Business review

CEO's report

Following the successful sale of Chromium in the first quarter and the creation of our Performance Specialties segment, Elementis is a more focused specialty chemicals business that brings a distinctive combination of expertise, innovation and teamwork to every formulation challenge. We create high-value specialty additives that enhance the performance of our customers' products and make a positive change in the world; unique chemistry, sustainable solutions.

In the first six months of the year the Group delivered a resilient financial performance despite weak demand conditions and customer destocking in several key markets. This is testament to the attractiveness of our business model and the ongoing effectiveness of our proactive pricing and cost management. Personal Care (now 44% of Group profit) performed well with strong revenue and earnings growth, while Performance Specialties displayed encouraging resilience as materially improved Talc earnings partially offset weaker Coatings volumes. The Group's performance, combined with continued strategic momentum as part of our Innovation, Growth and Efficiency agenda, has put us in a good position to deliver on expectations for 2023, and make further progress towards our medium-term performance objectives. The next update on our continuing strategic progress will be at our Capital Markets Day on 14 November 2023.

Group performance

Following the disposal of the Chromium business in January 2023 all prior year Group figures have been restated to exclude Chromium and allocate the $7m of annual stranded costs to the Personal Care and Performance Specialties segments.

In the six months to 30 June 2023, revenue declined 4% on an underlying basis* (down 6% on a reported basis) to $364m as pricing and mix improvements partially offset weaker volumes in Performance Specialties. Adjusted operating profit declined 10% on a reported basis to $53m, with lower revenues partially offset by proactive cost management across the organisation. As a result, continuing margins declined from 15.0% to 14.4%. Reported operating profit increased from $27m to $44m due to a $22m reduction in adjusting items.

Personal Care

In the six months to 30 June 2023, Personal Care revenue increased 7% on an underlying basis* to $112m (up 6% on a reported basis) driven by improved price/mix and continued strategic progress.

Sales into colour cosmetics applications was an area of strength, up 16% on the prior year period driven by new product launches such as Bentone^® Plus Glow. Asia and skin care, two strategic focus areas for the business also showed continued positive momentum. Sales in Asia grew 5%, with notable progress in Japan and South Korea as recent investments in sales and marketing resources and new products more than offset a slow start to the year in China. In skin care, our sales grew 7% against a strong prior year comparative as recent new product launches such as Bentone^TM Luxe XO continued to gain traction with customers.

Adjusted operating profit for Personal Care increased 16% on an underlying* basis (14% on a reported basis) to $27m, representing an adjusted operating margin of 24.5% versus 22.7% in the prior year period.

Performance Specialties

At the end of 2022, following the sale of Chromium, we streamlined our business by combining the Talc and Coatings segments into one operating division, Performance Specialties. This step has enabled a stronger end market focus on growth opportunities. We will continue to report Talc performance for transparency.

In the period, Performance Specialties revenue declined 9% on an underlying basis* to $252m (down 11% on a reported basis) with volume weakness across both Coatings and Talc partially offset by pricing benefits and improved mix. Adjusted operating profit declined 21% on an underlying basis* (23% on a reported basis) to $34m with a strong Talc performance recovery partially offsetting the volume led decline in Coatings.

Coatings

In Coatings, revenue declined 12% on an underlying basis* (down 14% on a reported basis) against a very strong prior year comparative to $181m. All regions experienced weaker performance as a result of lower end market demand and significant destocking throughout the value chain. In the Americas and EMEA sales declined 18% and 15% respectively due to weaker performance in both decorative and industrial markets linked to lower manufacturing, construction and residential activity, along with customer destocking. In Asia, where approximately 80% of our  sales are linked to industrial end markets, revenue declined 13% due to weak manufacturing activity in China post the lifting of COVID-19 related restrictions.

Adjusted operating profit declined 38% on an underlying basis* (40% on a reported basis) from $42m to $25m with improved price/mix offset by materially weaker volumes across all key end markets and geographies. As a result, adjusted operating profit margins decreased from a record high of 20.2% in the prior year period to 14.0%.

Talc

In Talc, revenue decreased 2% on a reported basis (flat on an underlying basis*) from $73m to $71m with the benefit from price actions, implemented in late 2022, and improved mix offsetting weaker year on year volumes.

Revenue from industrial talc (representing over 85% of total Talc revenue) was modestly down on an underlying basis* against the prior year period, with successful price increases in response to variable cost inflation offset by volume declines. While volumes sequentially improved from the last quarter of the previous year, they declined across all key end markets versus the prior year period linked to weak manufacturing activity and customer destocking. Sales to paper customers, which represent only 8% of total Talc revenue, rose strongly against a prior year period that was impacted by strike action at our main customers production plant. 

Adjusted operating profit increased materially from $3m to $9m, with margins rising from 4% to 13%. The delivery of cost synergies linked to the creation of the Performance Specialties business, variable cost decreases and the benefits of pricing actions all contributed to the performance improvement.

Balance sheet

At 30 June 2023 net debt was $255m compared to $367m at the end of 2022, with weaker earnings and working capital outflows, in line with our typical seasonality, offset by $139m of proceeds received from the disposal of the Chromium business in Q1 2023. Leverage at the end of the period was 2.0x net debt to adjusted EBITDA** (2.2x at 31 December 2022). Further progress on debt and leverage reduction is expected in the second half, driven by improved underlying cashflow generation, in line with typical seasonality.

Interim dividend

The Board recognises the importance of a dividend to our shareholders. Given the continued macroeconomic uncertainty and the desire to further reduce leverage, the Board has decided it is prudent not to declare an interim dividend for 2023. The Board will keep future dividends under review and will restart payments as soon as it is appropriate to do so.

Strategic progress - Innovation, Growth & Efficiency

In recent years, we have made significant progress positioning Elementis as a premium performance additives company, based on unique assets, value chains, and with clear opportunities for growth. Our strategic pillars of Innovation, Growth and Efficiency are designed to leverage this differentiated portfolio and the execution of our strategic priorities will deliver our medium term performance objectives of:

-     17% adjusted operating profit margin: driven by Innovation, Growth and Efficiency

-     90%+ adjusted operating cash conversion: consistent with 5 year average historical performance  

-     Leverage under 1.5x net debt / EBITDA: consistent with debt reduction track record

Innovation

Innovation is a key pillar for the growth of Elementis. We are recognised as a global leader in developing performance driven additives that address unmet consumer and market needs. We continue to focus on creating solutions for our customers that deliver product performance improvements and efficiency gains, while always focusing on how sustainability can be improved for our customers. We leverage our strong customer relationships with industry technology leaders and strive to become the innovation partner of choice.

At present, 72% of our revenue is from products that are natural or naturally derived^†. While this is a strong proportion, we are focused on improving this further. In the first half of the year we launched 8 new products, including two exciting new Personal Care products. Bentone Hydroclay^TM 700 is a 100% natural combination of high purity hectorite clay and xanthan gum that allows the creation of silky smooth and light skin products. Responding to the up-and-coming "skin glow" trend, Bentone^® Plus Glow is a new hectorite gel technology that combines hectorite clay with naturally derived active ingredients to combat signs of dull and flaky skin. Customer feedback on both these products has been extremely positive as they deliver excellent performance, reduce product development times, increase the speed to market for fast and agile brands, and are natural.

Growth

New products and new business will drive future growth. While near term growth is challenged by macroeconomic headwinds and customer destocking, we see long-term sustainable growth across all of our Personal Care and Performance Specialties markets, with attractive incremental revenue opportunities.

In Personal Care, Asia represents under 15% of our sales and the medium term aim is to double our cosmetics sales in the region. Despite headwinds in China, we achieved good growth in the first half, benefiting from recent product launches (for instance our JSQI gels) and investments in local sales and marketing resources. Today our Asia business is nearly twice the size it was three years ago, and with significant runway for further progress. In skin care, which represents approximately $20m of annual sales, we continue to make good progress leveraging the unique benefits of hectorite clay into a new market and have already delivered on our medium term ambition to add $10m of high margin sales since 2019.

In Performance Specialties, our high margin growth platforms in Coatings have a track record of success, increasing from approximately 30% of total revenue in 2019 to just under 40% today. While near term growth has been challenged we remain well positioned for further success. In the first half we expanded our NiSAT series for premium decorative paints with Rheolate^® PHX 7025. This product offers market leading performance attributes in a 100% active powdered format that requires no biocides, emulsifiers or surfactants, resulting in a volatile organic compound free product with significantly lower transportation emissions. Furthermore, the launch of Dapro^® Bio 9910, a new 96% bio based defoamer product, extends our waterborne industrial additives portfolio and enhances the sustainability credentials of our technology solutions. 

Efficiency

In recent years our supply chain organisation has faced multiple efficiency challenges including materials shortages and rapid cost inflation. The start of this year has been characterised by low demand. Again we have responded proactively, this time with particular focus on costs. Hiring and travel spend has been limited, and operations optimised to match the low demand environment, including reduced production runs and optimised maintenance plans. These activities have helped our first half performance.

Our new AP Actives plant in India will create a cost advantaged and resilient supply chain, generate material savings in 2024 and being a closed water production facility, significantly lower our environmental impact. Our global process engineers have delivered continuous improvement gains from areas such as debottlenecked spray drying capacity in Newberry, California and insourced raw materials at our operations in Milwaukee. Combined with further progress in procurement, leveraging our global scope and scale, we achieved $3m of efficiency savings in the first half across these two areas.

The macroeconomic environment in 2023 remains uncertain but we are confident that through a mixture of targeted innovation, agile supply chain management and continued efficiency focus, we can defend and improve margins over time.

Outlook

While global economic risks persist, the Group has again demonstrated resilience and the importance of its self-help agenda. We will continue to maintain our focus on Innovation, Growth and Efficiency and in 2023 expect to capture $50m of new business opportunities, create 15 new products and deliver $10m of additional efficiency savings.  

For the rest of the year, we are confident that our first half performance, combined with continued proactive cost management, means we are well positioned to deliver an improved financial performance in line with expectations and a further reduction in leverage.

Notes:

Where we refer to adjusted performance measures (e.g. adjusted operating profit), see Note 5

* Adjusted for FX (where constant currency reflects prior year results translated at current year exchange rates). See Finance Report for the constant currency impact at a business unit level

** Excluding the impact of IFRS 16 

^† Naturally derived products defined in accordance with IS0 16128 standard and explicitly excludes ingredients derived from fossil fuels

Finance report

Note: All prior year numbers are restated to reflect the allocation of Chromium stranded costs to the remaining business units.

*See note 5

Group results

Group revenue for the first six months of 2023 was $363.8m compared to $387.4m in the same period last year, a decrease of $23.6m (6.1%). Excluding the impact of currency, Group revenue declined by 4.4%, driven primarily by weak market demand and customer destocking in Coatings, partially offset by strong Personal Care. 

Group adjusted operating profit was $52.5m compared to $58.2m in the same period last year, a decrease of 9.8%, or 7.4% excluding currency movements, representing an adjusted operating profit margin of 14.4%, down from the prior year margin of 15.0%. Operating profit increased from $27.3m in the prior year period to $43.8m primarily driven by the impact of the adjusting items in 2022 (see Note 5 for further information).

Central costs

Central costs are costs that are not identifiable as expenses of a particular business and comprise the global corporate offices in the UK and US which include the Board of Directors, executive and senior management. The decrease in the adjusted operating loss for the first half of 2023 was primarily due to movements in adjusting items, partially offset by underlying cost inflation.

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 Group. The Board considers these non-GAAP measures as an alternative way to measure the Group's performance. Adjusting items in the 6 months ended June 2023 resulted in a charge of $10.2m before tax, a decrease of $13.0m against the same period 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.

In the first half of 2023, $8.7m of charges to operating profit were classified as adjusting items. Of these items, $7.1m relates to the amortisation of intangibles arising on acquisitions. Business transformation costs of $1.2m included costs incurred in relation to the closure of the Charleston plant announced in November 2020. A charge of $0.4m to the environmental provision is comprised of a credit of $0.8m related to the impact of changes in discount rates and a charge of $1.2m related to extra remediation work identified.

The charge to finance costs of $1.5m represents movements in mark to market valuation of financial instruments which are not in hedging relationships.

An explanation of other adjusting items relating to the previous period can be found within the Finance Report of the 2022 Annual Report and Accounts.

Other expenses

Other expenses are administration costs incurred and paid by the Group's pension schemes, which relate primarily to former employees of legacy businesses and were $0.5m in the period compared to $0.6m in the previous year.

Net finance costs

Net finance costs for the first six months of the year of $8.4m were $4.9m higher than the same period last year. Within this total, net interest costs were $3.4m lower at $7.1m due to a reduced level of borrowings and an effective interest rate hedging policy. Net pension finance costs were $nil  in 2023 compared with a $0.3m credit in 2022 due an higher discount rates. The unwind of discount on provisions of $0.5m was $0.2m higher compared to 2022 as a result of higher discount rates. The interest on lease liabilities in the period remained in line with the previous year. The fair value movement on derivatives which are not in hedging relationships was significantly lower than the prior year as a result of foreign exchange fluctuations.

Tax

The Group reports an adjusted tax charge for the first half of 2023 of $11.8m (2022: $10.4m); giving rise to an adjusted effective tax rate of 26.2% (2022: 22.4%). The adjusted effective tax rate is higher than the prior year due the increase in UK corporation tax rate from 19% to 25% effective from 1 April 2023.

Tax on adjusting items for the first half of 2023 amounts to a credit of $2.6m (2022: credit of $5.0m); resulting in a total statutory tax charge for the period of $9.2m (2022: $5.4m) and a reported effective tax rate of 26.4% (2022: 23.3%).

For the full year 2023, we are currently forecasting an adjusted effective tax rate of c.26%.

Earnings per share

Statutory basic earnings per share was 4.4 cents for the period compared to basic earnings per share of 3.1 cents in the prior period.

Basic adjusted and diluted adjusted earnings per share for the first half of 2023, calculated on the adjusted earnings of $33.3m (2022: $36.0m), was 5.7 cents and 5.6 cents compared to 6.2 cents and 6.1 cents respectively for the same period last year.

Note 9 provides disclosure of earnings per share calculations both including and excluding the effects of adjusting items and the potential dilutive effects of outstanding and exercisable options.

Adjusted cash flow

Cash flow is summarised below:

*See alternative performance measures on page 30

Net debt as at 30 June 2023 of $255.5m is significantly down on the 2022 year end position of $366.8m due to the disposal of the Chromium business. Adjusted operating cash flow in the period of $12.9m was slightly higher than the comparative 2022 period of $12.8m, with lower net working capital outflow and lower net capital expenditure partially offset by lower earnings.

Net capital expenditure in the period was $13.8m, $1.3m lower than the previous year. Capital spending for the whole year is expected to be c.$40m.

There were $1.3m of pension payments to the UK pension scheme in the period (2022: nil). The next triennial review to set any future contribution levels is due in September 2023.

Net tax payments in the period of $10.7m were slightly higher than the prior period due to the phasing of tax instalment payments.

Dividend payments were nil in the first six months of 2023 (2022: nil). The Board recognises the importance of a dividend to our shareholders. However, given the continued macroeconomic uncertainty and the desire to further reduce leverage, the Board has decided it is prudent not to declare an interim dividend for 2023. The Board will keep future dividends under review and will restart payments as soon as it is appropriate to do so.

Overall the Group had a net debt position at 30 June 2023 of $255.5m, representing a net debt/EBITDA ratio of 2.0x on a pre-IFRS 16 basis (2.2x at December 2022). Further reduction in leverage is expected by the year end, driven by improved trailing months earnings and robust cash conversion.

Working capital

Total working capital for the Group of $192.2m was $50.7m higher than at 31 December 2022, driven by increased debtors and lower creditors. As a result, debtors days increased from 37 days (31 December 2022) to 44 days and creditor days decreased from 82 days (31 December 2022) to 60 days. Inventory days have remained reasonably stable and we are looking to reduce absolute inventory levels in the second half.

Balance sheet

Property, plant and equipment decreased by $1.1m compared to the value at 31 December 2022, primarily as a result of depreciation of $18.2m for the 6 months offset by net capital expenditure of $13.4m and currency translation. Other net assets decreased by $55.4m primarily as a result of the disposal of the Chromium business which was completed on 31 January 2023.

Equity increased by $54.8m compared to 31 December 2022, primarily as a result of the statutory profit in the period of $27.5m, net of $9.3m from the impact of the disposal of the impact of the disposal of the Chromium business, foreign exchange gains of $8.4m and gains from impact of accounting for cash flow hedges of $7.8m. The remainder of the movement relates primarily to share based payment provisions and actuarial losses on pensions, net of the deferred tax impact.

The main dollar currency exchange rates as at 30 June 2023 and average rates in the period were:

Pensions and post retirement plans

During the period the surplus, under IAS 19, on the Group's pension and post-retirement medical plans increased by $1.4m to a net surplus of $18.9m. During the first six months of 2023 the UK scheme had an annualised loss on scheme assets of 5.1% (2022: return of 35.8%), liabilities decreased by 5% (2022: decreased by 23%) and the net surplus decreased by $1.6m. This movement was driven by actuarial changes due predominantly to an increase in the discount rate which more than offset a decrease in scheme assets over the period and the impact of higher inflation. Within the US schemes the net deficit decreased by $3.4m mainly due to the net return on plan assets. Contributions in the period totalled $0.7m (2022: $0.5m), all to the US plans.  There were net $1.3m pension payments to the UK pension scheme in the period (2022: nil). The next triennial review is due in September 2023.

Related party transactions

There were no material related party transactions entered into during the first half of the year and there have been no material changes to the related party transactions disclosed in the Company's 2022 Annual Report and Accounts on
page 210.

Cautionary statement

The Elementis plc interim results announcement for the half year ended 30 June 2023, which comprises the CEO's report, Finance report and the Directors' responsibility statement (which taken together constitute the Interim management report) and the interim financial statements and accompanying notes (incorporating a Condensed consolidated balance sheet at 30 June 2023, Condensed consolidated income statement, Condensed consolidated statement of comprehensive income, Condensed consolidated cash flow statement and Condensed consolidated statement of changes in equity, each for the six months ended 30 June 2023) (altogether 'Half-yearly financial report'), contains information which viewers or readers might consider to be forward looking statements relating to or in respect of the financial condition, results, operations or businesses of Elementis plc. Any such statements involve risk and uncertainty because they relate to future events and circumstances. There are many factors that could cause actual results or developments to differ materially from those expressed or implied by any such forward looking statements. Nothing in this Half-yearly financial report should be construed as a profit forecast.

Directors' responsibility statement

A full list of the Directors can be found on the Elementis corporate website at: www.elementis.com.

The Directors confirm that to the best of their knowledge:

·    The condensed set of financial statements set out in this Half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the United Kingdom.

·    The condensed set of consolidated financial statements, which has been prepared in accordance with the applicable set of accounting standards, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer, or the undertakings included in the consolidation as a whole as required by DTR 4.2.4R; and

·    The interim management report contained in this Half-yearly financial report includes a fair review of the information required by:

-    DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year.

-    DTR 4.2.8R of the Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in related party transactions described in the 2022 Annual Report and Accounts that could have a material effect on the financial position or performance of the entity during the first six months of the current financial year.

Approved by the Board on 26 July 2023 and signed on its behalf by:

      Paul Waterman                                                                               Ralph Hewins

      CEO                                                                                               CFO
26 July 2023                                                                                    26 July 2023

INDEPENDENT REVIEW REPORT TO ELEMENTIS PLC

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated cashflow statement, the condensed consolidated statement of changes in equity, and related notes 1 to 17.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom (ISRE (UK) 2410). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with United Kingdom adopted international financial reporting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with United Kingdom adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusion Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This Conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410, however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of the directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly financial report, we are responsible for expressing to the company a conclusion on the condensed set of financial statements in the half-yearly financial report. Our Conclusion, including our Conclusion Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

This report is made solely to the company in accordance with ISRE (UK) 2410. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

Cambridge, United Kingdom

26 July 2023

Condensed consolidated income statement
for the six months ended 30 June 2023           

¹ 2022 has been represented following the classification of the Chromium business as a discontinued operation, see Note 15 for further details.

Condensed consolidated statement of comprehensive income for the six months ended 30 June 2023

¹ 2022 has been represented following the classification of the Chromium business as a discontinued operation, see Note 15 for further details.

Condensed consolidated balance sheet
at 30 June 2023

¹  The classification of the Chromium business as held for sale was at 30 November 2022, thus the at 30 June 2022 Balance Sheet has not been represented to exclude the impact of the Chromium business.

Condensed consolidated cash flow statement
for the six months ended 30 June 2023

¹ 2022 has been represented following the classification of the Chromium business as a discontinued operation, see Note 15 for further details.

Condensed consolidated statement of changes in equity
for the six months ended 30 June 2023