LONDON, April 29, 2024 /PRNewswire/ --
29 April 2024
Mr. John O'Higgins
Chairman of the Board
Elementis PLC
The Bindery 5th floor
51-53 Hatton Garden
London EC1N 8HN
United Kingdom
Dear Mr. O'Higgins,
Elementis PLC – an urgent need for change
As you know, Gatemore Capital Management LLP ("Gatemore" or
"we") manages the Gatemore Special Opportunities Fund ("GSOF" or
the "Fund"), which currently holds an economic interest of over 4
million shares in Elementis PLC ("Elementis" or the "Company").
In our previous private letter to you and conversations since
then, we discussed the gulf between the fundamental strength of
Elementis and the Company's persistently weak share price. We have
decided to make our views public because we believe there should be
an open discussion regarding the best steps forward for the
Company. More importantly, we are concerned by the ineffective
engagement that has long characterised the Company's interactions
with shareholders, which has already resulted in public
attention.
This open letter reiterates our views on the key steps the
Company needs to take to rebuild investor confidence and unlock
significant value for its shareholders. Our opinion is also
informed by the extensive conversations to date with fellow
shareholders, the vast majority of which we believe agree with our
views and recommended actions.
Elementis is an attractive business that has lost its
direction
Elementis' persistently weak share price reflects the market's
sentiment, which is driven by years of disappointing
performance.
However, we recognise the fundamental strengths of the Company
and the opportunities for significant improvements if corrective
actions are taken now. After extensive outside-in due diligence,
which involved consultations with industry experts, former
executives, investment banks, and Elementis shareholders, we hold a
strong conviction that Elementis is a business with a robust asset
base, abundant growth opportunities and outstanding potential.
Noteworthy factors supporting this conviction include:
- The mission-critical nature of rheology modifiers in the end
product formulation;
- Customer loyalty, with coatings manufacturers seeing
significant benefits from maintaining long-term relationships with
providers after the product has been formulated;
- A distinctive competitive advantage through ownership of a
hectorite mine in California which
also underpins significant asset value in the business;
- Unparalleled expertise in the rheology modifier space with
market-leading R&D capabilities;
- Consistently strong historical gross profit margins.
These fundamental strengths, coupled with its persistently weak
share price, result in a perception that Elementis has lost its
direction.
Elementis' valuation has suffered from self-inflicted
management failures
We believe that many of Elementis' current problems are
self-inflicted and demonstrate a continued failure of judgement of
the Company's top leadership team, most notably the CEO.
Since the current CEO Paul
Waterman came into the office in 2016, Elementis has
delivered subpar Total Shareholder Returns ("TSR") as compared to
its peers, despite the share price having been supported by three
takeover approaches throughout the period.
[1]While we appreciate the challenging macro
environment in which the Company operates, Elementis' persistent
and significant underperformance relative to both its peers and the
FTSE 250 — by 86 and 76 percentage points, respectively —
underscores the poor management of the current CEO. The broader
issues facing UK PLCs have clearly not helped, but they do not
provide an excuse for this scale of underperformance.
Management missteps that have been allowed under CEO
Paul Waterman's watch include:
- Poor capital allocation: current management has shown
poor judgement on M&A. Approximately $650 million has been spent on M&A net of
disposals[2], which is equal to over a half of
Elementis' current entire market capitalisation. Furthermore, the
Company overpaid for the Mondo Minerals acquisition and failed to
deliver on promised synergies. Instead of delivering growth,
this acquisition resulted in increased financial leverage and
deteriorating cash flow, ultimately leading to covenant reset and
elimination of the dividend.
- Operational underperformance: under the watch of
the current management team, Elementis' financial performance has
been disappointing, with operating profit margins and EPS declining
despite multiple cost cutting initiatives. Management's latest
mid-term profitability guidance has been increased to
19%[3]. Whilst shareholders will hope that this does
indeed come to fruition, it is hard to overlook the fact that the
Company's 2023A reported 14.6%3 operating profit margin has not yet
reached the previous guidance of 17%3.
In recent periods, Elementis has also rejected all three
takeover approaches it has received, asking shareholders to be
patient and trust management's ability to execute its strategic
agenda and close the valuation gap.
Elementis' self-help measures are woefully inadequate
Elementis has recognised the scope for improvement, but the
proposed self-help measures reflect questionable timing, a lack of
ambition in the pace, and ultimately a lack of commitment to value
creation.
During its recent Capital Markets Day in November 2023, Elementis management unveiled a
$30 million cost-saving program
scheduled for 2024 and 2025. This program comprises a $20 million "Fit for Future" organisational
restructuring initiative and $10
million of procurement and supply chain efficiencies.
Given that the current management has been in place for over
seven years, it is puzzling why such actions were not implemented
sooner. It also raises questions as to whether the transformation
could in fact be expedited, with majority of the cost savings
realised as early as 2024.
The market is also sceptical of the management's ability to
deliver, which is reflected in the street consensus anticipating
only a 17.7% EBIT margin by 2026[4]. This forecast falls
considerably short of management's target, raising concerns about
the lack of transparency and detailed disclosure surrounding the
plan.
Given the management's track record to date, there are
inevitably significant doubts about their capability to execute and
deliver on their promises. Shareholders cannot be expected to have
confidence that the same executive who has overseen such an erosion
of Elementis' value can lead an effective cost-cutting programme.
The CEO must accept responsibility and recognise that he is no
longer trusted to be the individual to lead the Company as it seeks
to move away from its past missteps.
In light of these management missteps, the Company requires a
new leadership who can conduct a review of its strategy with
independence and clear eyes and execute an updated strategy with
conviction and strength.
The Elementis Board is not aligned with shareholders
The Non-Executive Directors of Elementis collectively hold less
than 0.05% of total shares outstanding, worth approximately £332k,
while at the same time earning approximately £526k per annum in
Board fees[5]. The misalignment in interest as reflected
in this configuration is, unfortunately, not uncommon in UK PLCs,
where boards are disincentivised from acting decisively and with
appropriate urgency for the benefit of shareholders.
Indeed, the UK Corporate Governance Code (the "Code")
discourages companies from incentivising directors with equity, but
we believe this is a fundamentally misguided approach and one of
the reasons why UK equity markets are so dramatically
underperforming and therefore struggling to attract foreign capital
or new listings. We note, however, that this guidance from the Code
falls under the "comply or explain" regime and is not a mandatory
requirement. Boards not only have the ability to create a
more appropriate alignment but are explicitly mandated act in the
best interests of shareholders – and certainly should not be
treating the Code as holding all the secrets to commercial
success.
Indeed, we believe Elementis should align the interests of its
Non-Executive Directors more closely with shareholders to foster
greater commitment to the Company's long-term success.
Change at Elementis is long overdue
Allowing Elementis' protracted period of operational and share
price underperformance to persist without urgent and decisive
action would inevitably disappoint all stakeholders vested in the
Company's success. In light of this, we call on the Chairman to
exercise leadership and steer the Board to take the following
steps, so as to chart a course towards unlocking the deep value in
Elementis' stock:
(i) Accelerate and confirm the details around Elementis'
announced cost-savings program;
(ii) Replace the current CEO, and select recently
appointed Non-Executive Director Heejae
Chae to lead the search process;
(iii) Conduct a strategic review of the portfolio with the
aim of refocussing the business and making it more attractive for a
strategic buyer.
It falls on you as Chairman of the Board to take the lead in
ensuring that the Board fulfils its fiduciary duties, responds to
shareholder concerns, and works to foster sustained equity value
creation for all shareholders.
With the benefit of our discussions with Elementis shareholders,
we are confident in the widespread support for our proposed
approach and recommended actions. This consensus underscores the
critical need for urgent changes within the organisation. In the
absence of decisive steps taken by the Board in the near term,
shareholders might be compelled to take proactive actions
themselves through available governance mechanisms.
Gatemore is uniquely positioned to unify shareholder interest
and unlock value
Founded in 2005 and based in London, Gatemore has a strong track record of
unlocking value in UK small- and mid-caps for all shareholders. We
focus on turnarounds and recoveries, and we effect positive change
within the companies in which we invest through thought leadership
and deep engagement. Our involvement with DX Group PLC ("DX") over
a six-year period exemplifies our expertise in unlocking benefits
for all stakeholders: DX transitioned from an operating loss of £14
million in FY18 to a profit of £27 million in FY23[6];
In late 2023, H.I.G. Capital Partners announced it would acquire DX
at 48p per share — or 6x above where the shares were we first got
involved.
We believe that this experience, along with numerous other
public and private engagements we have managed, demonstrates our
expertise in unifying shareholders on critical corporate actions
and unlocking value.
We remain available to further discuss any of this with you and
other members of the Board to ensure the full value of Elementis is
achieved. Thank you for your attention.
Sincerely,
Liad Meidar
Managing Partner
Gatemore Capital Management LLP
For media enquiries:
Greenbrook
Rob White, Teresa Berezowski
Email: gatemore@greenbrookadvisory.com
Tel: +44 (0) 20 7952-2000
Disclaimer
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manages ("Gatemore") is acting on behalf of itself and not as agent
for or on behalf of any third party. This letter is not intended
as, and should not be construed as, an offer or invitation or
solicitation with respect to the purchase or sale of, or a
recommendation to invest in, any security. The content of
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not been, endorsed or approved by any other person. You should
assume that, as at the date hereof, Gatemore may have a position
(long or short) in one or more of the securities of any company
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continue transacting in such securities.
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accounting, legal or tax advice or as a recommendation regarding
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Certain information in this letter constitutes "forward-looking
statements", which can be identified by the use of forward-looking
terminology such as "may", "will", "should", "expect",
"anticipate", "target", "project", "estimate", "intend",
"continue", or "believe", or the negatives thereof or other
variations thereon or comparable terminology. By their
nature, forward-looking statements involve risks and uncertainties,
actual events or results may differ materially from those reflected
or contemplated in such forward-looking statements.
[1] Bloomberg as of 26/04/2024. Total Return Index
(Gross Dividends). Specialty Chemicals Peers is a simple average
TSR of Ashland, Arkema, Imerys, Evonik and Lanxess.
[2] Elementis FY 2017 - FY 2023 financials.
[3] Elementis November
2023 Capital Markets Day Presentation, Elementis FY 2023
financials.
[4] Capital IQ mean consensus as of 25 April 2024.
[5] Holding value based on Capital IQ information
as of 1 December 2023 and market
capitalisation of £806m as of 26 April
2024. Non-Executive Board compensation per Elementis 2023
Annual Report.
[6] Group Adjusted Operating Profit before Tax.
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