Elementis Strategic Review

1
Elementis Strategic Review
31 October 2005
2
Strategic review - objectives

• Increase base earnings level
• finance growth internally
• generate cash to reward shareholders and
  employees
• Refocus attention on Specialty businesses
• largest (43 of group sales) and most profitable
  segment
• (70 of group operating profit)
• superior margins and return on capital
• potential for growth
• re-rating opportunity
• Increase Chromium earnings quality and
  predictability
• reduce sensitivity to industry supply/demand
  balance
• reduce exposure to volatility in input costs
• Increase financial transparency
• Second phase of strategic review to be completed
  H1 2006

2
2005 forecast
3
Increase base earnings level fixed cost
reduction

• Corporate functions absorbed by business units
• 80 reduction in Head Office personnel related
  costs
• responsibility closer to operations for improved
  decisions
• Specialties efficiencies in all categories
• Specialties and Pigments US administrative
  functions combined
• cost savings
• management upgraded
• Chromium reduction in all categories
• lower breakeven point
• reduced earnings volatility
• Total cost reductions 20.2 million

3
4
Fixed cost reductions other than Chromium
million

• Annualised reduction compared to 2005 level
• General Selling and Administrative 6.8
• Manufacturing 1.7
• 8.5
• Reductions are additive to savings resulting from
  actions announced in H1 2005
• 4.4 million year on year from H1 2005 actions
• 90 of savings expected to be realised in fiscal
  year 2006
• Further review of manufacturing efficiencies
• Specialties business pro-forma operating profit
  increased by more than 30

4
5
Fixed cost reductions - Chromium
million

• Annualised reduction compared to 2005 levels
• General Selling and Administrative 2.3
• Manufacturing 9.4
• 11.7
• Savings offset by reduction in output
• pro-forma profitability essentially unchanged
• breakeven sales level lowered
• Asset write down of 25 million

5
6
Chromium strategy

• Reduce earnings volatility which adversely
  affects overall Elementis profit trends
• Chromium earnings strongly influenced by
• pricing industry supply/demand balance
• fixed costs high break even point
• input costs Elementis does not transfer or
  hedge risks
• Maximise sustainable rather than peak profits
• use leading market share strategically
• reduce fixed costs to maintain profitability at
  lower sales levels
• hedge or offset input costs (energy etc)

6
7
Chromium strategy (cont)
million

• Volatility concentrated in UK operations
• Total sales 121.9 110.5 62.0
• Total operating profit 6.8 (3.8) 1.1
• US sales 69.5 58.7 33.1
• US operating profit 8.8 4.7 3.7
• UK sales 52.4 51.8 28.9
• UK operating profit (2.0) (8.5) (2.6)
• US business relatively profitable and stable
• UK business expected to be profitable in H2 2005
• UK has less favourable
• product mix
• customer mix
• energy supplies
• fixed cost base

2003 2004 2005 H1
7
8
Chromium restructuring

• Reduce Elementis worldwide capacity by 50,000
  tonnes (25)
• reductions all in UK
• industry supply/demand moves to approximate
  balance
• Net reduction in output of approximately 15
  because
• UK currently less than full operation
• US production can be increased
• mix changes eliminate lower price/margin products
• Negotiate changes in UK sales contracts to reduce
  volatility
• longer term agreements
• risk of changing input costs transferred to
  customers
• Reduction in overall fixed costs offset reduced
  output
• pro-forma profitability essentially unchanged
• breakeven production level 100,000 tonnes in 2006
  versus 140,000 tonnes in 2005

8
9
Chromium optimise sustainable profits

• Retain ability to influence longer term
  supply/demand balance
• Substantial idle capacity available to Elementis
  at minimal capital cost
• expand output in appropriate industry conditions
• influence construction of new capacity
• Breakeven level reduced
• maintain profitability at significantly lower
  volume
• breakeven at approximately 65 of planned
  production

9
10
Specialties strategy

• Cost reductions programme increases pro-forma
  profits by more than 30
• return on sales 13 (excluding Servo
  acquisition)
• Emphasize growing market segments
• New product introductions
• Manufacturing efficiencies
• Strategic review continuing
• complete review in HI 2006

after Head Office cost allocation
10
11
Pigments strategy

• Business has suffered from
• high production costs in residential coatings
  products, 30 of sales
• poor market conditions in residential coatings
• New plant in China to improve product costs
• Strategic review continuing
• complete review in HI 2006

11
12
Sale of Linatex

• Provides net sales proceeds of 17.6 million
• Helps finance restructuring
• Reduces pension deficit
• Allows management to focus on core businesses

12
13
Restructuring costs
million

• Cash cost
• Severance 10.0
• Others 2.6
• 12.6
• Non cash cost
• UK Chrome plant write down 23.9
• Others 1.1
• 25.0
• Total 37.6
• Reduction in chromium working capital provides
  cash towards restructuring costs 3.4
• Sale of Linatex covers remaining cash costs
• Sale proceeds (net) 17.6
• Transaction costs (1.1) Accelerated
  pension contribution (7.0)
• Net cash proceeds
  9.5

13
14
Summary of fixed cost savings
million

• Fixed cost savings excluding Chromium
• Corporate functions 0.4 1.9 0.2 2.5
• Specialties and Pigments 0.5 4.8 0.7 6.0
• 
  Total 0.9 6.7 0.9 8.5
• Actions announced in H1 2005 4.4
• Total fixed cost savings expected in 2006 11.1
• Chromium fixed cost reduction (11.7) is offset by
  reduction in output

2005 2006 2007 Total
14
15
Summary

• Fixed cost reductions expected to significantly
  enhance 2006 earnings
• Majority of restructuring improvements will be
  evident in 2006 financial reports
• Restructured Chromium business
• more profitable
• lower risk
• more sustainable long term profit model
• All 3 business units have potential for further
  improvement in 2006
• Strategic review continuing
• growth strategy for Specialties
• Pigments strategy
• continued efficiencies, especially manufacturing
• Increased free cash flow
• review dividend policy
• reduce debt
• Change in perceptions
• Specialties performance
• reduced Chromium volatility

15
16
Elementis Strategic Review
31 October 2005
16