Elementis Strategic Review Phase II

1
Elementis Strategic Review Phase II
March 2006
2
Strategic review - objectives

• Increase quality and predictability of earnings
• chromium restructuring
• other measures to reduce volatility
• Focus on Specialty businesses
• largest and most profitable segment
• superior margins and return on capital
• longer term earnings growth strategy
• Continue to increase base earnings level
• emphasize growth in free cash flow
• finance growth internally
• future distributions to shareholders and
  employees

3
Reduced earnings volatility

• Chromium
• capacity reduction on course for March 31
  completion
• break-even sales level reduced to 100KT from
  140KT in 2005 (65 of 2006 sales)
• industry supply/demand balance improved
• strategic capacity maintained
• 60 of UK external chromium output sold under 12
  month contracts
• Input costs hedged for year
• electricity 40
• natural gas 60
• Other
• Foreign exchange rates vs sterling hedged for
  year
• Euro 80
• 85
• Includes cost pass flow through agreements
  with customers
• of budgeted flows for year

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Specialties focus
Business line data for 2005 ( millions)
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Specialties focus - products

• Rheology modifiers (2005 sales 98.4m)
• modify flow characteristics of liquids
• maintain suspension of particles dispersed in
  liquids
• attractive manufacturing margins
• Dispersants (2005 sales 10.1m)
• promote separation of particles in liquids
• principally sourced from Servo acquisition
• lower manufacturing margins
• Compounded other products (2005 sales 31.3m)
• Colorants and other dispersions
• Surfactants (2005 sales 45.7m)
• Surface active ingredients used primarily in the
  formulation of detergents.
• part of Servo acquisition
• significantly below average manufacturing margins
• not part of Specialties strategy

Includes 4.7 million of businesses sold
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Specialties focus geographical markets
Revenues

• excludes surfactants

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Specialties focus end use markets
Revenues

• excludes surfactants

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Specialties focus business characteristics

• Product
• purchased on performance rather than to
  specification
• frequently specified in formulation
• critical performance factor in customer products
• small percentage of end product costs
• Market
• small number of key competitors
• proprietary technology and know-how
• industry supply/demand balance
• Demand
• end-use markets are consumables

9
Specialties focus comparative performance

• 2005 Operating Performance

• 2005 Restructuring will increase Specialties
  margins and return on assets

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Specialties focus financial comparisons

• 2005 Operating Performance

• Additional efficiencies planned
• excludes surfactants

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Specialties focus Strategic priorities

• Increase sales growth rate without compromising
  margins
• Volume growth
• new product development
• new applications
• market sector focus
• geographic focus
• medium-term impact
• Margin enhancement
• costs
• pricing
• product mix management
• nearer-term impact

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Specialties focus - volume growth opportunities

• Solvent based rheology (53 2005 sales)
• high market shares
• concentrated competition
• grow at market rates (GDP price)
• Low solvent and compounded products (47 2005
  sales)
• lower market shares
• fragmented competition
• strong technology and market positions
• new products/new applications
• grow at above market rates
• Market emphasis
• low solvent rheology
• personal care
• compounded additives and dispersions
• niche opportunities in plastic additives
• Asia and eastern europe

13
Strategic review new product development

• Pursuing fewer RD projects with more resources
  per project
• priorities market size and time to market
• RD project priorities (18 months or less)
• Rheological additives
• low solvent thickeners
• compounded additives and dispersions
• colorant stability additives
• personal care
• clear gellants for cosmetics and sunscreens
• Longer term projects (more than 18 months)
• aqueous dispersants
• oil field rheological additives
• Product development focus
• potential for significant increase in sales
  growth in 24-36 months
• not all projects will be successful

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Specialties focus Nanolayers in plastics

• Related to Elementis rheological additive
  technology
• Target applications
• Estimated market size
• oxygen barrier in food packaging films 170
  million
• Hectorite clay particles, proprietary to
  Elementis
• Building US and foreign patent protection
• High risk/high return project
• Too early to estimate likelihood of success
• currently research phase only
• no date set for commercialization
• Source Freedonia Group

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Specialties focus margin improvement strategy

• Efficiencies in SGA
• most categories
• Efficiencies in manufacturing
• increased utilisation
• Pricing
• tightening supply/demand balance
• reduction in key competitors

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Other business segments

• Pigments
• lower cost manufacturing drives profit
  improvements in 2006 and 2007
• price increases implemented Q1 2006
• optimise performance
• Surfactants
• produced at Servo facility in Netherlands
• now moderately profitable
• commodity characteristics
• shares facility with other Specialties additives
  (2005 sales 17.8m)
• optimise performance
• continue to review strategy

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Increase base level of earnings for 2006

• 2005 Restructuring reduces 2006 costs by 11.1
  million
• Eliminate first half 2005 UK Chromium loss
• Q1 2006 trading performance satisfactory in all
  segments
• Steps taken last year to grow earnings in 2006

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Increase base level of earnings for 2007

• Implement steps now to support 2007 earnings
• specialties efficiencies 2.2
• US pension curtailment (net) 1.2
• Incremental benefits of earlier actions
• Pigments manufacturing cost 1.0
• 2005 restructuring 0.9
• Total 5.3 million - 1.2p per share
• Other factors for 2007
• pricing and new products in specialties and
  pigments
• continued cost efficiencies
• chromium pricing

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Discretionary cash flow

• Increase conversion of earnings to discretionary
  cash flow
• Provide funds for growth and for distribution to
  shareholders
• Declining committed expenditures
• assumes Dec 31, 2005 deficit is amortised
  over 10 years _at_ 5 interest
• Excludes amount s charged to operating profit

- Interest
(3.5)
(3.5)
(3.5)
(3.5)
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Summary

• Addressing volatility in chromium, energy and
  foreign exchange
• Longer term focus on specialties
• industry leading returns
• margin enhancement opportunities
• organic growth potential
• free cash flow generative
• Q1 trading satisfactory in all segments
• New management structures yielding benefits
• business focus
• motivation
• Specific steps taken now to improve 2007 earnings
• Review at half year
• segment performance
• outlook for the year
• financial policy