2024 Interim results transcript

2024 interim results presentation transcript

1 August 2024

Paul Waterman, Chief Executive Officer

Introduction

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 have been working at since 2020.

At our Capital Markets Day last November, we shared how continued execution of this strategy would 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 multi-year 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 will continue to build on.

So, am I confident that we will 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 we will deliver both above market growth and further efficiency.

So, while this first half is a down payment on our CMD commitments, there is more to come, and it will be to the benefit of our shareholders. I’m very excited about where we are 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 will start with highlights and business segment performance, Ralph will cover the

Group financials and then I will take you through the outlook. Following this we will take your questions.

Key messages

We are pleased to report that Elementis has 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 1.3 times. And today we are 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 have 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 will provide more detail on the targets shortly, but first let me cover our safety performance, which improved further in the first half.

Improved safety performance

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

1 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 systematic approach to keeping our people safe.

Financial performance

Turning to our headline financial performance on slide 7. Revenue increased 5% to $383 million, reflecting more normalised volumes and improved mix. Operating profit of $65 million was up 24% on the prior period.

The best first half profit result 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 6.1 cents per share. And we continue to de-lever, with net debt falling since the year end and our gearing ratio at 1.3 times versus 2 times at this time last year. In line with our dividend policy, we have declared an interim dividend of 1.1 cents per share.

Strategic progress

Moving on to strategic progress, I am pleased to say we are moving at pace towards our 2026 CMD objectives. Progress is demonstrated in our focus areas of innovation, growth and efficiency.

On Innovation, we are on track to launch 15 products this year, with nine launched in the first half. These included bio-based defoamers for industrial coatings and hectorite-based skin care 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 am pleased to say delivery of our $30 million efficiency programme is running ahead of plan, and we now expect to deliver $15 million of savings this year and another $15 million savings in 2025. The organisational restructuring, which we call Fit for the future, is ahead of plan whilst our procurement and supply chain cost savings programme is progressing well with the AP Actives Middletown, New York plant now closed. Ralph will provide more detail on both programmes later on.

2026 financial targets on track

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 will reiterate that we have assumed 100% of the delivery is based on self help and we continue to assume that the 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 three-year average operating cash conversion to end June 2024 was 81% and performance over the last 12 months was 130%. So we are 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 are making good progress, but there is more to do. Now let’s look at the performance of our businesses by segment

Personal Care Performance

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 have 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.

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We continue to optimise our route to market, particularly in Asia, where, we have built the capabilities to directly manage more strategic customers. That not only increases customer intimacy but also drives higher margin. And finally, we are 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.

Personal Care strategic progress

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 have 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.

Personal Care growth platforms

Now let me tell you how we are 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 seven growth platforms, three in Personal Care, four in Performance Specialties.

Personal Care platforms will deliver about one-third of the $90m 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 are serving in Personal Care. Here we target above market growth of $10 million by 2026.

We are 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 are on track to deliver eight new product launches within the next 18 months. These products will focus on solving our customer’s 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 two to three times the market, with the biggest opportunity being the replacement of synthetic rheology control ingredients, with our natural hectorite technology. We are on track to launch seven 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 in 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 will 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 six months.

Skin care

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 five most popular products at the show, and we sent out over 700 samples to customers worldwide. This is our first product in a new Hydroluxe line. We are 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 is worth over $200 million.

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Colour cosmetics

We also made very 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, where we have doubled the 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 that 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 two customized products for our Chinese customers. But Asia growth is not all about China. In Korea we are 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 will continue to invest in this region to support further growth.

Antiperspirants

Moving onto the last growth platform in Personal Care - Antiperspirants. Here we are focusing on revenue growth and more importantly further margin improvement.

We made great progress on high-efficacy products launched over the last few years. I am 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 aluminium. Using waste aluminium 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 have filed a patent for a new deodorant active that will offer both odour 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 antiperspirant actives. We plan to launch it in the first half of 2025.

Performance Specialties

I will now move onto Performance Specialties. Overall revenue increased 6% to $268 million, driven by

Coatings. Adjusted operating profit increased by 22% to $42 million. Adjusted operating margin rose to

15.5%, driven by both improved volumes and mix in Coatings and $19 million of new business.

Coatings performance

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 have 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 19% margin we delivered in the first half, in continued weak market conditions is a testament to the improved quality of this business. This hasn’t been driven by a favourable 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 are 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 normalised 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 have 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.

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Performance Specialties growth platforms

Let me now move onto our Performance Specialties growth platforms. Of our seven growth platforms four are in Performance Specialties. These are expected to deliver around two thirds 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 are 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 NiSATs that are over 80% biobased, 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 are launching a new hectorite and organic thixotrope-based line 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 defoamers that we produce globally. We are building capabilities in both Portugal and in

China, to support future growth.

The third growth platform is Adhesives, sealants and construction additives. This is a market that we are only starting to penetrate but where our technologies bring both sustainability and performance benefits.

We are 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 are replacing bentonite-based products and significantly improving end product efficiency. Another new area that we are looking to expand into is the clear sealant market, worth around $150 million. We will be launching an additive that will allow us to replace fumed silica. Innovation is crucial here, and we have six new products in the pipeline. We are 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 for example. I will cover those later on. Let me now update you on the progress we have made in the last six months.

Architectural Coatings

In the second quarter we opened a new state-of-the-art NiSAT facility in China. NiSATs, 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 USA,

Europe, and Asia. With our unique position, we can efficiently serve large 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

Q&A

Operator (instructions for raising questions)

First and the first question goes to Kevin Fogarty of Deutsche Numis. Kevin, please go ahead.

Kevin Fogarty, Deutsche Numis

Morning all. Hi there, how are you doing. Thanks for taking my call. 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 that's kind of outside of the impact of growth initiatives coming through. So, I just sort of wondered, 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 seven of those growth platforms outlined. The update today obviously shows some good progress there and lots of ambition. I guess, when you think about those now, do you think about the need to invest further behind those. I know you're sort of guiding in terms of CapEx this year in and around kind of $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, Chief Executive Officer

Yeah. Okay. Good questions Kevin as ever. I think on the personal care 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 skincare 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 seasonal, 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 quite honestly, it's our

8 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 a, another shoe to drop on CapEx to pursue our ambitions on the growth platforms, frankly you saw in the presentation, we've done some expansion of

NiSATs in China, that will serve Asia. That was long been 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 we will continue on an ongoing basis. But really, with the footprint we have and the capital spending that we've anticipating, you know, there isn't anything big to happen in that area.

Kevin Fogarty, Deutsche Numis

Great. Okay. Thanks very much for those. Thank you.

Chetan Udeshi, JP Morgan

Yeah, hi, thanks for taking my questions. And firstly, congrats on good performance. I was just wondering if I look at your volume growth in H1, it's not really that high. It's 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 a 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 Ralph would be, is there a way you can offset the dilution on earnings, either through repayment of debt, et cetera, or that may not be an option given the maturity of your debt might be a bit longer duration.

Thank you.

Paul Waterman, Chief Executive Officer

Okay, I think I'll take the second question first because it's more straightforward. We don't anticipate any material stranded costs related to a potential Talc divestment, Chetan. 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 has 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 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, you know the other things like the value of innovation, the new products, the new business that we've been working at. I mean, you know, 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 the challenge as a spec chems player is you want to be doing the 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 detail.

Ralph Hewins, Chief Financial Officer

Yeah. Just a bit of, I mean, you're right. In terms of the growth, very little of the growth came through in terms of volumes, just about $4 million dollars worth, a couple of million dollars worth in terms of operating profit. Most of the price mix benefit, we got about $7 million of that in the first half was really down to mix.

And there were three things there in particular. One is, in our Coatings business, a relative tilt towards industrial sales, which are slightly higher margin than decorative. In the U.S. In particular, decorative volumes were quite subdued, as reflected in other company's results. And when we sell relatively more industrial, we tend to earn slightly higher margins.

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Second, we went more direct, particularly in Personal Care versus distributors, and that's 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 of the best in the

Group. Those three things together really contributed to the mix effect. In terms of your comment about dilution, in the event we go down the road that you're talking about, we clearly 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 for doing additional returns to handle any dilutive effects. So, I think we're confident we could manage the dilution on the business. That's a long way down the road yet.

Vanessa Jeffriess, Jefferies

Morning. Thanks for taking my question, and sorry I've dialed in late, so I'm sorry if this is repeating a question before. 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 product.

Paul Waterman, Chief Executive Officer

Yeah, thanks for the question. Look, I think on the pipeline, you know, it does bounce around every month a bit. And, yeah, 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. Sorry, what was the second question.

Vanessa Jeffriess, Jefferies

It's on the margin difference.

Ralph Hewins, Chief Financial Officer

Yeah, there it is certainly accretive. And the vast majority are in the 55% plus kind of place. Some are higher, higher than that, and obviously depends on the specific segment. You know, Colour Cosmetics being a bit different than Coatings products. But, yeah, 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 of value. Which is why we're really, really focusing on superior performance, better sustainability, or being able to take cost out of their operations, their processes.

Eva Hatfield, Head of Investor Relations

We have received a question via email as well from Sebastian Bray at Berenberg. So, he asked, how have prices and volumes developed in Talc. Does pricing pressure explain any of the headwinds year on year, leaving aside the strike, any signs of increased competition. And there is a second question as well.

Paul Waterman, Chief Executive Officer

Okay. Hey, thanks, Sebastian. I would say that in the first half, our top volumes were down about mid single digits, and they were pretty well driven by paper. The problems that we had in the country strike, that sort of complete shutdown for four or five weeks, that we were dealing with, I think on a 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 would be different than a few other competitors. And so pricing certainly had an impact there. But I would tell you that over ---- that is materially different than what we've seen in the last few years, competitive wise.

Eva Hatfield, Head of Investor Relations

The second question was, what will determine whether Talc remains part of the portfolio, and how long will the strategic review take. Is the decision to divest independent of the price offered by any potential buyer.

Paul Waterman, Chief Executive Officer

Yeah, look, I think on that one, I'll just back up a bit. We 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 nine months. It's become pretty clear that Coatings and

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Personal Care businesses have both developed into much higher margin businesses, and they both have good organic growth potential. You look at Coatings is 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. So, 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. You know, we're going to move, obviously, as quickly as we can. Not an easy decision, but I think it's, it's certainly the right decision. It was a long Sebastian question. I feel like I missed something.

Eva Hatfield, Head of Investor Relations

It's whether the decision to divest is independent of the price offered by any potential buyer.

Paul Waterman, Chief Executive Officer

Look, I think we've got to go through the process and see where it takes us. You know, we're always going to, 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. Any other questions?

Kevin Fogarty, Deutsche Numis

Oh, hi, guys. Just a couple of follow-ups, if I could do. If we look at Personal Care during the period, we've seen some tweaking or change in terms of your kind of distribution channels or route 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 Coaching side, you know, your comments on what some of the coatings majors have kind of pointed to recently. Your performance, I guess, has kind of decoupled quite a bit from theirs, I would have said. But could you sort of share with us kind of what they say to you in terms of their outlook. 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, Chief Executive Officer

Thanks, Kevin. So, to the question on route to market on Personal Care, I would say that it's market specific in that, about two thirds 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 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 hurting deco. But on the other hand, in industrial, we do see some, it does look a little bit more positive with the Inflation Reduction Act and a bunch of government money is being spent. So that's a bit helpful. Europe is pretty anaemic all around, frankly. And the progress that we're making is much more new business driven, and I think that's helping us quite a lot.

And then China, well, 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 you know 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

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

Kevin Fogarty, Deutsche Numis

Understood. No, that's helpful colour. Thanks for that.

Chetan Udeshi, JP Morgan

Yeah, hi. 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 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, Chief Executive Officer

I will start. Ralph can help me a bit. Look, I think that 2025, many of the things that we're doing right now, we're going to continue to be driving. 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 pull 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. 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, you know, 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, Chief Financial Officer

Yeah. So just to add to that, Chetan, I mean, with the $30 million set cost savings, we're saving $15 million this year. So, there'll 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 additional cost savings targeted for next year. You saw the first fruits of that, in the first half of this year it 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 to $25 million to come through and therefore you've got sort of $65 to $70 million to come through evenly over the course of '25 and '26. Probably a little bit more as we get momentum into '26. But those two components are going to be the biggest drivers of performance improvement into 2025.

Chetan Udeshi, JP Morgan

So, very clear. Thank you.

Operator

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

Paul Waterman, Chief Executive Officer

Thank you. Look, thanks very much to all of you for your time. You know, it's a good first half, but as I said,

I think earlier, you know, our heads are down and we want to make it a good, very good 2024 and just as importantly, set the table for '25 and '26. So, look forward to speaking with you all soon again.

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