in a timely manner, cost and demand for renewable assets remain important factors for success.

In 2020 at the height of COVID-19 related uncertainty, the Board decided to take several steps to provide additional financial headroom and preserve cash, one of which was the suspension of the dividend and relaxation of banking covenants as announced in 2020. In 2021, as a result of continued COVID-19 related macroeconomic uncertainty, the Board contemplated the longer terms interests of shareholders and creditors in the context of the Group's capital allocation priorities and it was deemed appropriate to focus on continued debt reduction versus a resumption of dividend. The Board carefully considered the short term negative impact on our shareholders, including employee shareholders but determined that these interests would be better served through prioritising the Group's capital allocation focus on investments to drive organic growth, further debt reduction and when appropriate the resumption of dividends to shareholders.

The ability to operate resiliently throughout 2021 continues to be a key priority for the Board as part of the ongoing long-term success of the Company.
The Board have continued to play a holistic role in oversight of the many supply chain issues that have dominated the macro and micro environments where the Group operates recognising managements' role in navigating the dynamic supply chain environment. The Board considered the interests and expectations of stakeholders in the regular reports received by management to address the dynamic supply chain landscape with a particular focus on cost management, inflationary environment, raw material availability, operational capability and ability to serve customers whilst continuing to demonstrate ongoing focus on innovation, strategic focus and financial profitability. The Board have received and discussed a range of information including: the balance of supply chain resilience and risk, employee safety and well-being and continued backdrop of global and local COVID-19 guidance.

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# Good performance improvement and leverage reduction

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## Group results

In 2021, revenue increased 17% from \(751m to \)880m due to strong new business success, targeted pricing actions and demand recovery across most of our end markets following a COVID-19 impacted prior year. Excluding the impact of currency translation, underlying revenue increased 14%. Revenue in Personal Care rose 9% on a reported basis and 6% on an underlying basis*, as demand showed steady recovery due to the gradual easing of social interaction and travel restrictions. In Coatings, revenue increased 20% on a reported basis and 17% on an underlying basis*, driven by strong new business success and pricing actions in response to accelerating cost inflation. In Talc, revenue increased 14% on a reported basis and 9% on an underlying basis*, as geographic expansion outside of Europe and delivery of revenue synergies more than offset weakness in both long life plastics for automotive applications and paper markets. Revenue in Chromium increased 16% due to strong volume growth as demand increased across a range of industrial end markets.
As a result of strong new business success, targeted pricing actions in response to accelerating cost inflation and demand recovery across many of our end markets, this year we delivered a much improved level of performance. In turn, this earnings recovery resulted in an encouraging reduction in financial leverage from 3.2x to 2.6x net debt to EBITDA.

## Ralph Hewins
Chief Financial Officer

Reported operating profit increased from a loss of \(28m to a profit of \)26m with a strong performance improvement partially offset by \(80m of adjusting items, the largest of which was a \)53m non-cash Talc goodwill impairment (2020: Talc $33.4m and Energy \(26.9m) due to the continuing impact of COVID-19 on industrial activity and global supply chains. Adjusted operating profit increased 28% on an underlying basis* from \)82m to $107m with the aforementioned higher revenue and associated earnings more than offsetting cost inflation primarily associated with global supply chain challenges. The statutory result for the year was a profit of $3m compared with a loss of $67m in 2020.

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## Adjusting items

In addition to the statutory results, the Group uses alternative performance measures, such as adjusted operating profit and adjusted diluted earnings per share, to provide additional useful analysis of the performance of the business. The Board considers these non-GAAP measures as an alternative way to measure the Group's performance. Adjusting items in 2021 resulted in a charge of \(71.2m before tax, a decrease of \)50.3m against last year. The key categories of adjusting items are summarised below. For more information on adjusting items and the Group's policy for adjusting items, please see Note 5 and Note 1 to the financial statements respectively.

<table><tr><td>Credit/(charge)</td><td>Personal Care \(m</td><td>Coatings \)m</td><td>Talc \(m</td><td>Chromium \)m</td><td>Central costs \(m</td><td>Total \)m</td></tr><tr><td>Business transformation</td><td>(0.1)</td><td>(4.2)</td><td>-</td><td>(0.3)</td><td>-</td><td>(4.6)</td></tr><tr><td>Environmental provisions</td><td>-</td><td>-</td><td>-</td><td>(8.3)</td><td>-</td><td>(8.3)</td></tr><tr><td>Impairment of goodwill</td><td>-</td><td>-</td><td>(52.3)</td><td>-</td><td>-</td><td>(52.3)</td></tr><tr><td>Amortisation of intangibles arising on acquisitions</td><td>(8.7)</td><td>(1.1)</td><td>(6.0)</td><td>(0.2)</td><td>-</td><td>(16.0)</td></tr><tr><td>Sale of Montreal land</td><td>-</td><td>-</td><td>-</td><td>1.0</td><td>-</td><td>1.0</td></tr><tr><td>Total charge to operating profit</td><td>(8.8)</td><td>(5.3)</td><td>(58.3)</td><td>(7.8)</td><td>-</td><td>(80.2)</td></tr><tr><td>Sale of businesses</td><td>(1.7)</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(1.7)</td></tr><tr><td>Mark to market of derivatives</td><td>-</td><td>-</td><td>-</td><td>-</td><td>10.7</td><td>10.7</td></tr><tr><td>Total</td><td>(10.5)</td><td>(5.3)</td><td>(58.3)</td><td>(7.8)</td><td>10.7</td><td>(71.2)</td></tr></table>

## Business transformation

In November 2020, the closure of the Charleston plant was announced. Costs of \(4.2m in 2021 (including \)0.4m of depreciation) associated with preparing the site for sale are classified as an adjusting item and the site is planned to be disposed of in the future. Further charges of \(0.4m relate to the optimisation of the supply chain footprint across our Personal Care and Chromium businesses.

## Environmental provisions

The Group's environmental provision is calculated on a discounted cash flow basis, reflecting the time period over which spending is estimated to take place. The movement in provision relates to a change in discount rates that has decreased the liability by \(1.3m in the year, and extra remediation work identified in the year which has resulted in a \)9.6m increase to the liability. As these costs relate to non-operational facilities they are classified as adjusting items.

## Impairment of goodwill

In Talc, while the business fundamentals are unchanged, the continuing impact of COVID-19 on wider industrial activity and global supply chains, especially affecting the automotive sector, and the near term forecast profitability of the business has resulted in a goodwill impairment of \(53.1m. This impairment is reflected as a P&L charge of \)52.3m and $0.8m movement in exchange differences on translation of foreign operations in other comprehensive income.

## Amortisation of intangibles arising on acquisition s

Amortisation of \(16.0m (2020: \)15.5m) represents the charge in respect of the Group's acquired intangible assets. As in previous years, these are included in adjusting items as they are a non-cash charge arising from historical investment activities.

## Sale of Montreal land

In 2021 the Group disposed of a non-core parcel of land in Montreal, Canada. The profit on disposal has been treated as an adjusting item.

## Sale of businesses

The \(1.7m loss on disposal of two non-core dental businesses, Eisenbacher Dentalwaren ED GmbH and Adentatec GmbH, has been treated as an adjusting item in 2021.

## Mark to market of derivatives

The movements in the mark to market valuation of financial instruments that are not in hedging relationships are treated as adjusting items as they are non-cash fair value adjustments that will not affect the cash flows of the Group.

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## Strategic report
Finance report continued

## Revenue

<table><tr><td></td><td>2021 \(m</td><td>2020 \)m</td><td>Change</td></tr><tr><td>Personal Care</td><td>174.7</td><td>160.8</td><td>9%</td></tr><tr><td>Coatings</td><td>384.3</td><td>319.1</td><td>20%</td></tr><tr><td>Talc</td><td>150.4</td><td>132.5</td><td>14%</td></tr><tr><td>Chromium</td><td>170.7</td><td>146.9</td><td>16%</td></tr><tr><td>Inter-segment</td><td>-</td><td>(8.0)</td><td>N/A</td></tr><tr><td>Revenue</td><td>880.1</td><td>751.3</td><td>17%</td></tr></table>

## Adjusted operating profit

<table><tr><td rowspan="2"></td><td colspan="3">2021</td><td colspan="3">2020</td></tr><tr><td>Operating profit/(loss) \(m</td><td>Adjusting items \)m</td><td>Adjusted operating profit/(loss) \(m</td><td>Operating profit/(loss) \)m</td><td>Adjusting items \(m</td><td>Adjusted operating profit/(loss) \)m</td></tr><tr><td>Personal Care</td><td>27.9</td><td>8.8</td><td>36.7</td><td>20.0</td><td>13.6</td><td>33.6</td></tr><tr><td>Coatings</td><td>56.5</td><td>5.3</td><td>61.8</td><td>(4.9)</td><td>46.3</td><td>41.4</td></tr><tr><td>Talc</td><td>(44.3)</td><td>58.3</td><td>14.0</td><td>(22.4)</td><td>39.0</td><td>16.6</td></tr><tr><td>Chromium</td><td>6.3</td><td>7.8</td><td>14.1</td><td>(3.6)</td><td>9.2</td><td>5.6</td></tr><tr><td>Central costs</td><td>(20.0)</td><td>-</td><td>(20.0)</td><td>(17.3)</td><td>1.7</td><td>(15.6)</td></tr><tr><td>Operating (loss)/profit</td><td>26.4</td><td>80.2</td><td>106.6</td><td>(28.2)</td><td>109.8</td><td>81.6</td></tr></table>

After adjusting items – see Note 5 to the financial statements