Elementis PLC

LSE:ELM

Earnings Call Analysis

Elementis delivers robust growth and margin improvements in H1 2024

Elementis reported a strong first half of 2024 with a 5% revenue increase to $383 million and operating profit up by 24% to $65 million. Margins improved from 14.4% to 17%. Net debt decreased significantly, reducing to $196 million with a net debt-to-EBITDA ratio of 1.3x. Key growth was driven by Coatings and Personal Care segments. Elementis announced $15 million in expected annual cost savings and aims for an operating margin of 19% by 2026. Innovation continues to thrive with nine new products launched in H1, contributing to an expected above-market revenue growth of $20-25 million in 2024 alone.

Strong Performance Amidst Flat Demand

In the first half of the year, Elementis achieved a commendable 5% revenue growth, reaching $383 million, despite a largely flat demand environment. This growth was propelled by key segments, particularly Coatings and Personal Care, showcasing the effectiveness of the company’s innovation, growth, and efficiency strategies initiated since 2020. The leadership highlighted that strong execution allowed the company to thrive even when the market conditions were not favorable.

Impressive Financial Metrics

Elementis reported an operating profit of $65 million, marking a 24% increase year-over-year, resulting in an operating margin of 17%. This is a substantial improvement from 14.4% in the previous year. The adjusted earnings per share rose by 9% to $0.061, reflecting effective cost management and strategic pricing, with net debt decreasing significantly to $196 million, compared to $255 million a year prior.

Efficiency and Cost Savings Initiatives

The company is running ahead of plan for its $30 million efficiency program, expecting to deliver $15 million in cost savings this year and another $15 million in 2025. This fast progress highlights Elementis’ commitment to improving operational efficiency and maintaining profitability without solely relying on market demand.

Guidance for Future Growth

Looking ahead, Elementis is targeting $20 million to $25 million of above-market revenue growth for the year, with a longer-term goal of achieving $90 million by 2026. They predict that with the right execution, even maintaining current demand levels, operating margins could exceed the 19% target set for 2026, as they refine their product offerings and optimize their operations.

Product Innovation and Market Expansion

In terms of product development, Elementis remains committed to innovation, with plans to launch 15 new products within the year, capitalizing on market trends for sustainable ingredients. The company has reported that new products accounted for 15% of first-half sales, a slight increase from the previous year, while natural or naturally derived products comprised 69% of total revenues. This strategic focus positions Elementis well in the growing Personal Care and Coatings markets.

Talc Strategic Review

Elementis has initiated a strategic review of its Talc business to evaluate its future potential, including considering divestment options. This could lead to a significant shift in their operational strategy and indicates a proactive approach to optimizing their business portfolio for maximum shareholder value.

Safety and Environmental Commitment

The company has made notable advancements in safety, achieving an operating cash conversion of 81% over the past three years, and significantly improving its safety record with a 50% reduction in recordable injuries. Elementis is committed to a robust health and safety management framework, further underscoring its dedication to its workforce and responsible operational practices.

Dividends and Capital Allocation

In alignment with its progressive dividend policy, Elementis announced an interim dividend of $1.1 per share. The focus remains on organic growth and maintaining a solid balance sheet, aimed at ensuring sustainable returns for shareholders while investing in growth opportunities.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, everyone, and welcome to the Elementis 2024 Interim Results Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions]



I will now hand over to your host, Paul Waterman, CEO, to begin. Paul, please go ahead.

[Paul Waterman, executive]

Good morning, and welcome to the Elementis 2024 Interim Results Call. Before we get into the presentation, I'd just like to share a few reflections on our first half results. The demand environment was flat, so there was no tailwind. The results were driven by execution of the innovation growth and efficiency strategy that we've been working at since 2020.



At our Capital Markets Day last November, we shared how continued execution of this strategy will deliver materially improved financial performance by 2026. I believe the first half performance needs to be looked at in this context. Our performance was strong relative to the environment, and this was a result of our multiyear focus on launching innovative new products, developing new business, while simultaneously taking action to make Elementis more efficient.



We now have a very solid foundation that we'll continue to build on. So am I confident we'll deliver our 2026 CMD targets? Yes, I'm absolutely confident. And even if demand conditions remain as they are, we have the right strategy and a very talented team to deliver it. And we will continue to actively manage our portfolio and will deliver both above-market growth and further efficiency.



So while this first half is a down payment on our CMD commitments, there's more to come, and it will be to the benefit of our shareholders. I'm very excited about where we're going. It's a very exciting time to be leading Elementis.



So with that, let's get into the presentation. In terms of the agenda, I'll start with highlights and business segment performance. Ralph will cover the group financials, and then I'll take you through the outlook. Following this, we'll take your questions.



We're pleased to report that Elementis delivered a strong first half performance with revenue and earnings growth driven by Coatings and Personal Care. The self-help actions we announced in November are progressing well. We delivered 5% revenue growth in a largely flat demand environment. This was underpinned by the growth platforms we set out at last year's Capital Markets Day.



Our efficiency delivery is progressing faster with $15 million of cost savings now expected this year. Our balance sheet continues to strengthen with net debt to EBITDA down to 1.3x. And today, we're announcing a strategic review of Talc to determine whether its full potential can best be delivered as part of Elementis or via a divestment.



In terms of outcomes, we've made good progress on our 2026 financial targets, delivering an operating profit margin of 17%. That compares to 14.4% in the same period last year. So a demonstration of strong progress.



Operating cash conversion was 81%, and return on capital employed improved from 15% for 2023 to 18%. I'll provide more detail on the target shortly. But first, let me cover our safety performance, which improved further in the first half.



We reported 1 recordable injury, which is a 50% improvement on the prior period, but equally one short of the 0 injuries goal that we are targeting. That said, we've achieved notable milestones in the first half. 85% of our plants have now worked safely with no recordable injuries for over 1 year and 60% have worked with 0 injuries for over 3 years. There's still more to do. We continue to drive further improvement, training our people and maintaining our assets.



Let me just mention the global HSE management framework, which we rolled out in the first half. This is aligned with the international standards for health and safety at work and part of our systemic approach to keeping our people safe.



Turning to our headline financial performance on Slide 7. Revenue increased 5% to $383 million, reflecting more normalized volumes and improved mix. Operating profit of $65 million was up 24% on the prior period, the best first half profit results since 2019. Our operating margin was 17% or 260 basis points higher than the 14.4% reported last year. Adjusted earnings per share increased 9% to $0.061 per share. And we continue to deliver with net debt falling since the year-end and our gearing ratio at 1.3x versus 2x at this time last year. In line with our dividend policy, we've declared an interim dividend of $1.1 per share.



Moving on to strategic progress. I'm pleased to say we're moving at pace towards our 2026 CMD objectives. Progress is demonstrated in our focus areas of innovation, growth and efficiency. On innovation, we're on track to launch 15 products this year with 9 launched in the first half. These included bio-based defoamers for industrial coatings and hectorite-based skincare products.



New products accounted for 15% of sales in the first half, up from 14% in the prior year. And we generated 69% of revenues from natural or naturally derived products. Our growth platforms are also on track, and we expect $20 million to $25 million of above-market revenue growth to come this year.



In the first half, we delivered $29 million of new business across Coatings and Personal Care, putting us well on track for $50 million of new business in 2024. Revenue growth in the first half was supported by strong growth in Asia, where Elementis sales increased 26%. On efficiency, I'm pleased to say delivery of our $30 million efficiency program is running ahead of plan, and we now expect to deliver $15 million of savings this year and another $15 million of savings in 2025.



The organizational restructuring, which we call Fit for the Future is ahead of plan, while our procurement and supply chain cost savings program is progressing well with the AP Actives Middletown, New York plant now closed. Ralph will provide more detail on both programs later on.



All these actions are supporting progress against our financial targets. First, our operating profit margin continues to improve. 17% in the first half gets us materially closer to our 19% plus target in 2026. I'll reiterate that we've assumed 100% of the delivery is based on self-help, and we continue to assume that demand environment will be unchanged. Should demand improve, we believe our operating profit margin will exceed 19%. Our second target is to deliver operating cash conversion of over 90%.



The 3-year average operating cash conversion to end June 2024 was 81%, and performance over the last 12 months was 130%. So we're making good progress here. Our third target is to improve return on capital employed to over 20%. We improved to 18% in the first half from 15% last year. Around half of this improvement came from earnings growth and the other half resulted from a write-down of the Talc assets. Overall, we're making good progress, but there's more to do.



Now let's look at the performance of our businesses by segment. Starting with Personal Care, where we delivered a record operating profit. Revenue was up 2% versus a strong first half last year. Our adjusted operating profit is up 22% to $34 million with the operating margin improving to 29.3%, supported by self-help actions. The expanded capabilities that we've been building over the last few years continue to drive momentum and have led to a higher quality business overall. This was mainly achieved by $10 million of new business with higher-value products with almost half of them being innovation sales. We continue to optimize our route to market, particularly in Asia, where we've built the capabilities to directly manage more strategic customers that not only increases customer intimacy, but also drives higher margin.



And finally, we're seeing the benefits of self-help cost and pricing management. Our plant in India is now successfully producing the majority of our AP Actives products, which has enabled us to consolidate our global production footprint.



On Slide 12, you can see that Personal Care is a high-quality business with attractive margins. To drive new business, we need new products and our commitment to innovation is enabling this. Overall, the share of innovation sales as a percentage of total sales has been increasing year-on-year over the last 5 years. We've launched 29 products since 2020, which are not only creating a stronger, higher-quality business, but have also helped drive our new business opportunities pipeline, which has now reached a record of $81 million. This gives me confidence about the future growth and the sustainability of our margins in the coming years.



And as you can see, this innovation and new business-led growth has created a business of scale as Personal Care now represents 45% of the group's profits. Now let me tell you how we're going to deliver on our Personal Care growth platforms. We set out in our November CMD a $90 million above market revenue growth target by 2026, driven by 7 growth platforms, 3 in Personal Care, 4 in Performance Specialties.



Personal Care platforms will deliver about 1/3 of the $90 million target. Here, we laid out the key deliverables to 2026 that support this delivery. The first is Colour cosmetics, which is currently the biggest application we're serving in Personal Care. Here, we target above-market growth of $10 million by 2026. We're leveraging our strong market position and application knowledge to support customers who respond to the latest trends and need the ingredients for the finest makeup products.



We're on track to deliver 8 new product launches within the next 18 months. These products will focus on solving our customers' key challenges around formulation versatility, flexibility and sustainability. Additionally, we will enter the field of film formation that is complementary to our current Hectorite offering. Secondly, in skin care, we see a growth potential at 2x to 3x the market with the biggest opportunity being the replacement of synthetic rheology control ingredients with our natural hectorite technology.



We're on track to launch 7 new products by 2026. We see significant growth potential in water-based skin and sun care products as well as film formation, which works alongside the benefits of hectorite and sun care applications. Additionally, we continue to invest in existing product development of our hectorite series beyond their functional properties, promoting hectorite as a hero ingredient. These developments will build on the successes we had in oil absorption and mattifying opening the door to more sophisticated skin condition and skin improvement claims.



Finally, in AP Actives, we target mid-single digit revenue growth and margin expansion driven by our high-efficacy AP Actives. We'll do this by entering a new market for deodorant actives, while also targeting a significant regional sales expansion in Asia. This is enabled through our improved manufacturing footprint with a local presence in the region. This is the program to 2026, but let me cover the progress we've made over the last 6 months.



First, skin care. In April, at the in-cosmetics trade show in Paris, which is the biggest show for personal ingredients in the world, we launched BENTONE HYDROLUXE 360. This is our newest hectorite launch, which provides outstanding sensory and texture benefits and also makes it easier for our customers to get the right stability and viscosity in their natural formulations. We received great feedback. It was amongst the top 5 most popular products at the show, and we sent out over 700 samples to customers worldwide. This is our first product in the new HYDROLUXE line. We're already planning the next launch at the in-cosmetics trade show in Amsterdam next April.



Together with existing products, this will enable us to expand our share in the natural rheology modifier market for skin care that's worth over $200 million. We also made good progress in Colour cosmetics, mainly driven by Asia, where the business grew over 30%. As I mentioned earlier, this was facilitated by our expanded capabilities in sales, marketing and technology in this region. We've doubled headcount since 2021. We saw strong growth in China, Korea, Taiwan and Japan.



Growth in China was driven by our relationships with the bigger local players, but also with some fast-growing manufacturing companies export globally. I mentioned the changes to our route to market earlier, which means that in China, we now serve more of our customers on a direct basis. For the first time, we launched 2 customized products for our Chinese customers. But Asia growth is not all about China. In Korea, we're advancing with contract manufacturers and in Indonesia, we supply big players for local but very popular Colour cosmetics brands.



So our continued investment in capabilities in Asia is delivering, and we'll continue to invest in this region to support further growth.



Moving on to the last growth platform in Personal Care, antiperspirants. Here, we're focusing on revenue growth and more importantly, further margin improvement. We've made great progress on high-efficacy products launched over the last few years. I'm talking about products that allow for 72 or sometimes even a 96-hour sweat protection claim. Revenue from these products increased 16% in the first half.



We also launched our first active based on waste aluminum. Using waste aluminum reduces Scope 3 carbon emissions with no impact on the efficacy of the product. Hence, this is providing sustainability benefits for us and our customers.



Last, we filed a patent for a new deodorant active that will offer both odor and sweat reduction benefits. This will allow us to enter a new $80 million deodorant actives market and will nicely complement our leading position in any perspirant actives. We plan to launch it in the first half of 2025.



I'll now move on to Performance Specialties. Overall revenue increased 6% to $268 million, driven by Coatings. Adjusted operating profit increased 22% to $42 million. Adjusted operating margin rose to 15.5%, driven by improved volumes and mix in coatings and $19 million of new business.



Turning to Coatings, which delivered a much improved financial performance. Revenue increased 10% to $200 million, supported by growth platforms and some benefits from selective restocking. Adjusted operating profit increased 52% to $38 million, reflecting improved volume and cost management. Adjusted operating margin improved to 19.3%, supported by self-help actions and better product mix.



Our first half improvement reflects the quality of our coatings business. Slide 19 demonstrates the change we've made over the years, improving the portfolio and reducing costs. Looking back, you can see we had an average margin of around 14% between 2015 and 2020, even in a healthy demand environment. Since 2021, Coatings margins have been driven significantly higher. The 90% margin we delivered in the first half and continued weak market conditions is a testament to the improved quality of this business. This hasn't been driven by a favorable market. The chart on the right-hand side shows average volumes of select chemical companies and industrial production growth and demonstrates the weak demand conditions we are still facing. That puts our 19% margin into perspective. We're obviously looking forward to demand improving, but even without it, we have confidence we can continue to grow earnings in the coming years.



Slide 20 shows the improvement in sales across the decorative and industrial sectors, driven by more normalized volumes post destocking. All our regions saw revenue growth in the first half. In the Americas and Europe, where our business is split relatively evenly between decorative and industrial activity, revenue increased 8% and 7%, respectively. And in Asia, where we are more focused on industrial coatings in China, sales improved 25%. Let me just remind you that China was still in lockdown in H1 2023, and we've also seen modest restocking in this region. So we do not expect the rate of growth to continue at this pace in the second half.



And finally, revenue across our global key accounts was broadly flat, with many of our large customers facing quite challenging demand conditions.



Let me now move on to our Performance Specialties growth platforms. Of our 7 growth platforms, 4 in Performance Specialties. These are expected to deliver around 2/3 of the $90 million revenue target by 2026. Now let me tell you our program to deliver.



First, Architectural Coatings, where we expect to grow at twice the market through 2026. We have a big opportunity to tap into the growing demand for high-end paints in Asia, which is an attractive $300 million ingredients market. To capture this opportunity, we're expanding our manufacturing footprint in Asia to increase our NISAT production capability. I'll talk about this more in a moment.



In addition, we will soon launch NICaS that over 80% bio-based without compromising on performance. And by next year, we will launch a full range of powdered NISATs, which help our customers reduce their carbon footprint. Our second growth platform is industrial coatings, where Elementis already has a strong position with our high-end rheology additives. There are some distinct opportunities here to build on that strong base, allowing us to add $30 million of incremental revenue by 2026.



Over the next 12 months, we're launching a new hectorite and organic Thixatrol baseline for powder coatings. Our leadership position in rheology additives supports our ability to provide full formulation to our customers. We already have a full range of dispersants and deformers that we produce globally. And we're building capabilities in both Portugal and in China to support future growth.



The third growth platform is adhesive, sealants and construction additives. This is a market where we're only starting to penetrate, but where our technologies bring both sustainability and performance benefits. We're looking to double our market share by 2026. One key area where we see rapid growth is in hectorite for tile mortars. This is a $100 million market where we're replacing bentonite-based products and significantly improving end product efficiency.



Another new area that we're looking to expand into is the clear sealant market worth around $150 million. We'll be launching an additive that will allow us to replace fumed silica. Innovation is crucial here, and we have 6 new products in the pipeline. We're also making sure that we have the right distribution network across the globe with dedicated experts that can help us penetrate these exciting market segments.



Lastly, Talc, where we aim to grow $15 million above the market by 2026. We will continue to focus on areas with the highest demand for differentiation, so highly technical applications where our premium Talc is most valued. Those include long-life plastics, technical ceramics and barrier coatings. I'll cover those later on. Let me now update you on the progress we've made in the last 6 months.



In the second quarter, we opened a new state-of-the-art NISAT facility in China. NISAT or non-ionic synthetic associated thickeners are critical ingredients in formulating premium architectural coatings. Hence, the new facility is bringing enhanced performance and environmentally friendly benefits to the Chinese architectural sector. We are now the only supplier to have these technologies with manufacturing capabilities in the U.S.A., Europe and Asia.



With our unique position, we can efficiently serve global clients from each continent as well as be close to the local champions. We can now deliver to 17 Asian countries locally from China, supported by in-region labs and improved distribution. Our continued focus on the Asian architectural market is already paying off. H1 delivered 35% growth in Asia and a sizable $29 million new business opportunity pipeline.



In Industrial Coatings, we're focusing on powder coatings, entering the $200 million market, which is expected to grow at a compound annual growth rate of 5% over the next 5 years. This is an area of focus for many leading coatings producers due to the notable sustainability and durability benefits of these products. Akzo and PPG continue to invest and expand their capability with over $100 million of investments announced in the last 12 months.



For Elementis, although we have a small base today, we already have the right offering and existing customer relationships to tap into this growth. Our hectorite-based products delivered durability as well as improved sustainability benefits. Some of the largest coatings manufacturers recognize this and are keen to adopt hectorite is to more and more powder formulations. We believe that going forward, hectorite will be able to replace PFAS or so-called forever chemicals while providing the same texture and other desired benefits. We're already working with over 30 customers globally, rapidly growing our client base.



Adhesive sealant and construction adders are large markets estimated at approximately $700 million, but a relatively new market for Elementis. Our recent growth has been supported by the success of our Thixatrol range, natural, caster based rheology additives. We believe these products are also an excellent alternative to fumed silica, which is currently used in sealants and adhesives for its rheology.



Silica is not an easy material to handle nor is it easy to handle safely. Hence, many customers are looking for alternatives. Our Thixatrol are natural, safer to handle and provide the rheology profiles and products need. And importantly, our products can reduce in-process energy usage by up to 80%. So you can imagine, there's a lot of excitement about these products. We're seeing increasing interest from direct buying customers, and we're hiring sales and technical experts to accelerate market penetration.



Moving on to Talc performance, which experienced challenging conditions in the first half. This was driven by continued weak but improving demand and further worsened by a nationwide strike in Finland, which closed all ports and railways in the country for a month and also forced a sharp reduction in activity at one of our key finished paper customers. As a result, we lost paper segment revenues and incurred additional logistics costs, continuing to fulfill customer orders. These are one-off factors that are not expected to repeat in the second half.



Adjusted operating profit reduced 65% to $3 million with margin declining to 5%. Over the past year, we've done quite a lot of work developing our 2025 to 2030 strategy. As a result, we decided to announce a strategic review of the Talc business to establish whether the full potential of Talc can best be delivered as part of Elementis or via divestment. I will update you in due course as work progresses on this.



We continue to believe that Talc is a business with strong fundamentals and attractive growth opportunities. We focus on higher-margin applications that require Talc of high and consistent quality. Those include, for example, long-life plastics, technical ceramics and barrier coatings applications. In long-life plastics, our Finntalc K-line, Boost plastic strength by up to 20%.



In the first half, we launched another product in the series, popular for its highly [ laminar ore ]. Secondly, technical ceramics. These are internal combustion engine particulate filters where a highly engineered grade of talc is needed to get the right efficiency. We've demonstrated the quality, purity and consistency needed to grow in this market and build a solid base, but we have the opportunity to grow further. We have technical approval from one of the largest manufacturer of these filters and expect to ramp up sales from early 2025.



I'll now hand over to Ralph to cover the financials.

[Ralph Hewins, executive]

Thanks, Paul, and good morning, everyone. Let me start with group revenue, which increased 5% on both the reported and constant currency basis to $383 million. Both our segments grew revenues. Overall volumes increased 1% with the improvement driven by the coatings business, which benefited from selective restocking, particularly in Asia. Price and mix contributed 4% or $14 million, largely driven by improved mix across each of the Coatings, Talc and Personal Care businesses. This was due to growth in the highest quality parts of our product portfolio and enhanced routes to market.



Moving on to Group adjusted operating profit. This rose by 24% on both the reported and constant currency basis to $65 million. With a balanced contribution from revenue growth and cost savings, our operating margins expanded from 14.4% to 17%. The volume impact was around $2 million. We don't expect the restocking benefit we saw worth about $4 million to repeat in the second half.



The net impact of price and mix was $7 million. The overall impact of the finished strike on Talc operating profit was around $3 million due to lost sales and higher costs. We delivered $7 million of cost savings. This is the first part of the $30 million cost program we announced in November, and I'll cover this in more detail later.



Turning to cash flow. There are a few points to highlight. On working capital, we saw an outflow, reflecting normal seasonality patterns of $21 million. This was materially lower than the $46 million in H1 2023. Our inventory levels improved from year-end '23 and were around $15 million better than the first half last year. In the second half, we anticipate working capital inflow.



Capital expenditure was $17 million, and our guidance for the full year remains at $40 million. Adjusting items of $12 million relate primarily to our Fit for the Future implementation costs and the settlement of a tax case in Brazil. After the impact of the dividend restart and the seasonal working capital outflow, our net cash flow was positive. Continued cash generation has reduced our net debt to $196 million, some $59 million below H1 '23.



The debt reduction progress is part of a multiyear track record. Our net debt-to-EBITDA ratio has reduced from 2.6x in 2021 to 1.3x now. We see the scope for further deleveraging in the future. We also completed the refinancing of our revolving credit facility in the first half, reducing it by $125 million to $250 million. Our total debt facility is now around $500 million.



Now let me remind you of our capital allocation priorities. First, we will invest organically to grow our business. Capital expenditure will be approximately 5% of sales, focused on growth and productivity opportunities. Second, with a strong balance sheet and the reinstatement of dividends, we are committed to a progressive dividend policy with a payout ratio of around 30% of adjusted earnings.



In line with our policy, the Board has declared an interim dividend of $1.1 per share, and we continue to see scope for additional returns of surplus capital for appropriate mechanisms as we deliver further.



I will now cover our efficiency programs. Delivery of our targeted $30 million annual cost savings is progressing faster than expected. In November last year, we announced a phase of $12 million savings in 2024, with the remaining $18 million in 2025. We now expect to deliver $15 million of cost savings this year and another $15 million in 2025.



Let me now provide a bit more detail on the progress of the 2 efficiency programs. First, the Fit for the Future organizational restructuring. This program, which is expected to deliver $20 million of the $30 million cost savings by 2025 is ahead of plan with faster implementation pace. We expect to deliver $8 million of savings this year, and savings come from 3 components.



First, we're creating a simpler, more efficient corporate structure. We've seen 40% of the announced 190 rolls exit the organization by the end of June. Second, we're setting up our new R&D and support center in Porto with around 100 new rolls. The recruitment is progressing very well with 90% of rolls hired so far. Third, we are outsourcing around 20 transactional rolls to India. This process is also on track with the contract in place with EXL and the first round of staff exits completed.



Throughout these major changes, we continue to focus on implementation health metrics, which include voluntary attrition, employee engagement, knowledge transfer and gender diversity. We're pleased to report that all remain positive.



Moving on to the second part of the efficiency steps, which will deliver $10 million of cost savings by 2025. These are coming from supply chain optimization and procurement savings. In March, we announced the planned closure of one of our AP Actives plants in the U.S. consolidated in our manufacturing footprint. The Middletown plant closed in June as expected. The closure underpins a large part of the targeted cost savings and will help to enhance our Personal Care margins.



We have a dedicated continuous improvement team, which identified over 90 projects generating over $1 million of cost savings in the first half. And across procurement, we implemented global category management strategies, focusing on direct and indirect spend. Over the last 12 months, we have renegotiated 75% of direct spend contracts. We've also consolidated over $200 million of indirect spend so far to better leverage scale and discipline, and we're currently implementing a new digital vendor management system, which is expected to go live in the third quarter this year, leading to better transparency and lower admin costs.



Taken together, these 2 efficiency programs are a critical driver of our 19% operating margins target.



I will now hand back to Paul to cover the outlook for the year.

[Paul Waterman, executive]

Thanks, Ralph. So to conclude, we've delivered a strong first half, driven by self-help actions and modest restocking. We do not expect these one-off benefits to recur in the second half and assume a stable macroeconomic environment for the remainder of the 2024 financial year with no material improvement in demand. Our growth and efficiency programs are progressing well, with the growth supported by $348 million of new business pipeline and 15 new products in 2024. We expect to deliver $15 million of annual cost savings this year with an additional $15 million next year. These ongoing self-help initiatives, together with the strong first half delivery underpins an upgrade today to our full year guidance and underpins our confidence in our ability to deliver our 2026 financial targets.



With that said, Ralph and I'd be happy to take your questions.

[Operator]

[Operator Instructions] And the first question goes to Kevin Fogarty of Deutsche Numis.

[Kevin Fogarty, analyst]

Just if we think about, first of all, on Personal Care, that sort of mix benefits that you've seen in H1. Just to be clear, that's kind of outside of the impact of kind of growth initiatives coming through. So I just sort of wonder I think you might have alluded to as you're wrapping up in terms of the visibility around kind of that dynamic repeating in the second half of the year. I just wondered if you could sort of say something on that, just to clarify kind of our thinking there would be quite useful.



And just secondly, clearly, you've outlined some good progress in terms of those growth initiatives. So back in November, we saw kind of 7 of those growth platforms outlined. The update today obviously kind of shows some good progress there and lots of ambition. I guess when you sort of think about those now, do you think about the need to kind of invest further behind those? I know you're sort of guiding in terms of CapEx this year in and around kind of EUR 40 million. But if we sort of roll that forward, is there any thinking in terms of the investment need that those initiatives now might require?

[Paul Waterman, executive]

I think on the Personal Care for performance, I would say that the mix benefit that we saw in the first half. Quite honestly, we see no reason why that actually shouldn't continue. The activities that we're seeing in cosmetics and skin care behind new products, not just ones recently launched but ones that have been cycling through the last few years and the growth that we're seeing in Asia, I think it's good momentum, frankly, that we will continue to see.



Clearly, there's a -- a little seasonality in the business for sure. I think a few of the customers have restocked a bit because of the whole Red Sea Houthi kind of the logistics -- some of the logistics challenges. But I think the overall momentum that we're seeing should continue actually. And it's -- quite honestly, it's our hope to build on it with more new products as well as with the consolidation of the AP Actives manufacturing footprint, which the benefits of that haven't really come through yet.



In terms of the growth platforms, the kind of capital investment that we've laid out will suffice, frankly, to support our ambitions in these areas. So there isn't another shoe to drop on CapEx to pursue our ambitions on the growth platforms, frankly. You saw in the presentation we have done some expansion of NISAT in China that will serve Asia. That was long in planning, frankly, and it wasn't a massive investment.



So optimization, frankly, of where products are made that allow us to tap into growing geographies is something that will continue on an ongoing basis. But really with the footprint we have and the capital spending that we've -- that we're anticipating, there isn't anything big to happening in that area.

[Operator]

The next question goes to Chetan Udeshi of JPMorgan.

[Chetan Udeshi, analyst]

I was just wondering, if I look at your volume growth in H1 it's not really that high, just like it seems around 1%, give or take. So it seems almost all of the profit improvements have come from not volumes, but probably price, mix, costs. Are you able to break down that more in a bit of detail just to get a sense of what could be driving the profitability?



And I'm more curious around the pricing part because we've seen many in chemical industry over the last year or so, given the weaker volumes and demand have seen pricing pressure. It doesn't seem that's been a factor with Elementis in numbers, but just wanted to get some clarity on that. And the strategic review on Talc. We, of course, will wait and see where it goes. But I remember when you sold the Chromium business, you had from memory, $7 million, $8 million of stranded costs at that point in time initially. Assuming Talc is sold, do you think we have a similar number to deal with initially before you take actions to mitigate those stranded costs? Or would that number be very different?



And maybe the related question for us would be is there a way you can offset the dilution on earnings, either through repayment of debt, etc.? Or that may not be an option given the maturity of your debt might be a bit longer duration?

[Paul Waterman, executive]

I think we'll take the second question first because it's more straightforward. We don't anticipate any material stranded costs related to a potential top divestment, Chetan. We just -- that it's not in the same position as Chromium was. In terms of performance drivers, I'll let Ralph give you the specific numbers. I would just say that you're right, volume it's not been a fair wind for sure. And when we were kind of putting together the planning for what we want to accomplish over the next few years, we didn't want to depend on that.



Demand is -- I would say it's like the 900-pound gorilla in the room. I mean what's it going to be? You don't know. So we assume that it would be pretty mediocre. And therefore, the other things like the value of innovation, the new products, the new business that we've been working at. I mean these are higher-margin products. So they help our mix pretty considerably.



The efficiency programs that Ralph kind of took you through, I mean, at which we're kind of halfway -- frankly, halfway through. There's quite a bit more to come there. I think on pricing, the only thing I'll say is we've definitely been completely on top of how do changes in costs impact our margins. And I think that the challenge as a spec-chems player is you want to be doing stuff that's special enough that you can charge for it when you need to and offset inflation, protect your margins. We've been pretty disciplined about that. We'll continue to be. I do think that we're kind of coming down the curve pretty fast on inflation. So to be over reliant on pricing, it wouldn't be very smart, and I don't think we are.



Ralph, do you want to give any more.

[Ralph Hewins, executive]

So just as a bit of -- I mean, you're right, in terms of the growth where a little of the growth came through in terms of volumes, just about $1 million worth. So a couple of million dollars' worth in terms of operating profit. Most of the price, mix benefit we got about $7 million of that and the first half was really down to mix. And there were sort of 3 things there in particular. One is in our coatings business, a relative tilt towards industrial sales, which is slightly higher margin decorative.



In the U.S., in particular, decorative volumes were quite subdued as reflected in other companies' results. And when we sell relatively more industrial, we tend to earn slightly higher margins. Second, we went more direct, particularly in Personal Care versus distributors, much generated a better mix effect in terms of our profitability. And the third thing is in cosmetics, we had a particularly good half in cosmetics, which we think will sustain but the margins there are again some the best in the group. Those 3 things together have really contributed to the mix effect.



In terms of your comment about dilution, yes, in the event we go, we go down the road that you're talking about. We clearly have -- would have a number of options. We certainly could repay the debt. But the main debt facility we've got now is a couple of term loans, which mature in June '26. We could repay those or partly repay those. And in addition, we've got scope to doing additional returns to handle any dilutive effects. So I think we're confident we can manage the dilution on the business. That's a long way down the road yet.

[Operator]

[Operator Instructions] And the next question goes to Vanessa Jeffriess of Jefferies.

[Vanessa Jeffriess, analyst]

You're doing very well in new business, obviously. Just wondering about the pipeline. It looks like the total pipeline is down 15%, but Personal Care is up 11%. Is that reduction coming from Coatings or from Talc? And then just second of all, it looks like you're getting a very healthy margin contribution from those new products. How do we think about the margin differential between those and then your standard classic products?

[Paul Waterman, executive]

Look, I think on the pipeline, it does bounce around every month a bit. And yes, the -- certainly, the momentum on Personal Care has been quite good. We're pretty pleased about it, particularly in Asia. The slight downshift that we saw was a bit of a mix actually between coatings and talc. But again, as I said, it's a very big number, and it does move around a bit.



Yes. It is certainly accretive. And the vast majority are in the 55% plus kind of place some are higher than that. And obviously, it depends on the specific segment, Colour cosmetics being a bit different than coatings products. But yes, we managed that actually pretty proactively frankly. And really, what drives it is the level of innovation. I mean what you're bringing to the customer that they don't have that they want, that's a value, which is why we're really, really focusing on superior performance, better sustainability or being able to take costs out of their operations, their processes.

[Sebastian Bray, analyst]

We received the question by e-mail as well from Sebastian Bray at Berenberg. So he asked how the prices and volumes developed in Talc? Does pricing pressure explain any of the headwinds year-on-year leading aside the strike? Any signs of increased competition? And there was a second question as well.

[Paul Waterman, executive]

I would say that in the first half, the -- our top lines were down about mid-single digits, and they were pretty well driven by paper, the problems that we had in the country strike, the sort of complete shutdown for 4 or 5 weeks that we kind of were dealing with. I think on the longer wavelength basis, if you take your mind back to Russia, Ukraine War and energy costs just exploding in 2022, and you can probably all remember, we were chasing those costs with pricing as quickly as we could, which is why we broke even that year.



So we obviously had to react being a European dominant player in a way that will be different than a few other competitors. And so the pricing certainly had an impact there. But I would tell you that over [Audio Gap] that is materially different than what we've seen in the last few years, competitive-wise.

[Sebastian Bray, analyst]

The second question was what will determine where the Talc remains part of the whole portfolio? And how long will it strategically be take? Is the decision to divest independent of the price offered by any potential buyer?

[Paul Waterman, executive]

Look, I think on that one, just back up a bit. We've always said that there aren't any sacred cows in the Elementis portfolio. And we've taken some big decisions in the past are getting rid of our surfactants business in 2018, selling the Chromium business in 2022. And I think as we've been doing work on the Elementis 2025 to 2030 strategy over the last 9 months, it's become pretty clear that Coatings and Personal Care businesses have both developed into much higher margin businesses, and they both have good organic growth potential.



Coatings' margins approaching 20%, Personal Care approaching 30%. So as we look at Talc, it's a fundamentally strong business. But since the pandemic, a number of the European end markets have structurally declined, especially automotive. And so while there's good potential to grow the business, it's not clear it can deliver the operating margins and the return on capital that meet our expectations, particularly those that we laid out at the Capital Markets Day last November.



Still it raises the question of whether or not we're the best owner going forward. And we've got to determine if our capital and our management attention should really be focused there. So we're going to be reviewing it. We're going to move, obviously, as quickly as we can. Not an easy decision, but I think it's certainly the right decision.

[Sebastian Bray, analyst]

It's whether the decision to divest in the end of the price offered by any potential [indiscernible].

[Paul Waterman, executive]

Look, I think we've got to go through the process and see where it takes us. We're always going to choose the option that we think is going to create the highest value for shareholders. At least that's always the intent. That's what I would say.

[Operator]

We do have a follow-up from Kevin Fogarty of Deutsche Bank Numis.

[Kevin Fogarty, analyst]

Just a couple of follow-ups, if I could do. If we look at sort of Personal Care, during the period, we've seen some tweaking or change in terms of your kind of distribution channels or reach to market. And I just wondered, is that a kind of structural shift for you guys? Or is it a sort of market-specific rationale kind of driving that? And then just secondly, obviously, on the Coatings side, your comments on what some of the coating majors have kind of pointed to recently your performance, I guess, has kind of decoupled quite a bit from there I would have said.



But could you sort of share with us kind of what they say to you in terms of the outlook, and I guess, the role that you provide for them? Is there anything that you get from those customers that you can kind of share with us?

[Paul Waterman, executive]

So to the question on sort of route to market on Personal Care. I would say that, that is -- it's market specific. In that about 2/3 of the Personal Care business is direct. And when we're kind of coming into a country or growing a part of the world where we don't have very much presence at all, distributors obviously can play a really, really helpful role. But then kind of what happens ultimately is that you have customers that actually -- they start to grow up pretty quick. And you can see the runway is really substantial. And the judgment is that we want to own that relationship. We don't want someone in between it because that allows us to accelerate innovation and frankly, more deeply penetrate what their needs are and gain their share of wallet.



And so we've taken that decision. Not to say we don't value distributors, we do, and it works really, really well. But there comes a point, frankly, very often in certain countries where you really want to be direct with those customers that are kind of coming of age is what I would say.



In terms of the question on Coatings, I don't know that I could tell you anything you don't already know in the sense that if you look around by region, clearly, in the United States, the housing situation is pretty negative, right? You're just not seeing the level of transactions that you did when there was 3% mortgage rates. And so that's clearly pretty Deco.



But on the other hand, in industrial, we do see some -- it does look a little bit more positive with the inflation reduction ags and a bunch of government monies being spent. So that's a bit helpful. Europe is pretty anemic all around, frankly. And the products that we're making is much more new business driven. And I think that's helping us quite a lot. And then China, there's kind of what's going on in China, a bunch of exporting certainly, some industrial activity, military shipbuilding, things like that.



So I feel like we're benefiting a bit from that, but their housing is a disaster right now. And so that's certainly not helpful. And then I think in Southeast Asia, India, we're certainly making some headway. We've got a relatively new customer [ Aditya ] Birla who they've come into the coatings market in India very aggressively. And we did almost $2 million of business with them in the first half. So we see bright spots in Southeast Asia as architectural coatings kind of start to off a very, very small base, I think, start to grow, which is why we made the investment we did in China.



So I think that's kind of the -- I think as rates start to get cut in the back half of this year, I think it's very possible we'll start to see a little bit of a better environment in '25. But I mean it's a bit -- we'll just have to see.

[Operator]

We have one more follow-up from Chetan Udeshi of JPMorgan.

[Chetan Udeshi, analyst]

Just a quick question. Maybe a difficult one, but just looking into 2025, can you remind us what could be the key moving parts? You talked about $15 million of savings in accelerating in '25. What would be the net contribution of that on earnings? And anything else that you think outside of macro, which will help you continue to show the momentum that we see at the moment in H1?

[Paul Waterman, executive]

Look, I think that 2025, many of the things that we're doing right now, we're going to continue to be driving. So yes, we have 15 out there as our number. Obviously, we're going to work hard to see if there's more that we can do. We've got to obviously manage the margins. So we pulled the value through to the P&L. We're going to work pretty hard on that. There are a number of new product launches that we have planned. And I think our ambition for new business will be just as strong.



And I do think as we've continued to develop the business throughout Asia. I think we'll be looking for more penetration and growth in both Personal Care and coatings. So -- and then obviously, as I said, pricing is always a factor, but we're going to be thoughtful, frankly, given that it's not the 22 inflationary environment anymore. It's kind of a different time.



So Chetan, I think it's -- and really getting the cumulative effects of that focus, that's, I think, what's going to underpin the kind of step change and improved performance that we can make in 2025. And again, I don't know what demand is going to be, and I'm absolutely adamant that I don't want to assume that we're going to get any help on that because that makes the game as hard as it can be for us. And therefore, we take all the tough decisions we need to take in order to drive performance.

[Ralph Hewins, executive]

So just to add to that, Chetan, I mean, with the $30 million cost savings, we're saying $15 million this year, so there will be $15 million, which really we've got well underpinned now because there'll be a lot of that will come through from run rate effects from this year's actions. So $15 million discrete additional cost savings targeted for next year. You saw the first fruits of that in the first half of this year was $7 million. So there's $15 million on the cost savings to come through.



And then in terms of the $90 million of growth that we set out for '24,'25, '26 we're saying that in '24, we expect $20 million to $25 million to come through. And therefore, you've got sort of $65 million to $70 million to come through even the -- over the course of '25 and '26, probably a little bit more as we get momentum into '26. But those 2 components are going to be the biggest drivers of performance improvement into '25.

[Operator]

We have no further questions. I'll hand back to Paul for any closing comments.

[Paul Waterman, executive]

Thank you. Look, thanks very much to all of you for your time. It's a good first half. But as I said, I think earlier, our heads are down, and we want to make it a good -- very good 2024. And just as importantly, we set the table for '25 and '26. So look forward to speaking with you all soon again.