Elementis plc (ELM) Earnings Call Transcript

Good morning. Thank you for joining us. I'm Luc van Ravenstein, CEO of Elementis, and you know Kath, our CFO, and it's great to share Elementis' results for the first half of 2026. There are a lot of good things happening. Here's the agenda. I'll give a summary of the progress at H1. Kath will then cover the financials, and I'll then talk about how we are driving growth. And then there'll be a Q&A at the end. Let's get straight into it. It is a strong performance. One year into Elevate Elementis, the strategy we launched last year, we're making great progress on all fronts. Revenue up 5% at organic constant currency, profit up 16%, a significant increase and margins at 23%. And in terms of portfolio, we're making great strides. We completed the pharma sale in June and started a share buyback. We acquired Alchemy, a fast-growing, high-margin skin care business. And we now have the right portfolio, an excellent global manufacturing footprint that gives us supply resilience so we can fully focus on growth. And this all means we're confident of meeting expectations for 2026 full year. The order book into Q3 is solid, and that's in mixed markets. So this is the new Elementis. You can see the transformation over the last years. We've sold talc, chromium and pharma. And this gives us a unique high-quality portfolio. Elementis today is a pure-play specialty chemicals leader in large and growing markets. Additives are a small part of formulations, typically 1% to 2%, but they're critical for performance. So think strong margins. But also think growth. We focus on areas that make us special and where we can win, and that's hectorite, rheology and formulations. Rheology is critical for our customers' products. That's about getting the right stability and texture. And hectorite is a unique and versatile mineral that enhances performance in a wide range of applications. And our formulations are the expertise we've built up over a long period for our customers, and that's our secret sauce. And this is Elevate Elementis, the strategy we launched this time last year. We talked about 3 strategic priorities to create value. Accelerating top line growth is the first one. The second is getting closer to our customers, so we are their first choice. And the third one is creating a simpler and leaner Elementis. And we're taking big strides forward in all of these areas. I'll come back to that later. On the right side, you see our financial ambitions. We're now hitting a lot of these targets. Mid-single-digit growth through the cycle. We are at 4.7% organic constant currency revenue growth. Adjusted operating profit margins of 23% plus were there at the half year, but that doesn't mean it's job done, and Kath will go into more details on this. 3-year operating cash conversion greater than 19%, we are at 95% and ROCE greater than 30%. We're getting very close there. So that's our priorities and our progress. It's early days, but the strategy is working. And you see that in our numbers, but you also feel it when you talk to our Elementis colleagues. Our people know this is a special time here, and they feel the freedom to win. And on that, over to Kath.

Thank you, Luc, and good morning, everyone. Firstly, I'd like to say we're pleased that we're able to present a strong set of financials in the first half. A couple of housekeeping points around the presentation of the financials. Following the sale of the pharmaceutical manufacturing business, this is now reported as discontinued operations. The 2025 H1 P&L and cash flow figures have been restated for continuing operations and used for comparison purposes. I wanted to briefly show an overview of the key metrics for H1 2026. Most of these items will cover in the following slides, so we won't go into detail here other than highlighting mid-single-digit revenue growth contributed to strong growth in adjusted operating profit and a 140 basis improvement in margins. In combination with lower net finance costs and a lower number of shares following the buyback last year and the start of the current share buyback, adjusted earnings per share was up 28.8% to $0.085. We've experienced mixed conditions in the first half, but the team's focus on performance and delivery is evident, and we're starting to see the delivery of the Elevate Elementis strategy. As we turn to look at group revenue, you'll see that despite the mixed backdrop, we delivered a strong performance with overall revenue up 9.4% on a reported basis and 4.7% on an organic constant currency basis to $318.2 million. Bridging from 2025, we had favorable FX tailwind of approximately $9.8 million and the contribution of Alchemy was $3.5 million. Volumes were up $16 million, primarily in Coatings with strong demand in Asia and EMEA, partially offset by the weak demand environment in North America. And the muted growth in Personal Care was also impacted in Americas due to isolated weak demand in Q1. On pricing, we delivered $6.8 million across both businesses, a testament to the specialty nature of our portfolio and ability to price accordingly in response to the inflationary impacts of the Middle East war. And turning lastly to mix. This was down $8.7 million, primarily in Coatings as we see the benefit of our local-for-local strategy, for example, NiSATs in China. NiSATs are additive for premium decorative coatings. This strategy has benefited volumes, absolute profit and margin improvement, but comparatively lower prices result in downward pressure on revenue mix. In Personal Care, the negative mix was due to a product mix weighted towards lower-priced but higher-margin products. We anticipate that we are slightly more weighted in H1 than recent years due to the strong Asia demand in both Personal Care and Coatings and the timing of customer promotional activity in AP Actives, alongside the ongoing macroeconomic uncertainty. Moving on to operating profit. We delivered strong operating profit growth, which increased by 16.4% to $73.2 million. Within this, we benefited from favorable FX of $2.6 million and the contribution of Alchemy. Higher volumes resulted in $6.4 million drop-through to operating profit, representing a 40% drop-through. And the net price/mix impact was broadly neutral after pricing offset inflationary cost increases. Our ongoing self-help savings initiatives resulted in savings of $1.3 million in the first half, bringing the total since Elevate Elementis was launched this time last year to $7.3 million. As part of the strategy, we also stated that we would invest an incremental $6 million in R&D over 2026 and 2027. And we started this in H1 with an additional spend of $0.8 million and expect more to come in the second half. Taking the savings and incremental R&D spend together, the first half savings are a net $0.5 million of the $4 million we committed to in 2026, and we are on track to complete this by year-end. As noted earlier, our strong profit performance helped drive higher margins, increasing 140 basis points to 23% -- the anticipated H1 weighting will moderate this in margin in H2 and for the full year. Now let's take a deeper look into the reporting segments. Starting with Personal Care. Revenue was up 2.9% on an organic constant currency basis to $109.2 million, with strong growth in cosmetics, particularly in skin care in Asia. EMEA saw good growth, whilst North America growth was muted, particularly due to the isolated weaker demand in Q1. AP Actives' revenue was flat with volume increases offset by mix due to a lower price product mix. In addition, there was the benefit of the Alchemy acquisition and FX tailwinds. Good progress was made in adjusted operating profit with a 3.1% organic constant currency improvement with pricing offsetting inflationary increases, improved profitability from product mix despite the downward pressure on revenue and cost savings contributing. In addition, there was the benefit of the Alchemy acquisition. The higher profits in turn helped to drive a higher margin, which was up 30 basis points to 38.1% compared to the reported margins last year, Personal Care now includes a circa 380 basis point improvement due to the sale of the pharmaceutical manufacturing business. And lastly, on this slide, I wanted to highlight that Alchemy acquired in November 2025 is performing well, fully integrated into Elementis and on track for sustainable double-digit growth. Progress has also been made with the wider portfolio. Now moving on to the Coatings segment. We delivered a strong performance in revenue, particularly compared to the mixed market backdrop with 5.6% organic constant currency growth to $209 million. We saw particularly strong growth in Asia and EMEA, partially offset by continued weak demand in North America linked to weak construction activity. Our local-for-local strategy, which I referenced earlier, primarily benefited Coatings and especially our Asia and LatAm regions. We also saw good growth in the energy sector, which was helped by the ongoing improvements in the last year at St. Louis. The combination of higher volumes, profitable mix and cost savings has driven a strong profit and margin uplift in this segment with organic constant currency operating profit up 18.7% to $43.2 million and a 250-basis point increase in margins to 20.7%. Now taking a look at free cash flow. A key feature of this business is its strong cash flow generation, and I'm pleased to report that we've continued to generate good free cash flow whilst investing for growth. Looking at the key components, the seasonal working capital outflow in the first half has been driven by a combination of higher receivables and inventory. Higher receivables are due to the revenue growth, particularly in Q2, which was up circa 7% alongside no factoring in June 2026 compared to $16 million in June 2025. Inventories are higher, reflecting raw material prebuys and inflation linked to the Middle East conflict. However, we've had a specific focus on inventory in the last 6 months, and I'm pleased to say that the quality of inventory mix has improved, and we continue to take actions to manage inventory closely. CapEx increased versus last year as we have continued to invest in growth CapEx and complete our new Porto office and labs, which the team moved into last week. As a result of these movements, our adjusted operating cash flow was $29.8 million compared to $41.3 million last year. And as we move down the cash flow statement, it's worth calling out 2 items. Firstly, our cash taxes were higher due to an IRS refund in 2025 relating to claimed utilized net operating losses for prior periods. And adjusting items were $7.1 million lower following a lower level of restructuring implementing Elementis simplification and leaner strategy for which actions have finished at the end of H1. There will be some P&L charges in H2 and cash outflow in H2 and 2027. In addition, we sold the Middletown site in New York, which was closed in 2024, resulting in a circa $3.5 million net cash inflow for the half. Our balance sheet remains robust and net debt has reduced to $163.8 million and 1.1x leverage. Looking at the key movements from left to right, we started the year with a net debt balance of $185.4 million. Adding back the free cash flow generated of $13.3 million as well as the $32.7 million of the combined net proceeds from the sale of the pharma manufacturing business and its cash outflow during our ownership, we had an increase in cash available for distribution of $46 million. Of this amount, we used $6.7 million to repurchase shares, $4.1 million from the share buyback program started in early June and the remainder for the purchase of 1.3 million shares by the Employee Share Options Trust. The 2025 final dividend was paid in May and has a small FX impact on net debt. The share buyback program is ongoing, and we expect to finish towards the end of the year or early next year. Now turning to capital allocation. Our aim is to maximize return on invested capital while maintaining a strong balance sheet and strategic optionality. In relation to investments, our CapEx program continues to be focused on investing for growth and productivity. We're continuing to invest in R&D and are in progress to increase total spend from 2% of revenue to 3% by the end of 2027. To complement these organic growth investments, we will selectively pursue bolt-on acquisitions, and we continue to look for opportunities in this area whilst being mindful of our Elevate Elementis targets. Return on capital employed at the end of June was 29.4%, a 100 basis point improvement on the prior year continuing operations ROCE and close to our minimum 30% target. On dividends, our policy is for a payout ratio of around 30% of adjusted earnings on a full year basis. As we announced this morning, the Board has approved an interim dividend of $0.015, representing a 15.4% increase on last year. In considering future additional returns, we will assess several factors, including prevailing market conditions, our existing progressive dividend policy, the investment requirements of the business and our desire to maintain leverage at around 1x net debt to EBITDA over time, which we continue to anticipate we will achieve by the end of 2026. I'd now like to hand you back to Luc, who will take you through the rest of the presentation. Thank you.

Thank you, Kath. All right. I'm going to get into the 3 priorities for our strategy, Elevate Elementis, growth, customers and a leaner platform to move forward. But before I do, let me come back to why Elementis is unique, and these are the winning differentiators that I mentioned before. Going from right to left, formulation solutions. This is our expertise we've built up over years for our customers' formulations. It's about how we deliver value to help our customers day in, day out make better cosmetics or paints. And then rheology, where Elementis is the global leader. We have the broadest portfolio in the industry. This is about 2/3 of our business, and it is a crucial component of any formulation. And then hectorite. It's unique, highly efficient. It's very versatile. It's being used in mascara, drilling muds, lipsticks and self-leveling coatings. And that's the red piece of the pie underneath. It's now 1/3 of our sales, and that's good for our margins, but also hectorite has given us exciting growth. So what's so special about it? Hectorite is natural, pure and unique. And I won't go through all of these benefits here, but we're confident that hectorite will deliver double-digit growth through the cycle. And this is why, we have a unique access to pure hectorite. We own the largest commercially viable high-grade deposit in the world. Our current known resources will last for more than 50 years, and this is a competitive advantage to us. But it's not an asset only. We don't typically sell straight hectorite. We formulate it, blend it, and this is where we innovate and add value. We're building 3-in-1 systems to bring together rheology with other functional additives such as skin care, for example. So customers get easier to use products. But also hectorite has a unique composition that allows us to get into a lot of new exciting opportunities also outside of Coatings and Personal Care. For example, it removes PFAS, the forever chemical from wastewater. We've demonstrated on a pilot scale that it's highly efficient. So that's a snapshot of hectorite. We're just scratching the surface here on hectorite, and we're going to do much more of this. So these are our 3 strategic priorities. We have some key deliverables to advance in these 3 areas. Let me talk you through them. Let's start with growth. I want to give you a feel for how hectorite launches are driving growth because we're always obsessing about finding new applications. And a great example is skin care. This is a large market, $800 million for rheology and sustainability is critical here. And premium textures are a sweet spot for hectorite. A few years ago, we had hardly any sales here. So we invested in resources. We hired sales and R&D people from the skin care industry that talk our customers' language. We launched new products such as HYDROCLAY that are a great fit for this application. And last year, we had about 3% share here. So plenty of room to grow. This year, we've seen a significant uptick. We've had a sales increase by 12% in the first half, but maybe even more exciting is the amount of end products launched, including hectorite that jumped up by 25%. There were more than 800 new skin care and sun care products on the shelves in H1 that include our hectorite. And that is a great leading indicator for expected sales. We brought some samples for you, self-tanning cream that includes hectorite. I think of that as an early Christmas present. We developed that with a regional champion. We benefit from our local-for-local model. We've got great customer relationships, and this has gone from 0 to millions in 1 year. First choice for customers. This is something that's critical to accelerate growth. We want to be best-in-class in terms of service levels for our customers. Let me come back to the targets we set last year. There were 2 areas that need our attention, OTIF on time in full, improving that performance and St. Louis, our biggest site in the U.S. where we make organic clays. One year on, this is a snapshot of the early benefits. On OTIF, at the end of 2024, we were at 76%. We moved it up to 88% this H1. So we're getting close. And on St. Louis, we've made leadership changes to add know-how. We're applying best practices from other sites. That's not rocket science, but it's working. About 99% of our production is right first time now. That's a big improvement, and it supported our growth. It's critical for the confidence of our people on the road with customers. And a great example is CHARGUARD. That's a product that stops wires and cables from burning by preventing dripping. And you see an image on the right-hand side here. This is a totally new application. Coming out of St. Louis, has generated $1.5 million of business in H1, and it's all self-help. So the focus for us is on sustainable growth, but there was also a significant opportunity to simplify Elementis, making it a leaner, more agile company. And the structure now is leaner. For example, a much smaller top management team, but we also streamlined several functions. And on the other hand, we've invested in growth, particularly in innovation and sales. The net cost savings were about $0.5 million towards our target of $4 million for the year. So that's a run-through of how this Elevate Elementis program works in practice, and we're very excited by the early results we're seeing. So, bringing this all together, this is a strong performance in H1. We're on track for Elevate Elementis. We are now a pure-play leader in specialty chemicals, and you see that coming through in our results. We're confident of hitting our full year '26 expectations, and that's in spite of mixed markets. But let me end where I started, growth. I said earlier, people ask me what makes us different. They ask me what about our growth agenda. And that's exactly what we'll get into for our Product Innovation Day. Date in the diary is November 3. It's at our new state-of-the-art lab in Porto, Portugal, and we want you to get a better feel for how Elementis will accelerate growth. We'll go deeper into how our products work, innovation, how we work with our customers and we partner up with them. But it's also a great opportunity for all of you to meet our teams. And with that, we'll take your questions. Thank you very much.

Angelina Glazova from JPMorgan. I have 2 questions, please. My first one is on the full year guidance and current developments. So we have seen strong first half results, and congratulations on that. And you have mentioned a strong momentum in the order book into Q3. But at the same time, you have opted to maintain the full year guidance, which one might read as somewhat cautious. So could you give us a bit more color as to how you think about the second half? Obviously, external environment might be difficult to predict. But when you look between the businesses, where do you think there might be a deceleration at some point in the second half? And then secondly, my question is on hectorite. You have mentioned today that it's already 1/3 of group sales, yet I remember that when we spoke at the full year results, it was closer to 1/4 of sales. So if you could give us a bit more color on what drove this change? And to what extent it is a change in the scope for the sale of pharma manufacturing business? And to what extent this is acceleration between segments? You have mentioned skin care. So that's maybe one to focus on. And if you could just remind us the split of the Personal Care business between different buckets, so skin care, AP Actives because there might have been some change as well in recent years.

Thank you for those questions. I'll start with your first one. Look, we're very pleased with our H1 performance and the advancement of our Elevate Elementis strategy. But let's be clear, I think that the macro environment is still very uncertain. Consumer spending is still not great. So we prefer to be cautious and not get ahead of ourselves. But indeed, we're very pleased with our performance, and we're very confident of delivering our strategy medium term. But let's not get ahead of ourselves there. On your second point, hectorite, yes, it has gone from 1/4 to 1/3. You're absolutely right. And this has been basically driven by 2 aspects. One is indeed the pharma sale and the other one is great growth for hectorite. We've mentioned that we are going to grow hectorite double digit through the cycle. So that's definitely been helping us in the first half as well. Skin care is growing 12%, a lot of that from hectorite, and we foresee that, that's going to continue. So split of the businesses. For us, the Personal Care business, we've got the AP, antiappeasement actives business, and then we've got, let's say, the cosmetics business, which consists of color cosmetics, skin care and some other smaller bits and pieces. Skin care, we just mentioned is about -- for us, we have about 3% of that $800 million market that was last year. So -- and we had 12% growth in the first half. So, it's still quite small for us, but it's growing fast. Color Cosmetics is still the vast -- or the largest part of the cosmetics business and the AP Actives business. I don't have the exact numbers in front of me, but still $75-ish million of revenue.

On a full year basis.

On a full year basis, yes. Thank you.

Vanessa Jeffriess from Jefferies. Congratulations on the results and the share price, which hasn't been here in a long time. So, you set these growth and margin targets last year, and now you're already here, which is nice to you. But can we expect any kind of further margin target or anything now that you're there? Or is the focus really on accelerating growth?

Thank you for your support, Vanessa. Look, first of all, 23% plus is our margin targets. We're only 1 half in. As Kath mentioned, typically, we have a bit of a stronger first half than the second half. So, we really -- let's first get there. And also, let's demonstrate quarter after quarter, half after half growth on the top line, margin delivery and results delivery. We're 1 half in. We're very confident that we're doing the right things and delivering our strategy. But let's deliver. I don't know, Kath, if you have anything to add to this.

I think that's fair. I mean 1 half doesn't make us -- that we've achieved the target. So -- and just on the margin point, as I said, we do expect that to moderate in the second half just because of the H1 and H2 weighting.

And then you talked about 12% skin care growth in the first half. I didn't give numbers on cosmetics, but I imagine that was pretty good as well. I think you said it's flat. I think when we spoke a couple of months ago, there was a comment about the World Cup maybe being a tailwind I'm not sure if that came through. You said on Page 29, the double-digit growth from high efficacy actives, which represent the majority of the portfolio. So, I'm not sure that we've seen that growth in AP Actives come through for a while. So, I guess if you can talk about that. And then I'm sorry if this is an off-based question. But I guess given what you've achieved in pharma and talc, is AP Actives actually central to the strategy anymore? And does that actually fit as part of the portfolio?

Yes. So, if you look at AP Actives, indeed, you're right about that one-off event. which I wish had ended in a different way. But if you look at the business, at the AP Actives business and the portfolio, it has changed fundamentally from where we were in 2018 when we acquired it to where we are now. So, these high-end, high-efficacy actives have grown fast. So, the shape of the business, although indeed performance has been relatively flat from a revenue and top line perspective, the shape of the business is different, and it's a profitable business. So, we're, in that sense, happy to have it also because it gives us a better foot in the door, a stronger Personal Care business, and it helps us in conversation with large customers. And we're moving towards new applications, innovations, et cetera. We talked about new natural actives. We've had our first sale there actually in the first half, small, but still, I think, significant to demonstrate proof of concept. So, we're actually happy where this business is going. But thank you for those questions.

Kevin Fogarty from Deutsche Numis. Two, if I could. Just on Coatings, pretty strong performance if we think about the backdrop in global coatings markets, et cetera. Could you just provide a bit of detail in terms of how much of that is perhaps penetrating kind of newer markets for coatings perhaps as a driver there rather than kind of industrial and deco markets? And just secondly, on innovation, there's clearly quite a lot going on. You're pulling out sort of 25% in terms of skin care. And I just sort of wondered what's the sort of speed of innovation like, I guess, and how does that suit a player like you guys? And perhaps wrapping into that, how does it change the customer base perhaps you're working with?