# Strategic report

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/LSE_ELM.L_2017/LSE_ELM.L_2017.mmd` · pages 1-7_

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Strategic report

2 Chairman's statement
4 Reignite Growth – 2017 highlights
12 CEO's strategic overview
14 Our key performance indicators
16 Our business segments
18 Our focused business model
20 Our business segments' performance
22 Finance report
26 Corporate social responsibility report
32 Principal risks and uncertainties
37 Going concern and viability statement

## Governance

40 Board of Directors
42 Executive Leadership team
44 Chairman's introduction to governance
45 Corporate governance report
49 Nomination Committee report
51 Audit Committee report
55 Directors' remuneration report
77 Directors' report
79 Directors' responsibility statement
80 Independent auditor's report

## Financial statements

90 Consolidated income statement
90 Consolidated statement of comprehensive income
91 Consolidated balance sheet
92 Consolidated statement of changes in equity
93 Consolidated cash flow statement
94 Notes to the Consolidated financial statements
130 Parent company statutory accounts
132 Notes to the Company financial statements

## Shareholder information

137 Glossary
138 Five year record
139 Shareholder services
140 Corporate information

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Our Reignite Growth strategy goes through every aspect of our business. It examines, challenges and clarifies actions that need to be taken to help us build a high performing Group.

2017 has seen us strengthen the foundations of Elementis by focusing on our 4 strategic priorities. As a result we are now better placed to Reignite Growth and we look forward to maintaining this momentum during 2018.

## PAUL WATERMAN
CEO

## REIGNITE GROWTH: STRENGTHENING THE FOUNDATIONS

![](images/2_0.jpg)

## OUR 4 STRATEGIC PILLARS

PURSUE BEST GROWTH OPPORTUNITIES
What we did in 2017: Acquired SummitReheis, implemented global key account management and developed Asia Coatings.

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INNOVATE FOR HIGH
MARGINS AND
DISTINCTIVENESS
What we did in 2017:
Improved our innovation
capabilities, focusing on fewer
and bigger opportunities.

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PURSUE SUPPLY CHAIN TRANSFORMATION
What we did in 2017: Agreed the sale of the US Colourants business and Surfactants segment, and improved productivity.

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CREATE A CULTURE
OF HIGH PERFORMANCE
What we did in 2017:
Invested in our people,
structure and performance
management processes.

Go to page 11

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## GROUP

Elementis plc is a global specialty chemicals company that delivers Enhanced Performance Through Applied Innovation. Harnessing our expertise in high performing ingredients to refine and improve stability and flow, we enhance our customers' product performance.

In 2017, we operated across 3 business segments: Specialty Products, Chromium and Surfactants.

## INVESTMENT PROPOSITION

## Unique value chain

We combine the only high grade commercial heterotrite mine in the world with our global asset base to serve customers in the Americas, Europe and Asia. We are a market, technology and innovation leader in rheology modifiers and a leading producer of chromium chemicals in the United States.

## Robust organic growth

We focus on mission critical products that deliver enhanced performance to our customers in attractive growth sectors such as Personal Care, Energy and Coatings.

## Attractive margins

Our operating margins are sustained through the quality of our products and the delivery to our customers of Enhanced Performance Through Applied Innovation.

## Strong cash flow

A robust balance sheet, strong operating cash flow generation and capital expenditure discipline fund our Reignite Growth strategy while providing healthy and growing dividends.

## Value creation

We are a growing and sustainable business. The implementation of our Reignite Growth strategy will further create value by consistently exceeding our cost of capital.

## ENHANCED PERFORMANCE THROUGH APPLIED INNOVATION

At Elementis we apply innovation to all parts of our business. Through operations, research and development, sales and marketing we apply innovation with purpose to provide value to our customers. With the application of our unique expertise and premium ingredients, we enhance our customers' product performance and enable distinctiveness in the market.

## Revenue (from continuing operations)

![](images/3_0.jpg)

## Profit after tax

![](images/3_1.jpg)

## Ordinary dividend per share

![](images/3_2.jpg)

## Revenue split by business segment \( ^{®} \) 

![](images/3_3.jpg)

## Total revenue

![](images/3_4.jpg)

## Adjusted operating profit

![](images/3_5.jpg)

## Adjusted operating profit margin

![](images/3_6.jpg)

## Revenue split by geography \( ^{®} \) 

![](images/3_7.jpg)

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## SPECIALTY PRODUCTS

Through the application of our expertise in high performing ingredients that improve stability and flow we provide high value additives that enhance our customers' product performance. We deliver Enhanced Performance Through Applied Innovation to the Personal Care, Coatings and Energy markets.

<table><tr><td>Revenue</td><td>\(611.0m</td></tr><tr><td>Adjusted operating profit</td><td>\)109.0m \(</td></tr><tr><td>Adjusted operating margin</td><td>17.8% \)</td></tr></table>

![](images/4_0.jpg)

## Personal Care

A leading global supplier of rheological additives and antiperspirant active ingredients

## Coatings

A leading supplier of rheological modifiers and speciality additives to decorative and industrial coatings markets

## Energy

A leading supplier of rheological modifiers to enhance the performance of drilling mud over a wide range of conditions

## CHROMIUM

We are a leading producer of chromium chemicals with a strong position in North America. We provide chromium chemicals that make our customers' products more durable.

<table><tr><td>Revenue</td><td>\(186.7m</td></tr><tr><td>Adjusted operating profit</td><td>\)30.1m \(</td></tr><tr><td>Adjusted operating margin</td><td>16.1% \)</td></tr></table>

![](images/4_1.jpg)

## SURFACTANTS

In December 2017, we agreed the sale of the Surfactants business to Kolb Distribution AG for €39m.
This business manufactures a wide range of surface active ingredients and products used as intermediates in the production of chemical compositions.

<table><tr><td>Revenue</td><td>\(47.8m</td></tr><tr><td>Adjusted operating profit</td><td>\)5.4m \(</td></tr><tr><td>Adjusted operating margin</td><td>11.3% \)</td></tr></table>

![](images/4_2.jpg)

## Our Specialty Products value chain

As part of our Specialty Products business segment value chain, we own and operate in California a mine that is the world's largest source of high quality rheology grade hectorite clay. This raw material, combined with our global manufacturing footprint, puts us in a position to add value to our customers in the Personal Care, Coatings and Energy sectors on an international scale.

![](images/4_3.jpg)

The only high quality rheology grade hectorite mine in the world.

![](images/4_4.jpg)

Combined with our 14 global manufacturing bases and technical expertise.

A global leader

14
sites

Enables our customers to create innovative, high performance products.

## 3 business

sectors

![](images/4_5.jpg)

Personal Care

![](images/4_6.jpg)

Coatings

Energy

More on page 16

More on page 16

More on page 17

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## ANDREW DUFF, CHAIRMAN

![](images/5_0.jpg)

The positive results and significant strategic progress made in 2017 are strong evidence that the Group is strengthening the foundations to Reignite Growth at Elementis. As I reflect on the first year following the launch of the new strategy to Reignite Growth at Elementis, I am pleased to report a year of strong strategic progress, solid earnings growth and good cash flow generation.

The acquisition of SummitReheis, disposal of the Surfactants business and far-reaching supply chain initiatives are a few examples of the significant change taking place at Elementis.

I continue to be impressed by the commitment and hard work of all our employees. They are focused on enhancing our customers' product performance through the application of expertise and innovation. On behalf of the Board, I would like to thank the entire team at Elementis.

## FINANCIAL RESULTS

In 2017, revenue from continuing operations rose 27% to $782.7m and revenue from total operations, including the discontinued Surfactants business, increased 26% from \(659.5m to \)830.3m \( ^{2} \) . Operating profit for the year increased by 7% from \(85.1m to \)91.4m, however this excludes the impact from discontinued operations and adjusting items. Adjusted operating profit for the year grew 32% to \(128.1m^{3} \)  compared to \(97.0m^{3} \)  in 2016, and profit after tax grew 73% from \(68.1m in 2016 to \)117.6m in 2017, reflecting the contribution from the newly acquired SummitReheis business and underlying growth across all of our 3 business segments. Group adjusted diluted earnings per share rose 12% from 17.4 cents \( ^{3} \)  in 2016 to 19.5 cents \( ^{3} \) .

## BALANCE SHEET

Following the acquisition in March 2017 of SummitReheis for \(362m, Elementis has moved from a net cash position of \)77.5m at the end of 2016 to a net debt position of \(291.1m at the end of 2017. One of the Group's core strengths is its cash flow generation and 2017 was no different, with adjusted operating cash flow of \)107.1m^{3}, up 12% on prior year.

The IAS 19 deficit, on the Group's post retirement benefit plans, declined from \(30.1m at the end of 2016 to \)10.5m at the end of 2017. This was driven by the UK pension plan, which moved further into surplus. The scheme accounts for the majority of the Group's pension obligations.

## DIVIDEND POLICY

Under the dividend policy introduced in 2012, the Board undertook to pay approximately one third of earnings, after adjusting items, each year in a combination of interim and final dividends. In addition, a special dividend was paid each year of up to 50% of the net cash balance at the end of the year, provided there were no immediate investment plans for that cash.

Following the acquisition of SummitReheis in 2017, and the movement from a net cash to a net debt position, the Board has revised its dividend policy to reflect our view of the long term earnings and cash flow potential of the Group. Going forward:

- It is our intention to pay progressive ordinary dividends, normally with a dividend cover of at least 2 times adjusted earnings

– The interim dividend paid each year will normally be one third of the prior full year dividend
– We look to maintain balance sheet flexibility and strength in the context of the Company's investment plans. Taking that into account, when net debt is structurally below one times earnings (EBITDA) we will seek to make additional returns to shareholders.

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This year the Board is recommending a total ordinary dividend of 8.80 cents per share (2016: 8.45 cents per share), reflecting its confidence in the Group's business model and ability to generate cash, the medium term prospects and the levels of investment required over the short to medium term to deliver the Reignite Growth strategy.

The final dividend will be paid on 1 June 2018 in pounds sterling at an exchange rate of £1.00:\(1.4035 (equivalent to a sterling amount of 4.3463 pence per share) to shareholders on the register at 4 May 2018. The Board declared an interim dividend at the time of the Interim Results announcement of 2.70 cents per share (2016: 2.70 cents).

## GOVERNANCE

In February 2017 and March 2017, the Board appointed Sandra Boss and Dorothee Deuring respectively as Non-Executive Directors. Their appointments have contributed strongly to the quality of Board discussions and, reflecting their areas of expertise, brought new insights and a diversity of perspective to the strategic conversations taking place. Andrew Christie resigned from the Board at the AGM in May 2017, having served for 9 years. I would like to thank Andrew for his contribution both as a Non-Executive Director and as Chairman of the Remuneration Committee. Steve Good has succeeded Andrew as the Remuneration Committee Chairman.

The interactions and communication flows between executives and Non-Executive Directors have been strong and as a result the new Board is well placed to challenge, guide and support the executives in the delivery of our Reignite Growth strategy.

The Board considers that it has applied fully all of the principles and provisions of the UK Corporate Governance Code during 2017. More information is provided in the Corporate governance report.

In January 2018, we welcomed our new Company Secretary, Laura Higgins, replacing Wai Wong who has stepped down after 10 years' service. Laura brings significant company secretarial experience to us gained from roles in UK and internationally quoted companies. I would personally like to thank Wai for his contribution and commitment over many years.

## PEOPLE

Ensuring that we have the right people and talent for the future needs of our business is critical to our continuing success. As a Board we spend considerable time on succession planning, and talent development across our business. Led by Paul Waterman, there have been extensive changes in the structure and composition of the Executive Leadership team and we now have a strong executive team in place to take the Reignite Growth strategy forward.

## OUTLOOK

The positive results and significant progress made by the Group in 2017, combined with a strong financial position, are strong evidence that the Group is adopting the right strategy and strengthening the foundations to Reignite Growth at Elementis.

Our priorities in 2018, the second year of the strategy, are to maintain this momentum. We have seen encouraging signs in 2017 and are confident of delivering continued progress in 2018.

## ANDREW DUFF

Chairman

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