Elementis PLC

LSE:ELM

Earnings Call Transcript 2021-Q4

[Operator]

Hello, everyone, and welcome to the Elementis 2021 Full Year Results Call. My name is Daisy, and I'll be coordinating today's call. You will have the opportunity to ask a question at the end of the presentation. [Operator Instructions]

I will now hand over to your host, James Curran, IR-Elementis to begin. So, James, please go ahead.

[James Curran]

Good morning. Welcome to the Elementis 2021 full year results presentation. I'm James Curran, Director of Investor Relations, and thank you for joining us today. The slides of this presentation can be found on our website. And as usual, please make notes of the cautionary statement on slide 2.

I'll now hand over to Paul Waterman, CEO of Elementis.

[Paul Waterman]

Good morning. Thank you for taking the time to join us today. In terms of the agenda, I'll start with the highlights and business segment performance, Ralph will review the group financials, and then I'll take you through our outlook and priorities. Following this, we'll take your questions.

On slide 5 are the key messages. Our financial performance was much improved, driven by demand recovery across many of our end markets and record new business success. The speed of recovery in the first half demanded a resilient supply chain performance. Raw material shortages emerged due to weather events and supplier outages. Logistics issues appeared in the shipping container imbalances and ongoing port congestion. Our global supply chain team responded well throughout the year to manage this.

Overall, timely pricing actions mitigated inflation that accelerated as the year progressed. Raw materials, logistics, and energy costs increased faster than at any time over the last 20 years. We made significant progress in implementing our innovation, growth, and efficiency strategy to ensure we're well-positioned to deliver on our medium-term performance ambitions.

Our performance delivery in the face of these challenges allowed a significant reduction in financial leverage from 3.2 to 2.6 times net-debt-to-EBITDA, and we're focused on making further progress.

Concerning safety on slide 6, at Elementis, we're absolutely focused on putting the health and safety of our employees first. This year, we reached some notable milestones. Three quarters of our sites worked safely with no recordable injuries. Our new plant in India was built with zero recordable injuries. This is over 1 million worker hours of injury-free construction. A great achievement. While our recordable injury rate as compared to the US chemical industry was favorable, we experienced 12 injuries in 2021; and that's a disappointing result. The only acceptable number of injuries is zero.

To drive improvement, we'll continue to invest in training our people and maintaining our assets. We'll also invest in programs that help our employees stay focused on staying safe. In 2021, we held our first ever global safety week involving all Elementis staff focused on promoting safety awareness to strengthen our safety culture and support our path to zero injuries.

Turning to our headline financial performance, in 2021, we saw a strong performance recovery. Sales rose 17% to $880 million driven by new business success, targeted pricing actions, and demand recovery across many end markets. Coatings had a very strong year with great new business momentum and efficiency gains from the recent consolidation of our organoclay plants in the US. Operating profit rose 31% to $107 million, with underlying revenue growth more than offsetting cost inflation and driving a margin improvement from 10.9% to 12.1%. Earnings per share increased 63%. And leverage reduced from 3.2 to 2.6 times, driven primarily by higher earnings.

Turning to the supply side on slide 8. Disruptions have been ever-present since the onset of COVID-19, but they've been asynchronous, impacting different countries and regions at different times and often for different reasons. There were huge challenges in 2021. First, the sharp demand recovery required fast action to increase production at a number of our most important sites. In response, we hired extra workers, increased staff sizes, and extended production runs; in turn, setting production records at several of our sites. It's worth noting our ability to produce products in more than one location globally was incredibly helpful.

Second, we experienced raw material shortages and cost increases. For example, molten polyethylene glycol was in short supply in the US due to several production shortages. In one month, we modified production systems to switch from liquid to solid polyethylene glycol, thereby lowering costs, reducing Scope 3 emissions, and ensuring continuity of supply to our customers. We also materially increased supply resiliency by qualifying multiple sources for many key raw materials.

Third, due to limited container availability, congestion at sea ports, and driver shortages, freight rates increased almost fivefold. We responded by using air and overland transportation where possible, booking shipping far in advance, and implementing surcharges.

And finally, rapidly accelerating energy inflation was a key challenge in the second half of the year, particularly within our European-based Talc business. Lowering our energy intensity, executing price increases, and implementing surcharges helped to reduce the effect, albeit with a lag impact.

Overall, our global supply chain responded well. However, these challenges have continued into 2022, and we will stay focused on overcoming them.

Turning to slide 9, we've continued to implement our innovation, growth, and efficiency strategy. On innovation, we launched 21 new products in areas such as skin care, AP Actives, and industrial and decorative coatings. New products accounted for 14% of sales in 2021, compared to 10% in 2017, but we're on track to reach our 17% target by 2025. We launched new products with our open innovation partners Aqdot and NXTLEVVEL. And to support future growth and innovation, we open two new personal care labs in China and Brazil.

In terms of growth, we closed $50 million of new business. This was a record performance and was $20 million ahead of last year, driven by wins across Coatings, Talc, and Personal Care. Overall, our Coatings business grew 17%, outpacing the market. Against our targeted high-margin growth platforms, we grew 37% versus prior year.

Industrial Talc revenue rose 15% as geographic expansion and revenue synergy delivery helped to offset declining European automotive production. And Personal Care delivered strong growth in both skin care and Asia, two key areas of strategic focus where we're underdeveloped and there remains significant growth opportunity.

On efficiency, we continue to make progress. In 2021, we delivered $10 million of cost savings supported by the closure of our Charleston plant and capacity consolidation to our St. Louis plant. Our new AP Actives plant in India started up in the third quarter and is now undertaking a 12-month production ramp-up. We're now focused on delivering an additional $10 million of cost savings by 2023. Continuous improvement, procurement, and productivity projects planned for 2022 and 2023 will underpin achievement of this target.

On ESG on slide 10, our efforts are accelerating. This year, we appointed our first ever Global Sustainability Director. This is a key role that leads our Environmental Sustainability Council, ensures regulatory compliance and leads development of multiyear performance improvement plans. We made good progress against our 2030 environmental targets, materially reducing GHG emissions, energy, and water usage per tonne of production versus 2020. We were awarded the Responsible Chromium Award by the International Chromium Development Association in partnership with EcoVadis. As the only chromium producer in the world to achieve this, it's an important recognition of our safety, operational, and sustainability credentials. In addition, our progress was recognized by various rating agencies with upgrades at MSCI and EcoVadis when we were raised to Gold at CDP and Sustainalytics.

Against the social pillar, we're making good progress. Quarterly systematic measurement of employee engagement throughout COVID-19 improved leadership focus and interventions. In 2021, employee engagement improved materially, up 8 points to 63%. Female representation in senior management has continued to steadily improve. It was 31% in 2021 versus 24% in 2018. In addition, the Global DE&I Council coordinates activities to support improved recruitment, training, and retention required to create a more diverse and inclusive workforce.

We've also taken steps to ensure that our high standards of governance are maintained. We recently employed – appointed a dedicated Global Compliance Officer to support continuous improvement of the global compliance program and to lead the compliance champions network. We launched an Ethics & Compliance Council to raise awareness and focus across Elementis. And last, we launched a global cybersecurity campaign and implemented mandatory employee training to address this material risk.

Overall, we're making good progress, but there's more to do.

Before moving on, on slide 11, there's an important point to make about sustainability. At Elementis, our intent is to integrate sustainability into all that we do, across our business, our products, make a positive contribution to our customers, wider society, and the environment.

In Personal Care, our natural ingredients replace petrochemically derived alternatives. In Coatings, our additives enable the transition from solvent to waterborne products. And in Talc, our products decreased the weight of vehicles, and thus reduce emissions. In Chromium, our products extend the life of critical industrial equipment such as turbines and jet engines by three to four times. This product focus is underpinned by our global innovation and supply chain approach.

Sustainability is at the center of our innovation efforts. Today, 53% of our revenue is from naturally derived products such as castor wax-based thixotropes, and hectorite clay-based skin care ingredients. In addition, every innovation project is assessed with sustainability improvement via the Elementis sustainability scorecard to ensure continuous improvement as our portfolio evolves. With over 60 active innovation projects in the pipeline, we are well-positioned to make further progress.

We also recognize that reducing the environmental impact of our production processes will have a positive impact on society as well and support progress towards our 2030 goals. In 2021, we switched three production sites to 100% green energy. We reduced the energy requirement to our Newberry Springs clay processing plant by 10%, and we significantly increased water recycling across the group. Going forward, there are 65 live projects across our supply chain that will deliver additional efficiency and sustainability budgets.

Now, let's turn to our segment performance. Starting with Personal Care on slide 13, revenue rose 6% on a constant currency basis to $175 million, as demand in the second half started to recover from COVID-19-related social distancing measures. Adjusted operating profit rose 6% to $37 million, with improved volumes and mix more than offsetting incremental costs related to our new India plant and investments made to support future growth in Asia.

Looking at Personal Care demand in more detail on slide 14, today, we are a business of scale positioned to grow by leveraging favorable long-term trends such as the move to natural ingredients, product premiumization, and increasing consumer demand in Asia. However, in the short term, demand was negatively impacted by COVID-19. More people worked from home, traveled less, and have more limited social interactions. In Europe, retail sales of cosmetics and antiperspirant deodorants remained approximately 5% and 3% below pre-COVID-19 levels. However, as restrictions eased in 2021, demand suddenly improves and this recovery is continuing in 2022.

Turning to slide 15, in 2021, we continue to make strategic progress to ensure we are well-positioned for the full post-COVID demand recovery. In skin care, our aim is to deliver $10 million of incremental sales over the medium term. In 2021, sales grew 41%, driven by three new skin care product launches including BENTONE HYDROCLAY 2100. As customers increasingly look for natural products, our skin care offer continues to build momentum. Our NBO pipeline is at $14 million now, up 75% from $8 million at the end of 2020.

In India, despite COVID-19 outbreaks, our new AP Actives plant started up as planned in the third quarter and is undergoing a 12-month production ramp-up process. Once complete, this will create the most advantaged and resilient AP Actives supply chain in the world while providing better access to faster-growing Asian markets and built to recycle all water used in the manufacturing process. It is a very environmentally friendly plan.

On innovation, we launched seven new AP products including AqFresh Pure in collaboration with Aqdot. We've also strengthened our presence in Asia. We opened a new lab in Shanghai, China and invested in incremental sales, marketing, and technical expertise; doubling our head count in the region. Asia revenues grew 44%. And with our business still underdeveloped, there's opportunity for future growth.

Turning to Coatings on slide 16, sales increased 17% on a constant currency basis to $384 million, driven by $23 million of new business success, targeted pricing actions, and a recovery in industrial end markets. Coatings' adjusted operating profit rose 46% to $62 million. It increased volumes, improved price/mix and cost savings from the Charleston/St. Louis consolidation, more than offsetting accelerated raw material inflation.

On slide 17, Coatings' top line performance was strong across the board. Industrial coatings increased 13%, benefiting from the recovery in areas such as marine and protective applications, and good demand for our waterborne industrial additives. Sales from the decorative market rose 24% due to new business success and continued share gains for our premium [ph] non-sag (00:16:23) technology.

By region, Americas increased 17%, supported by construction activity and new business gains, particularly in decorative coatings. Europe grew 27% with good momentum for our castor wax-based thixotrope products using the hybrid adhesives and sealants segment. And in Asia, we grew 9% with robust waterborne industrial coatings demand, somewhat offset by slowing activity in our main market of China. And across our global key accounts, which represent the biggest coatings companies in the world, we grew 28% with double-digit growth across all relationships.

We're continuing to make strategic progress in four key areas. First, we're accelerating our innovation and improving our product quality. In 2021, we launched seven new products. New business momentum continues to build. We generated a record $23 million of new business, up 53% over 2020. In addition, our high-margin growth platforms grew 37%. We invested in Southeast Asia local sales and technology resources, adding eight people. This year, we grew revenue 30% in the region and expect to make a lot more progress going forward.

Finally, our global key account management program enables us to drive innovation and strengthen relationships at our most important customers. Today, we have 10 joint development projects running, more than double three years ago. We're now a global technology partner to several of the largest global coatings players. So good strategic progress in 2021 and more to come.

Before I move on on slide 19, I want to say a few words about our high-margin growth platforms in Coatings. These areas represent advanced technologies that target markets with attractive structural growth. Together, they currently represent approximately 35% of Coatings revenue.

We have clear competitive advantages in premium decorative where we're gaining market share via our products to deliver enhanced one-coat hide, better stain resistance, and improved sustainability credentials. High-grade adhesives and sealants, our growth market, where customers want high performance solutions to replace mechanical fastening. Our thixotrope products play nicely into this trend. They offer customers up to 30% energy savings, deliver enhanced sag resistance; and, being 75% bio-based, offer clear sustainability benefits. In waterborne industrial, our additives deliver both performance and sustainability benefits. And in performance hectorite, our products generate superior performance in construction applications.

We expect that these high-margin growth platforms will continue to grow and represent approximately 45% of total Coatings revenue by 2026 as we continue to launch new products and win new business in these market segments.

Moving on to Talc on slide 20. Sales rose 9% on a constant currency basis to $150 million, with new business wins across coatings with new business wins across coatings and technical ceramics, more than offsetting automotive and paper demand weakness. Operating profit declined by $3 million caused by weak European auto production and fast-accelerating cost inflation, particularly in the second half.

On slide 21, looking at Talc performance in more detail, there were significant cost inflation and demand challenges in 2021. Starting with energy, Talc is a European-based business with processing facilities in Finland and the Netherlands that use electricity. Unfortunately, electricity price increases accelerated as the year progressed. In the fourth quarter, electricity costs went through the roof, rising 365% versus prior year.

On logistics, we transport a lot of material around the world from our logistics hub in Amsterdam via container cargo shipments. Mainly to port congestion, container imbalances, and trucker shortages, costs rose significantly, particularly in the second half.

And finally, 2021 remained challenging for auto production. This was particularly true for European auto, which declined for the fourth year in a row. This negatively impacted our high-margin, long-life plastics segment, which represents approximately 25% of Talc revenue. Unfortunately, these external challenges more than offset underlying strategic progress.

Approximately 80% of the Talc business is in Europe and there's significant opportunity to grow and expand globally. Driven by $13 million of new business, we grew 24% in Asia and 62% in the Americas. Our high-value industrial growth platforms also showed good momentum. In technical ceramics, we gained significant market share with existing customers and gained new business in China. Sales to coatings customers in China. Sales to Coatings customers grew 8%, leveraging our global scope and scale in the Coatings market. As a result, we continue to make good progress towards our revenue synergy target with $16 million captured to-date.

Taking a step back on slide 22, the fundamentals of the Talc business remained strong. We're the number two player in the global niche market with only three players in scale. We have a fully integrated value chain with global reach. Starting with long-life Talc deposits in Finland, through the unique processing and formulation capabilities, supported by quality and technical service is highly valued by our customers. And Talc follows a performance additive logic that represents a small percentage of formulation costs, but [ph] adds critical performance attributes in its (00:22:28) value price.

Looking forward, there are clear drivers of performance recovery and growth. First, in response to fast-rising variable cost inflation, we implemented 10% to 15% price increases in the fourth quarter and 5% to 10% surcharges in January of 2022. These pricing actions did not materially impact 2021 performance due to timing lag, but they will support performance recovery in 2022.

Second, our growth opportunities are unchanged. There remains significant opportunity to grow in both Asia and the Americas, which represent under 20% of revenue. We also expect to continue to grow market share in high-value industrial applications such as coatings, long-life plastics, technical ceramics, and the emerging barrier coatings segment for recyclable paper packaging. And we're on track for delivery of $20 million to $25 million of revenue synergies by 2023.

Finally, while the Talc business is very well-invested, there are opportunities to improve efficiency. In 2022, we will launch several continuous improvement initiatives to lower energy costs and further reduce water usage at our plants.

And moving on to Chromium on slide 23, revenue rose 16% to $171 million, driven by strong volume recovery. The massive areas such as construction, metal plating, and leather tanning showed strong recovery from the COVID-19 impact of prior year. Average pricing was modestly down, but we saw sequential improvement in the second half of the year. Operating margins rose from 4% to 8% with improved volumes offsetting increased raw material and logistics costs.

Before moving on, it's worth expanding a bit on the business dynamics. First, the volume recovery which began in late 2020 has continued in 2021, and there remains room for further improvement. High-margin aerospace and refractory applications remain weak versus pre-COVID levels. And all the recovery is currently being held back by semiconductor shortages.

Higher volumes, combined with supply chain challenges at a number of our competitors, pushed global utilization levels up from 75% in 2020 to around 85% on average in 2021. As a result, market prices have started to sequentially increase. We saw this in the second half of the year, and it will benefit our performance in 2022.

While encouraging, a word of caution on cost inflation. Key raw materials such as chrome ore and sulfuric acid rose materially in price during 2021 and, along with energy, look set to rise further in 2022. While we are pricing accordingly, this is a dynamic situation, and Chromium has more contractually based businesses elsewhere in our portfolio, which will make cost recovery slower than we'd like.

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

[Ralph Rex Hewins]

Thanks so much, Paul. Hello, everyone. Turning to group revenue on slide 26. Revenue rose 17% on a reported basis. 3% was from currency tailwinds, as we benefited from relative weakness of the dollar against the euro and renminbi. Underlying growth was 14% with volume growth driven by new business success and demand recovery across many end markets. Pricing was up 4% as actions taken in the second half started to impact performance.

Looking at group adjusted operating profit on slide 27, this rose by 31% on a reported basis and 28% on an underlying basis with strong revenue growth partially offset by cost increases. Variable cost inflation of 33%, mainly linked to raw materials, was more than offset by price actions primarily within Coatings.

Let's take a look at the cost and pricing in a bit more detail. In 2021, prices moved up across every major input cost from packaging to energy and raw materials. As a result, we saw approximately 10% inflation around circa $300 million in raw material and energy basket.

To manage this, we took several steps. First, we increased prices, and this ramped up as the year progressed. While taking such significant price increases is never pleasant, it's been crucial for our performance. And importantly, they have been accepted without any material business losses. Moving into 2022, we see even higher levels of inflation based on current spot rates and have been taking further price actions at the start of this year. Across disrupted supply chains, we've rapidly qualified alternative suppliers. Given our products are specialty in nature, you can't switch raw materials at the drop of a hat. It takes time in both ourselves and our customers need to become comfortable. However, where it's deemed possible, we've acted with speed. And finally, we also increased the amount of our spend on the global procurement, thus ensuring we leverage our buying scale across multiple sites.

Although we're seeing some deep pockets of inflation, we delivered $10 million of savings in 2021. Closure of our Charleston site and the consolidation of capacity at St. Louis lowered our fixed cost base and made our North American organoclay operations more efficient, generating around $5 million of savings.

In procurement, we increased our strategic purchasing, better leveraging our scope and scale, and revisited pockets of spend where it's cheaper to make than buy. This has delivered around $3 million in savings in 2021. And finally, our global process engineers are allowing both our environmental impact and cost of [ph] service (00:28:42) and delivered around $3 million of savings in 2021.

Looking forward, we [indiscernible] (00:28:48) we see a further $10 million of efficiency by 2023. The new AP Actives plant in India will be a key pillar of these savings, helping to create a lower fixed cost base and avoid tariffs on key raw materials. But we have further opportunities across procurement and manufacturing to drive further savings across the organization.

Turning now to CapEx, our spend in 2022 will be similar to 2021 at $50 million to $55 million or roughly 6% of sales. In 2022, just over 50% of our spend will be directed to maintenance and safety projects. These investments are important. They ensure we continue to run our funds both efficiently and safely. The rest of our spend will be directed towards growth and productivity. Key projects are focused on Coatings' capacity expansions. So, in Brazil, we're expanding our HASE polymer capacity using debt repayments. In Scotland, we continue to create new business success for our premium decorative technology by expanding production of NiSAT rheology modifiers. And finally, in Taiwan, we're making productivity investments to ensure we can make more organic thixotropes for high-performance adhesives.

Turning now to cash flow. There are a few points to highlight. This year, $33 million of one-off tax-related payments obscured a fairly healthy underlying cash flow. As previously disclosed, we had a $20 million tax outflow in the first half in relation to EU state aid. Whilst we're confident of ultimately being successful on appeal and having the cash returned, this will not happen until mid-2022 at the earliest. In addition, in late 2021, we had a $13 million cash out in relation to a historical tax case, which would enable us to reduce future cash tax payments.

Our working capital, as experienced, we saw an outflow that was reflected on the – reflected for the need to support strong top line growth. Despite these impacts, we ended the year at 2.6 times net-debt-to-EBITDA, a significant reduction versus the prior position of 3.2 times, and we have good momentum to deliver a further reduction.

And finally, a word to reaffirm our capital allocation priorities. First, we will invest organically to grow our business. Capital expenditure will be approximately 6% of sales and we're focused on growth and productivity opportunities. Second, debt reduction continues to be a major priority. We see a clear path to get to under 1.5 times leverage while simultaneously investing in growth. And further, on shareholder returns, we suspended dividend payments during 2020. Whilst regretful, this was clearly the right thing to do given the COVID-related demand uncertainties. We recognize the value of dividends to our shareholders and intend to reinstate payments when further progress has been made on reducing financial leverage from its current position.

I'll now hand back to Paul to wrap up.

[Paul Waterman]

Thanks, Ralph. Starting with a few words on the fundamentals of our growth segments on slide 34. Each business was well-placed to benefit from a combination of structural trends and Elementis-specific opportunities. In Personal Care, the move towards premium products based on natural ingredients, along with strong growth opportunities in skin care and Asia, represent a clear pathway to grow, and our strategic priorities are closely aligned to this.

In Coatings, our distinctive technology offerings focused on high-margin growth platforms such as premium decorative, industrial waterborne additives, and adhesives and sealants result in a distinctive higher-value and faster-growing product portfolio.

And in Talc, despite the short-term headwinds, vehicle lightweighting, tightening emission regulations, and the shift to recyclable food packaging mean we are well-placed to expand our global footprint, grow market share in high-value industrial applications, and deliver on revenue synergies.

These opportunities, combined with our focus on innovation and efficiency, mean each business is well-placed to materially improve its margin profile. We're confident that these strong business fundamentals, combined with our strategic initiatives on innovation, growth, and efficiency, will underpin delivery of our medium-term performance objectives.

First, we expect operating margins to recover and improve to 17%. Second, we anticipate our already strong levels of operating cash conversion to remain over 90%. And finally, we expect our cash generation profile to reduce our net-debt-to-EBITDA to under 1.5 times.

And to finish, on slide 36, a few comments on our 2022 outlook. First, as you can see on the slide, there's tremendous self-help that comes with delivering on our innovation, growth, and efficiency strategy. We will continue to remain laser-focused on execution, controlling what we can control. Second, the global supply chain will remain challenging and inflation will likely continue throughout the year. Therefore, we'll continue to be focused on cost management and timely pricing actions to defend and improve our margins.

And finally, we're confident that with further steady demand improvement, our self-help agenda will help to deliver an improved financial performance and a reduction in leverage. As we are seeing in Russia and Ukraine, the macro environment can change quickly. But we've made a good start to the year and look forward to making further progress in 2022.

And with that said, Ralph and I would be happy to take your questions. [ph]

[Operator]

Thank you (00:34:47) very much. [Operator Instructions] Our first question is from Kevin Fogarty from Numis. Kevin, your line is open. Please go ahead.

[Paul Waterman]

Good morning, Kevin.

[Kevin Fogarty, Analyst, Numis Securities Ltd.]

Morning, how are you guys doing?

[Paul Waterman]

Good. Good.

[Kevin Fogarty, Analyst, Numis Securities Ltd.]

Just had two, if I could, to start off with. I guess countries that has been very – a stellar performance in Coatings. You've clearly kind of taken market share there. I guess going into the current year, you clearly faced kind of tougher comps in that business. And I just wondered sort of confidence, I guess, of kind of continuing to outperform those end markets going into the current year and how important will be sort of capacity expansion for you to do that.

And just in terms of Personal Care, I guess sort of, is there anything you can say about sort of current demand trends following sort of COVID restrictions gradually kind of lifting. It'd just be useful to get any insight you can give there.

[Paul Waterman]

Sure, Kevin. So, I'll start. Ralph, you can chime in. I think on Coatings, yeah, I understand the point about tougher comps, but I think that we have really, really good growth momentum, particularly on decorative coatings, our NiSATs are premium. NiSATs are making big inroads in terms of shared growth, particularly in the United States. Our organic thixotropes are kind of moving towards the adhesives and the sealants segment well. We make very good headway in Europe. And so we see that as continuing. A number of areas, our waterborne industrial additives, again, have really good growth momentum. This is about more brand penetration and more volume.

Geographic expansion, I think I talked in the presentation about Southeast Asia. We see that as a multiyear opportunity. I think though I wouldn't – we wouldn't expect another year of 17% growth. That was clearly a snapback from 2020. And then obviously, the macro, we definitely see that China, which is 30% of our business, that economy is not as robust as it was, and then clearly with what's going on. The cost or steady inflation implications of whatever happens in Russia/Ukraine is something we have to have our eye on.

So, if it's about self-help and new business, and we're targeting $25 million and do business in Coatings, we feel pretty confident as well as all the new products that continue to come to support these growth platforms. Pretty robust position, I think, for us to be in Coatings, and that's why the margins are growing and improving as fast as they are.

On Personal Care, we definitely benefit from restrictions being lifted, masks coming off. And so we saw a volume growth in the second half, and that momentum has continued into 2022. I think on the AP Actives business, we're benefiting from new product penetration. That's helping us a really good deal. And obviously, the words I spoke about, our global supply chain positions will help us quite a bit. We're gaining market share at key customers, but the category still needs to sort of come back, and so we're kind of really watching that pretty closely. I think that the...

[Kevin Fogarty, Analyst, Numis Securities Ltd.]

Sure.

[Paul Waterman]

Our Personal Care recovery is between the top cosmetics, efficiency, and penetration on AP Actives. It helps our margins really quite considerably over the next year or two. 21%...

[Kevin Fogarty, Analyst, Numis Securities Ltd.]

Sure.

[Paul Waterman]

...is good, but we feel confident that we can perform materially better than that.

[Kevin Fogarty, Analyst, Numis Securities Ltd.]

Sure. Okay. No. That's helpful. And I guess sort of if you think about the second half kind of margin in that, is there a bit of sort of catch-up in terms of kind of price increases to come through? I think you kind of alluded to that. But just to clarify that, is it...

[Paul Waterman]

Yeah. I think that – I did – I kind of ignored pricing, but we are very actively managing margins via pricing. And so we've been quite aggressive on Coatings because we needed to be, as well as on Personal Care. And all of those are implemented. So, it does make one feel more positive about how margins could improve in the second half. However, the caveat is, we continue to monitor the inflationary – the inflation situation really, really closely. If it starts to fall away, that's a great tailwind, but there's no guarantee that it will. So, we're going to have to sort of see how 2022 plays out on the cost side.

[Kevin Fogarty, Analyst, Numis Securities Ltd.]

Sure. No. Understood. Okay. That's helpful. Thank you. Cheers.

[Operator]

Thank you. Our next question is from Sebastian Bray from Berenberg. Sebastian, your line is open. Please go ahead.

[Paul Waterman]

Good morning, Sebastian.

[Sebastian Bray]

Hello. Good morning and – good morning, everybody. Good morning, Paul. Thank you for taking my questions. Could I start with a conceptual one? Leverage is coming down. It looks like it might dip below 2 times in the present by the end of the year. And you – when rejecting the minerals tax bid, Elementis put out a pathway to getting over $2 a share. If it turns out the market needs a bit of encouragement to share the same view, are you prepared to buy back stock as well as reintroduce the dividend, or can we think about priorities there given the valuation is still low relative to history? I have two smaller questions which are more technical follow-ups on nickel and cobalt and chromium pricing, but I'll pause there just for the first one.

[Ralph Rex Hewins]

So, I'll take that, Paul. I mean – hi, Sebastian. Yeah. I mean, interesting conceptual question. I think our priority really for now is, with our net debt at the end of the year at 2.6 times, is to continue our deleveraging. We set out a medium term target of getting down to 1.5 times. So, I think we really should consider that special returns would be a consideration after we've resumed the dividend for a start.

So, that's – we're very keen to resume the dividend. We will do that when we make further progress on deleveraging, which we do expect to do. But I think getting the sort of the regular dividend resumed first would be the priority before looking at additional ways of making returns.

But, you're right, in terms of conceptual, the business does throw off a good amount of cash. The net debt dollar million number didn't come down significantly in 2021 because of the $33 million of sort of one-off tax-related items. So, as you saw, the sort of the net debt to EBITDA come down from 3.2 to 2.6, it sort of slightly obscured the amount of sort of deleveraging momentum in the business. So, I think you're right to point to the fact that we do expect to see fairly good progress in that this year.

[Sebastian Bray]

Thank you. The more technical questions I was referring to are, firstly, on pricing through the business. Is – why exactly is it in – if I just try and unpack the tone here, it effectively sounds like, don't worry about margins in Personal Care and Coatings too much because we're confident of our pricing power and putting through the increases. Maybe we're a bit less sure near term on Talc and Chromium. And I'm just wondering, is there anything intrinsic about the frequency of contractual refresh? I guess it's less frequent for Chromium. Or the expectations when setting prices for the Talc business that just means structurally this takes longer to recover, because I thought Chromium was mainly annual and Talc was – you can effectively do what you like, but it's maybe every half year. Is it right or...

[Ralph Rex Hewins]

Yeah.

[Paul Waterman]

Yeah. I can start on that one. I think on Personal Care and Coatings, I think the amount of new products and the competitive position that we have, amount of innovation enables us to action pricing well and maintain customer loyalty. I think it's very strong on Talc as well. The situation in there that was slightly different in terms of the rate of cost increase into the third and fourth quarter was kind of breathtaking. And so we took very massive increase as I've said in the presentation. And, again, 100% customer retention. And so it's a temporary effect. It'll dissipate in 2022.

The Chromium business is a different business in that the pricing tends to be set by quarter. There's a bit of it that's annual; some, six months. So, the implementation of price changes is staggered in. Although, again, if – and it's dependent upon obviously the global chromium capacity utilization, which is starting to tighten up. So, the price dynamics on that business are slightly different, if that answers the question, Sebastian.

[Sebastian Bray]

No. That is helpful. Thank you. And the last one is – looks like a technical question. For the metal, the nickel and the cobalt that are shipped out of the Talc business, I cannot remember. I think you usually ship to a Russian port. And if so, does this need to be [indiscernible] (00:46:01)? Does this need to be changed or am I wrong in this and there was no impact at all?

[Ralph Rex Hewins]

Fortunately, Sebastian, that's not right. No. They go to an OECD market. Yeah. And just sort of rightsize the nickel – the nickel and the cobalt are sort of actually together as part of a concentrate to get shipped. They're not shipped as separate products. It is – it still remains a small part of our business around about 10%. So, we see the real value driver is the industrial talc opportunities. The nickel and cobalt really is effectively a small byproduct, but it is good to see the pricing on those mix moving up, which is a small positive. So, they don't [indiscernible] (00:46:52).

[Sebastian Bray]

Thank you for taking my question.

[Ralph Rex Hewins]

Yeah.

[Sebastian Bray]

Thank you.

[Operator]

Thank you. Our next question is from Chetan Udeshi from JPMorgan. Chetan, your line is open. Please go ahead.

[Paul Waterman]

Good morning, Chetan.

[Chetan Udeshi, Analyst, JPMorgan Securities Plc]

Yeah. Hi. Thanks. Morning. First question I would ask is, just to get some clarity on the energy exposure of Elementis, both in Europe and US. And can you give us some color on how much energy cost inflation do you guys see in full year 2021 and especially Q4? And how are you thinking about 2022 at this point? In a related topic, how do you hedge? Or do you – is there any hedging mechanism on your energy exposure?

The second question on Coatings, we've already seen some big coating companies talk about a normalization in the decorative paints volumes because of the slowdown in the DIY market. I mean, can you remind us how big is the deco business for you guys outside Asia? And have you seen that in your demand patterns from the Coatings market? Thank you.

[Paul Waterman]

Yeah. So, on the energy exposure, Chetan, the US is natural gas, and we're well-hedged for that. Europe is predominantly electricity in the Netherlands and in Finland. This was a pretty settled market actually in the last three or four years up until 2021. We've hedged our electricity need for 2022. I think it's – 85% of the energy has been hedged.

So, that's kind of the – [ph] would you (00:49:04) add to that, Ralph?

[Ralph Rex Hewins]

Sure. Well, it's [indiscernible] (00:49:05) of our variable cost, it's about 5% – has been about 5%. It's taken up an increase in shares. The unit prices go up, but that's around the cost. It's perhaps a little bit more in terms of percentage of cost in the Talc business as they are – all the talc sites run on electricity. The talc sites are in Finland and Netherlands, and so they have really been affected by the 4Q spikes in electricity there. But overall, it's around about 5% of the variable cost.

[Paul Waterman]

Yeah. And the question around deco in our business, overall, it's about one-third of our global coatings business. We don't have very much deco exposure in Asia, small base, although it does appear that there's some really, really good growth opportunities that we'll see over time. And it's about – if you look at Europe and the US, it's about 50% of our business.

I think we expect market growth in 2022 on deco, but we are not dependent on it. I mean, the story, really the Elementis story, is about gaining market share in NiSAT, in HASE at more customers with our premium technology. We saw – we made good progress in the last 18 months, but the fact is that there's more to come in 2022 and 2023 and beyond. So, we've got about 15% of that market segment, and we feel there's really good runway for us to continue to grow.

[Chetan Udeshi, Analyst, JPMorgan Securities Plc]

Thank you.

[Operator]

Thank you. Our next question is from Andrew Stott from UBS. Andrew, your line is open. Please go ahead.

[Paul Waterman]

Good morning, Andrew.

[Andrew Stott, Analyst, UBS AG (London Branch)]

Good morning, Paul. Morning, Ralph. Thanks for taking the questions. So, you – it's back to the dividend, I think the earlier question, really, but I'll ask it a different way. Can you just let us into the board's discussions around the dividend? Because I get the fact that there wasn't a lot of cash generated in FY 2021 and partly because of the tax cost. But is there a forward-looking element to that dividend absence? So, specifically, I've got one eye on your payables number. Quite a big inflow on payables from a cash flow standpoint. So, does that unwind in 2022? And could it be feasible that we don't get a lot of free cash flow in 2022? That's the first question. So, I'll stop there and let you take that.

[Paul Waterman]

Sure. You want to take the dividend?

[Ralph Rex Hewins]

Okay. Andrew, good morning. Dividend obviously is a matter for the board. I think the way we're thinking about it is there's a sort of – if you like, a sort of a book end of where you ended 2020 up sort of 3.2 over 3, clearly the level of leverage post-2020. Demand hit was too high to even consider resuming the dividend at that point. So, that's one end of the book end. And then you've got the 1.5 medium-term goal of leverage, which we are still confident of being able to achieve.

I think as we make progress from that at sort of 3.2 through 2.6 at the end of last year towards the 1.5, there'll be a moment when the level of confidence is the amount of deleveraging and the environment conditions at the time are the right moment to resume it. So, I think it's within sight. But at the moment, certainly at the end of 2021, we should still make progress on bringing our levels of debt down.

On your point on working capital, I'm not – I mean, all elements of working capital moved fairly considerably. I think a number of companies have seen this. I mean, it's a sort of percentage of sales that actually stayed fairly stable. We had a big increase in revenues. So, receivables, payables, inventories, all actually increased in 2021. So, I don't think – I mean, I think clearly if raw materials and prices go up, we'll all be seeing absolute levels increase. But I think we've got the capacity to deal with that, given the sort of percentage of working capital to sales is remaining very much under control. So, I don't think that would be a big determining factor on dividend considerations nor on deleveraging. We're confident we can still deleverage with higher absolute levels of working capital.

[Andrew Stott, Analyst, UBS AG (London Branch)]

Okay. Thank you. Can I just follow up with a separate question, please?

[Paul Waterman]

Sure.

[Andrew Stott, Analyst, UBS AG (London Branch)]

This is around – Paul, you mentioned a couple of occasions the $50 million of new business opportunities. How do I think about that in a spreadsheet world? How much of that's in 2021 and how much of that's still to come?

[Paul Waterman]

Oh, the $50 million, Andrew, happened in 2021.

[Andrew Stott, Analyst, UBS AG (London Branch)]

So, it's all in 2021? Okay. Perfect.

[Paul Waterman]

Yeah. That's right. And we've set obviously similar expectation for 2022. And we – obviously Coatings has a great deal of momentum, so it's a big part of that $50 million. But frankly, we're continuing to make very good inroads on Personal Care new business; in skin care, which is a big strategic initiative for us; cosmetics; as well as AP Actives. And then on Talc, we expect $15 million of new business in 2022; and it's quite well underpinned. It's long-life plastics, it's technical ceramics, it's barrier coatings. Quite a lot of emphasis at Elementis, I think, to high-grade the product portfolio, but then obviously monetize these innovations as quickly as we can.

[Andrew Stott, Analyst, UBS AG (London Branch)]

Okay. Thanks. And then sort of final question, if I can. On Mondo – or Talc, sorry. I mean, old language. I mean, if I think about the long run profitability, you were doing $23 million pre-purchase on EBIT, you're down at $14 million in FY 2021 in what is a – I guess a semi-recovery year. I'm trying to disentangle the electricity cost issue, right? So, do you think you can grow EBIT in 2022 for Talc despite what's happened to those electricity prices in the Netherlands and Finland?

[Paul Waterman]

Yeah. Andrew, we do. I mean, the – when we think about the 2021, I mean, strategy was always to grow industrial talc, which has grown 7% a year for the past 12 years. We grew 15%. Strategy was to geographically expand the business. We grew Americas, 62%; Asia, 24%. We close $13 million in new business. So, lots of good strategic progress.

I think the two big challenges that we had that are temporary and pandemic-related were this accelerating cost inflation. Electricity, massive increases in the fourth quarter. Had a $3 million in-year impact. But the other area for us was logistics, specifically container logistics, which were 4 times higher than 2020. That also had a $3 million in-year impact.

And then the other area is, obviously, European auto, which – that's about 20% of our long-life plastic sales. Production units in Europe are down 30% over the past three years. And in the second half, our long-life plastics was down about 20%. So, that had a pretty big negative mix impact relative to what we would've expected, and that was a few million dollars.

I think the reason why we feel confident about the performance recovery in 2022, to be able to take the kind of pricing that we took, it's – I mean, I don't – it's massive actually. And to not lose business, absolutely key to show the quality of our Talc business and the runway. And, again, we're not backing off on the NBOs. That $50 million target is well-underpinned, and we aren't assuming any European auto recovery as we think about 2022.

So, these are the kind of moving parts, I think, that give us confidence as we built the program for 2022 and beyond. We can get back to the $23 million, and then grow from there.

[Andrew Stott, Analyst, UBS AG (London Branch)]

Okay. Thanks, Paul. Thanks, Ralph.

[Paul Waterman]

Thanks, Andrew. I think unfortunately we're out of time; but thank you very much for joining us, and we'll speak soon.

[Operator]

Thank you, everyone, for joining today's call. This is all the questions we have time for today. You may now disconnect your lines, and have a lovely day.