Gatemore calls on Elementis to replace CEO

In an open letter, Gatemore urged the speciality chemicals company to accelerate and confirm the details around its announced cost-savings programme, replace the current CEO and conduct a strategic review of the portfolio "with the aim of refocussing the business and making it more attractive for a strategic buyer".

The investor said it reckons many of the company’s problems are self-inflicted and demonstrate a continued failure of judgement of the top leadership team, most notably the CEO.

It noted that since Paul Waterman came into the office in 2016, Elementis has delivered subpar total shareholder returns compared to its peers, despite the share price having been supported by three takeover approaches throughout the period.

Among the missteps that have been allowed under Waterman’s watch, Gatemore highlighted about $650m spent on M&A net of disposals, which it said is equal to over a half of Elementis’ current entire market capitalisation.

It said the company overpaid for the Mondo Minerals acquisition and failed to deliver on promised synergies. Instead of delivering growth, the acquisition resulted in increased financial leverage and deteriorating cash flow, ultimately leading to covenant reset and elimination of the dividend.

It also pointed to operational underperformance.

"Under the watch of the current management team, Elementis’ financial performance has been disappointing, with operating profit margins and earnings per share declining despite multiple cost cutting initiatives," said Gatemore, which owns 0.6% of Elementis shares.

"Management’s latest mid-term profitability guidance has been increased to 19%. 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%."

In a brief statement responding to the open letter, Elementis said it continues to believe that "shareholder value is best driven by a focus on delivering the substantial actions that are currently being progressed at pace throughout the business and that underpin progress towards the 2026 targets of 19%+ operating margin, more than 90% cash conversion and more than 20% return on capital, generated by $90m of above market revenue growth and $30m cost savings".

It added: "The board continues to engage with, and welcomes feedback from, all shareholders, with a clear focus on driving shareholder value, and looks forward to updating the market in its trading update alongside its AGM tomorrow."