Good morning, everyone, and welcome to the Elementis 2025 Results Presentation. Thank you for joining us. Great to see you. In terms of agenda, I'll begin with our highlights for the year, and Kath, our new CFO, will then run you through our financial performance. Then, I'll take you through our strategic progress for over the past year and finally to our outlook for 2026. We'll then open for questions. It's been quite the year. Looking back 10 months into the job, I'm really proud of everything we've achieved together. We delivered strong profit growth and margin expansion despite soft demand environment, and that's clear proof of the quality and resilience of our business. From a strategic perspective, the sale of the Talc business and launching our Elevate Elementis strategy were more than milestones.
They set the foundation for this company can achieve when we focus and move forward as one team. We're making solid progress across all of our strategic priorities, such as innovation sales up to a record of 16.4% and zero lost time accidents. Lots of positive momentum. You might remember a version of this slide from our last half year result presentations. Our portfolio has fundamentally transformed over the past years. We've reshaped Elementis into a pure-play specialty chemicals business focused on our two segments: personal care and coatings. Selling Talc was a major step in making this happen, and it was my first priority when I started as CEO. With Chromium sold in 2023, we exited these commoditized capital-intensive businesses, and it was absolutely the right decision. It allows us to focus on our core strengths and capabilities.
As you'll have seen this morning, I'm pleased to share that we've agreed to sell our pharmaceutical business to ABF. This sale is in line with our strategy as well, further sharpens our focus. More on this on the next slide. In November, we added Alchemy Ingredients to the portfolio, a fantastic bolt-on right in our personal care sweet spot. It's a fast-growing, high-margin business that strengthens our position in skincare and cosmetics. This is the new Elementis. We're a company with a unique position built on three real differentiators: hectorite, rheology, and formulation solutions. We're really pleased with the shape of the portfolio, and we're well positioned for growth. We announced today that we reached an agreement to sell our non-core pharmaceutical manufacturing business to ABF. Last year, the business made $35 million in revenue.
Our pharmaceutical business was originally acquired as a part of SummitReheis in 2017. It manufactures antacids and pharmaceutical excipients from our Ludwigshafen site in Germany. While the business has performed well, it's clear that it no longer fits with our strategic focus. Because of that, the sale we announced today is the best outcome for both the pharma business and for Elementis. It's a straightforward, clean transaction. It will reduce our capital intensity and on a pro forma basis will deliver an uplift to 2025 group operating margins. We're working towards a completion in Q2. With the Talc business sold, we accelerated the delivery of all of our 2026 financial targets by one full year, which is a fantastic result.
With Elevate Elementis, we shared our new targets: mid-single-digit revenue growth, operating margins of more than 23%, and three-year operating cash conversion to be above 90%. ROCE excluding goodwill of more than 30%. Our proven track record gives us the confidence that we can meet these targets and be among the top of our peer group. Moving to sustainability. Next slide. Starting with safety, which is fundamental to how we operate. Last year, we achieved our first zero lost time accident since 2019. That's a big milestone. On the environment, we continue to make good progress. The divestments of Talc and Chromium have significantly reduced our carbon footprint, which is now nearly 80% lower than 2019. We continue to transition to a more sustainable and responsible business.
For example, at our hectorite mine, we moved to almost entirely renewable energy from a 0% base last year. Finally, on people, we've made a lot of changes in the organization with Fit for the Future, which was a big reorganization for us. The engagement scores actually improved with voluntary attrition down by 40%. We're well below industry average now. For me, even more importantly, I see it when I visit our sites, how proud the team is when I visit the Newberry, which is where we have our hectorite site, or when I visit the new Porto team. With that, I'm delighted to hand you over to Kath, our new CFO, to cover our financial performance.
Thank you, Luc. Good morning, everybody. Before I begin, I'd just like to share some initial reflections of my first few months in Elementis. I've been here for four months now and two months as the CFO. I've been genuinely impressed and frankly relieved by what I've seen. I've had a really warm welcome, with lots of people taking time out of their busy schedules to help me onboard. It's clear everyone is working with real commitment to unlock the full potential of Elementis. I've had the opportunity to visit locations in the UK, Europe, and USA. I really enjoyed learning about the business. There's nothing quite like being in the manufacturing environment, seeing products being made and looking to see what we're talking about in meetings. The real highlights for me have been hands-on in the Alchemy lab and visiting the hectorite mine.
What has really stood out is the passion, dedication, commitment, and pride of our people. They care deeply about the company, and rightly so. I'm confident that we can continue to build on these strong foundations, demonstrating that we have opportunities to grow revenue and profit, and continue to generate strong cash and returns. When I look at the macro backdrop for 2025, we could be standing here looking at a very different set of results, and I'm definitely glad that I don't have to present that set. Despite the challenging market, we have made good progress in 2025, and the team have done a fantastic job. It's in this context, I'd like to cover the results for the prior year. Following the sale of Talc, the 2024 P&L and cash flow figures have been restated for continuing operations and used for comparison purposes.
I wanted to show a brief overview of the metrics for 2025. Most of these we'll cover in the following slides, we won't go into detail here other than highlighting. Despite a small decline in group revenues, we delivered strong growth in adjusted operating profit and a 150 basis point improvement in margins. In combination with lower net finance costs and a lower number of shares following the buyback, adjusted earnings per share was at 14.2% to $0.137. An outstanding performance considering the challenging operating environment that Luc referenced earlier. As we turn to look at group revenue, you'll see that despite the backdrop, we delivered a resilient performance with overall revenue down 1% on a reported basis and 1.9% on a constant currency basis to $597.5 million.
Bridging from 2024, we had favorable FX tailwind of approximately $5.2 million. Volumes were down $5.6 million due to the weak demand environment in coatings, resulting in a reduction of $14.1 million, and this was partially offset by volume growth in personal care of $8.5 million. On pricing, we delivered $7.8 million across both businesses, a testament to the specialty nature of our portfolio. Of note, a combination of proactive pricing, procurement agility, and supply chain optimization actions helped us to fully offset the direct impact of tariffs in the year. We believe the latest news on this topic, at least as Saturday, 21 February , will continue to leave us in a neutral position. Turning lastly to mix.
This was down $13.7 million, primarily due to a combination of one-off sales in coatings of $3.4 million in 2024, not repeated in 2025. Along with the continued softness in industrial coatings and decorative end markets. AP actives saw strong growth in lower priced but margin-accretive products, as well as a consumer-driven shift from aerosol to roll-on formats in LATAM. As we turn our eyes to adjust our adjusted operating profit, we delivered strong growth, which increased 4.6% to $126.7 million. Within this, we benefited from favorable FX of $1.9 million. Lower volumes had an adverse impact of $1.9 million, and the net price impact after offsetting inflation was $10.5 million.
These headwinds were mitigated by the ongoing delivery of our self-help initiatives, which led to $80 million of total cost savings in the year, more to come on this shortly. As noted earlier, our strong profit performance helped drive higher margins, increasing 150 basis points to 21.2%. Let's take a look deeper into the reporting segments. Starting with personal care. Revenue was up 2.4% to $224.5 million, with strong growth in skincare and cosmetics, offsetting a slight decline in AP actives. Looking at the regional performance, we saw higher revenues in EMEIA and Americas, with Asia flat compared to last year.
Adjusted operating profit was up strongly at $72.8 million or 16.9%. Importantly, brings the absolute profitability of the personal care segment in line with the coating segment. This improved profitability was driven by improved volumes and pricing alongside cost savings. The higher profits in turn helped to drive higher margin, which is up 410 basis points to 32.4%, including the benefit of one-off volume and cost savings in H1 previously noted at the half year. Lastly on this slide, I wanted to highlight that our results in 2025 included the pro rata contribution from the recent acquisition of Alchemy, a small quantum for the year given the late acquisition timing, but meaningful strategically.
Now moving on to the coatings segment. We delivered a resilient performance with revenue of $373 million compared to $386.4 million last year, with a decline in coatings partially offset by strong performance from our energy business. The year-on-year decline was impacted by the benefit of high margin one-off sales in Q4 2024. The drop-through from the lower revenue led to a lower adjusted operating profit of $70.4 million. The combination of higher pricing and our self-help actions supported the operating margins, finishing the year at 18.9% compared to 20.3% in the year before. You will recall H1, we highlighted some operational challenges at St. Louis that were holding back our coatings performance.
While there's still progress to be made, I wanted to share positive news that the debottlenecking program at St. Louis is progressing well and leading to improved performance, which Luc will cover more fully later. Last year, we successfully completed the balance of our two-year, $30 million cost savings program by delivering $12 million via our Fit for the Future restructuring and supply chain initiatives. In addition to this, we announced in July a further $10 million in savings that we were aiming to deliver over the remainder of 2025 and 2026. These are net of planned additional R&D spend, which will increase our total spend from 2% of revenue to 3% over the next two years.
As we announced this morning, we have delivered $6 million of savings already, and we will deliver the balance of $4 million by the end of 2026. Our cost saving programs have reduced complexity and improved operational efficiency. We will continue to proactively identify opportunities to streamline our cost base and capture further efficiencies as we deliver on our growth agenda and become a simpler and leaner company. Taking a look at free cash flow. A key feature of this business is its strong cash flow generation, and I'm pleased to report that we generated good free cash flow of $41 million in 2025 compared to $51 million in the prior year.
Looking at the key components, higher adjusted EBITDA was more than offset by the working capital outflow in the year, driven by higher receivables due to lower debt factoring and strategic inventory build. We also had higher CapEx as we increased our investment to support adjacent market growth and capital investment in support of the St. Louis improvement program. A result of these movements, our adjusted operating cash flow was $104.7 million compared to $123.2 million the prior year. We move down the cash flow statement, it's worth calling out two items. Firstly, our cash taxes were lower by $4.4 million, primarily due to an IRS refund received relating to a 2024 claim to utilize net operating losses for prior periods.
Also adjusting items were $6.7 million lower as the Fit for the Future program finished during the year. Our balance sheet remains robust, whilst leverage ticked up to 1.3x , this was after acquiring Alchemy and returning cash to shareholders. Looking at the key movements from left to right, we started the year with a net debt balance of $157.2 million. Adding back the free cash flow of $41 million, as well as the proceeds from the Talc sale of $52.5 million, we had an increase in cash available for distribution of $93.5 million. Of this amount, we returned $79.1 million through our first buyback program and the 2024 final dividend and the 2025 interim dividend.
The share buyback program led to the purchase and cancellation of approximately 4% of our issued share capital. In October, we completed the disposal of the disused Eaglescliffe site for a negative cash consideration of $11.1 million. I would like to specifically note the strategic divestment of both Talc and the Eaglescliffe site have enabled us to significantly reduce our environmental liabilities and provisions. In November, we completed the acquisition of Alchemy for a total upfront consideration of $20.1 million. Taking off the FX of $11.4 million, we ended the year with a net debt balance of $185.4 million and a net debt to EBITDA ratio of 1.3x . Our aim is to maximize return on invested capital while maintaining a strong balance sheet and strategic optionality.
In relation to investments, our CapEx program will be focusing on investing in growth and productivity. We will also invest in R&D and have plans to increase total spend here from 2% to 3% of revenue. To complement these organic growth investments, as we demonstrated with the acquisition of Alchemy, we will selectively pursue bolt-on acquisitions while maintaining a strong balance sheet. On dividends, our policy is for a payout ratio of around 30% of adjusted earnings.
As we announced this morning, the board has recommended a final dividend of GBP 0.03, taking the full year dividend for 2025 to GBP 0.043, up 7.5% from last year and represents a 31% payout ratio. In considering future additional returns, we will assess several factors, including prevailing market conditions, our existing progressive dividend policy, the investment requirements of the business, and our desire to maintain a leverage around 1x net debt to EBITDA over time, which we anticipate we will achieve on an organic basis in 2026. In light of the announcement of the pharmaceutical manufacturing business disposal, our expectation is to distribute the net proceeds to shareholders following completion. We will provide a further update upon closing. Lastly, for your reference, we've included some technical guidance for 2026 on slide 19.
With that, I'll now hand over to Luc, who will take you through our strategic progress over the last 12 months and the outlook for the year. Thank you.
Thank you, Kath. For those less familiar with Elevate Elementis, this is our new strategy. We presented it in July. The plan is simple. We have three strategic priorities. First, top-line growth. This is about focusing on what we do best in the areas that make Elementis unique without the distractions of talc and chromium. Our objective is to grow revenue by mid-single digits over the medium term, and in the next slides, I'll share a view of our growth opportunities and our progress in 2025. The second priority is about service delivery. Our ambition is to be best in class and the first choice for our customers. We've made some great progress, and I will show that later. Third, simplification and agility. We're building a simpler and leaner Elementis that empowers colleagues, makes us more agile, and allows us to execute at pace.
Delivering against these three priorities is what will drive value creation, and it will help us to deliver the new medium-term targets. Looking at our first priority. For us to grow and unlock our full potential, it is important to focus on what makes Elementis unique and what will allow us to win. We call these our winning differentiators, and let me briefly touch upon them. Hectorite, this is a very special asset. It's a white mineral that comes from our mine with long-term reserves. It has really unique properties because of its chemical composition and its platelet structure. We don't just sell hectorite. We modify it, add value to it, for example, by making pre-formulated gels for cosmetics, and our customers love its efficiency. You only need a tiny amount to get a big effect.
It's natural. It delivers the kind of premium skin feel that consumers are looking for. Rheology, this is the science of flow. It's what's needed to stabilize ingredients in a paint can. It's also what makes sunscreen spread evenly on the skin. Here, Elementis is the global leader. Formulation solutions, this is our expertise built up over the years of our customers' formulations. It's how our people work together with our customers to improve the performance of a paint or a skincare product day in, day out. Our colleagues in the labs have worked at AkzoNobel or Estée Lauder. They talk our customers' language. That's a huge benefit. Now, we operate in big, attractive markets, as you can see here.
Our focus, though, is to target these niche areas where our winning differentiators set us apart. We work together with our customers to improve their products. For example, in skincare, we're replacing synthetic additives by hectorite, giving it a more premium texture. In industrial coatings, we help the transition from solvent-borne to high-performance water-based formulas. I'm not going to go into the detail of all of these here. The point is we are using our expertise and our unique portfolio to help our customers make better and more sustainable products. Lots to go for in our current markets. Outside of our existing markets, there's a large new adjacent space for us that we're tapping into as well. We're using the same model. We have entered areas that we're going to scale.
One example is hectorite for geothermal energy. Here because the wells are extremely deep, you're facing ultra-high temperatures at which hectorite is stable. We're using our formulation knowledge and existing customer relationships to grow with this market. We had our first sales in 2025 and have a number of field trials planned for this year in the U.S. and Germany. Lots of exciting opportunities and potential for growth. We're focusing on the right areas, building on our winning differentiators, what levers are we pulling to now bring in this growth? First, we're investing more in R&D, 50% more. For example, in application knowledge to support customers, we're building a hectorite center of excellence. We're already seeing the benefits. Last year, innovation sales reached a record of 16.4%. That has doubled in the last five years.
We launched 19 new products, of which we sent more than 1,500 samples to our customers. Some of the innovation highlights from last year on the right-hand box. We launched DEOLUXE SC, our patent-pending non-metal-based active. This is looking quite promising. Several large customers are testing, and we expect the first sales in the second half of this year. We also launched a number of new hectorite products. BENTONE ULTIMATE, also patent-pending. It's a highly active hectorite technology that delivers exceptional skin feel, mostly for lipstick and mascara. In coatings, we launched THIXATROL 5050W for metallic pigment orientation and waterborne automotive coatings. Lots of excitement around innovation. Next, we're covering more customers directly, also local and regional accounts. We want to understand firsthand about their needs. We've made good progress last year. We now service about 67% of our customers directly.
We're also building a local for local footprint. This reduces cost and increases reliability. More and more customers are demanding local supply, particularly in China. This is how we're going to look at growing organically. To complement our organic growth, we're looking at bolt-on acquisitions, but in a very disciplined way and only when it fits our strategy, which does not depend on M&A. The acquisition of Alchemy is a great example. In November last year, we announced the acquisition of Alchemy right in our personal care sweet spot. Alchemy develops innovative rheology modifiers for personal care. They're fully natural and can fully replace synthetic raw materials in cosmetics. The business has done really well in recent years, delivering double-digit revenue growth and operating margins in line with our personal care business. We're bringing on a team with incredible expertise in this market.
We're already working together on new products, including with hectorite. Quite a nice synergy. The point is, with Elementis behind it, Alchemy can scale faster, leveraging our global sales network as well as our application capabilities. It's a great example of how bolt-ons can strengthen our core and accelerate growth. To make the most of this growth agenda, we need to be the best supplier to our customers. An important measure is On-Time In-Full, in July, we shared our targets to deliver a 20% uplift over the medium term. I'm pleased to share that we're now already halfway, and we'll stay focused on this. Second, we talked about St. Louis in July, one of our largest sites, and we had been dealing with some backlogs there. We had a big opportunity, 30% by unlocking capacity.
I've made some leadership changes there, brought some experienced people back, and we're seeing the results. A 20% improvement since the first half of 2025. That puts us 2/3 of the way there. At the end of the day, all of this comes down to customer focus and mindset, whether you work in sales, R&D, or in the plant. With some of the changes we've made, we have a new top-notch customer service center in Porto. We've seen a 50% reduction in customer response times. We've also received external recognition that you can see on the screen, which is a great acknowledgment for the team. We're building a simpler, leaner Elementis, and to us, this means driving agility, faster execution, and responsiveness, so we can scale and deliver more value to our customers. We've made good progress. We streamlined our organization and leadership team.
We've eliminated the stranded cost related to talc. Some of these things were low-hanging fruit, like reducing office spaces that we didn't really need. Some things took more coordinated effort, like qualifying 50 new suppliers that led to quite significant procurement savings. Looking ahead of 2026, we're not done here. There'll be more procurement savings to come. We're making our supply chain more efficient, and we'll continue to move towards a local for local model. This is a continuous journey. All right, onto our last slide, outlook. While we remain mindful of the recent geopolitical uncertainty, we're confident in another year of progress. We're seeing great momentum and excitement building in the business.
I'm pleased that we've made solid start to 2026, and our priorities for the year are clear: deliver organic growth through R&D and customer intimacy, achieve best-in-class customer service levels, and lastly, drive operational efficiency and continue to deliver cost savings. The team and I are fully focused on delivering this plan. Thank you very much. With that, let's move to Q&A, please. If everybody could please say their name, speak to the microphone so that folks on the call know who you are. Thank you.
Hello, Vanessa Jeffriess from Jefferies. Just wondering if you could speak first about how the first quarter has started, given weather in the U.S. and improving beauty markets, and how you think about seasonality for the year, given coatings is normally stronger in the first half, but we're probably not gonna see much improvement soon?
Hi, Vanessa Jeffriess from Jefferies. Thank you for that question. We had a solid start of the year, which is encouraging after Q4 was relatively soft. Solid start in coatings as well, which particularly was softer in Q4. The seasonality is we expect it to be quite typical, 52/48 balance. Yeah, encouraging start.
Just on your new growth areas, great that you were able to execute on Alchemy. How do you think about the mix between achieving that growth from bolt-on M&A and not diluting margins, given I can't imagine there's much out there making the margins you are?
Yeah. No, absolutely. Look, this is a organic-led strategy. We're really focusing on organic growth, which there are great opportunities in our existing segments, as we say, personal care and coatings, as well as these new areas that we talked about. It really is organic-led. Look, we work with many, many companies out there, such as Alchemy. We knew that for a long time this company. Those could be nice new arrows to our bow, but again, this is really organic led. You're right, our margins are in a nice spot. We're driving them up further, and it's difficult to find companies that are actually accretive to our, to our margins. Alchemy was one of those, by the way, so we're very happy to use them to grow faster. Yeah.
Just on pharma, I know that you didn't give profit, but based on past commentary, I would guess that that's making probably 10% margins. It seems like you sold it at a multiple similar to your own group multiple, which is interesting, I think speaks to your undervaluation. What else is left in the group, do you think, that is making similar margins and could be sold?
I think you're absolutely spot on in terms of your analysis around the margins and what we did there with pharma. For us, this was a really good step from a margin and a CapEx perspective, but also from a strategic perspective, most importantly. Pharma is really an activity that it's a really great piece of business, but it doesn't fit with us. Looking at the rest of the portfolio now, we're really pleased with the portfolio we have. We don't have any other business in this kind of margin area. Yeah, it's right now it's about growth, really. That's what we're focused on. We're pleased with the portfolio. Thank you.
Thank you.
Great. Thanks very much. Kevin Fogarty from Deutsche Numis. If I could kick off firstly on innovation. You called out, several examples of progress, I guess, in new rheology markets. It feels like you're making sort of more progress there perhaps, rather than the current ones. It's obviously sort of quite a different sale in terms of new markets rather than the current. I just wondered if you could sort of talk a little bit about that process, and, sort of, I guess culturally, how is that different, you know, in terms of what you're trying to do there relative to what Elementis has done in the past? You're at 16% in terms of innovation sales. Just thoughts on the 20% target you've got out there.
Just secondly, if we can think about personal care, just if you could frame the benefits from cost savings perhaps during the year, any thoughts on personal care Asia and dynamics there during the year would be quite useful, and just sort of confidence on retaining the margin, which is clearly at a significantly higher level than in the past.
Thank you, Kevin, for those questions. Perhaps I can take the first couple and then, Kath, you can help me on the third, if you don't mind.
Okay.
Thank you. In terms of the new markets, indeed, look, we have a large market in personal care and coatings where we have great opportunities for growth. We talked in July, for example, about replacing some of the synthetic additives in sun care. That's our existing market, huge opportunities. If I look at our growth going forward, probably the largest piece of growth is actually going to come from those existing markets. We have exciting opportunities in new markets for sure as well, where frankly, we've started to look into only relatively recently. Some of these opportunities we will actually be able to address and bring in with our current sales force, application knowledge, et cetera. I gave the little example of geothermal.
Geothermal drilling is actually happening a lot with our existing customer base already, the Schlumberger of this world. We have the access to the customers, we have the knowledge of deep water drilling through our oil and gas business. That's an opportunity that we'll bring in with our existing setup. Other opportunities, for example, we've identified a new opportunity for hectorite to remove PFAS out of wastewater. That's really interesting, but we're not gonna build a whole sales force and application knowledge for wastewater removal. There we might work with a partner. Right? I think for these new opportunities, very large, some of them will bring in with our existing knowledge. Some we'll build, some knowledge we'll build, for example, in the construction market, and some we'll just have to partner up with other people.
That's the way I look at that, but a lot of innovation coming from our existing markets. Your second question was around innovation and about our path towards the 20%. Absolutely key indeed, because if you think about everything we do in innovation sales typically generate 5%-10% higher margins than the rest of our sales. It's really important. It also helps us to in our relationship with our customers and our relevance to our customers. We've made great steps last year, 200 basis points up to 16.4%. We foresee to further progress that with all of the activities that are ongoing, towards indeed our mid, medium-term target of 20%.
We make some good progress and, you know, the investment in R&D, which sometimes is also simply about bringing that application knowledge in, is going to help. Your third question was around personal care, particularly personal care Asia. You know, for us, personal care in Asia is still a relatively smaller business compared to the European and the U.S. personal care business. We had some movements in personal care in the first half last year. Korea, color cosmetic market is a big one for us, and there was some order timing for which H1 was relatively softer. We had a better second half of the year. We continue to see good momentum.
What I would say is, in the fourth quarter, we did see in antiperspirant some softness, particularly from some format changes in Latin America, as I think Kath referred to. Aerosols moving to roll-ons, that's for the antiperspirant business.
Mm-hmm.
In general, we see good momentum. We're very happy with the margins. As I said, Alchemy is accretive there, or is actually in line with our personal care markets margins. I don't know, Kath, if you wanna, if you wanna add anything on the, on the margin point that Kevin was asking about.
I think last year, we made good progress with the Fit for the Future finalization and the start of the new cost savings. Personal care specifically also benefited from the closure of the Middletown site. That is directly related to personal care. From the other perspective, a lot of it ends up being in allocations because we've got joint plants and back office, which ends up being allocated.
Great. That's helpful. Thank you. Thanks.
Thank you, Kevin. Yeah.
Hello. Thank you. Hi, Angelina Glazova from JPMorgan, thank you for the presentation. I have two questions. First, I wanted to ask about the midterm targets on margins for 23%. You have already talked us through some drivers for growth that you see in the midterm. How should we think about Elementis bridging the gap in operating margins from current level to target of 23%+? Do you see any particular drivers as more important relative to others? There is also clearly a difference in margin profiles between the two divisions. How do you see that developing? Is there anything maybe for the coatings business where you see those actions which could help lift the margins?
Secondly, looking at 2026, are there any particular items in terms of cash flow generation, net debt development that we should be mindful of? Thank you.
Thank you, Angelina. I'll kick off with the first question, and then if you don't mind...
Yep.
to complement and go on to the second question. In terms of the margin development, look, we made a nice step in the right direction. Actually selling the pharma business is going to help us, like Vanessa just said, a little bit more. Look, this is really about growth. As we just discussed, we're growing in areas that are actually margin accretive. Hectorite, we're actually looking to selling more hectorite and growing that double digit. That's going to help the mix. That's going to help our margin development. Obviously we're taking some more cost out this year, but there is a, you know, a limit to that at a certain point. The big reorganizations are behind us.
We had Fit for the Future behind us. This is about high margin growth. Obviously we continue to look at how we can do things more efficiently. We'll always think about how we can do things at a lower cost than having Kath come in with a fresh pair of eyes a couple of months ago has also really helped in that respect. It is about growth and about high margin growth, and that's the way we're gonna really get to that 23%+ level. Kath, anything to add, or you want to go to the second point?
Well, I think it's also related to the profile. Personal care-
Yeah.
... has got higher margins and higher growth, and therefore that would naturally generate some accretive margin.
Yeah. Good point.
With respect to cash flow and net debt, page 19 had some technical guidance flagging CapEx will be between 4%-5% in 2026. We will also expect a small working capital outflow in the year. I reference in my script that we still had some factoring at the end of 2025. We will not be factoring in 2026, that will naturally unwind. With the sales increase that we're expecting, we will need to fund that. I think from a big picture, you know, we are expecting to be circa 1 times leverage on an organic basis by the end of 2026. When I say organic, I'm ignoring the sale of the pharma business, 'cause as we said, we expect to get the net proceeds back.
Hi, this is Madhumanti Sanyal from CaixaBank. I want to know if there is, if you think there is a strong synergy between the coatings and the personal care business. If coatings continues to show lower than expected performance, would you consider a sale of the coatings business without affecting the performance of the personal care business?
Thank you for that question. Look, coatings and personal care are different markets, right? Our customers in coatings are Sherwin-Williams and PPG and AkzoNobel, and in personal care, you talk to L'Oréal and Estée Lauder. The markets are different. In terms of how we operate at Elementis, there's a lot of synergies. Most of our manufacturing plants are actually multipurpose and multi-market plants. They service both markets, both coatings and personal care. Our plant in Livingston in Scotland in the U.K. is about half/half personal care coatings. In that respect, there's a lot of synergies. Also, if you look at the products that we manufacture and the knowledge that we have in our laboratories, we talked about rheology, we talked about hectorite, all of that ends up in both coatings and personal care.
The product knowledge, the manufacturing footprint synergy, these businesses are intertwined. No. I would add to that as well is that we're actually quite pleased with the performance of coatings. If you look back at coatings, where we were seven, eight years ago, the margins of the coatings business were in a bad year 10 percentage points around that. In a good year, it was 14-15%. Right now, in a low demand environment, we're at 18.9%. We're actually quite pleased with the coatings performance, and we're excited about the opportunities ahead.
I've got some questions from Sebastian Bray at Berenberg. Has there been any change in the energy business that led to the strong performance as you've highlighted despite the oil price decline? One. Second question, what are management's thoughts on additional buyback after receiving proceeds from the sale of the pharma business? Thirdly, are there any signs of a recovery in hectorite sales in personal care? Did these grow in 2025? If not, why this was the case?
Thank you, Sebastian, for those questions. Shall I take one and three, and you do two?
Sounds good.
All right. Let's do it. Energy business. We're actually very pleased with the performance of the energy business. It is a relatively small business, give or take $40 million, but it did very, very well last year. One thing that Sebastian might remember, we closed our Charleston site in the U.S. back in 2019 or early 2020, and that was at the time a purely energy focused business or plant, I should say. We moved those manufacturing, the manufacturing of those products to St. Louis. That helped us in terms of margins. That's one thing that helped us. I would also say that by doing so, we really transformed the energy business, which if I look when I joined Elementis 14 years ago, was a much larger business.
Now we really focus this business, one, on manufacturing only from St. Louis, focus on hectorite. Why on hectorite? We really have a unique winning differentiator with hectorite because it's, it works very well for deep water drilling. If you go very deep, you have to drill at temperatures of 250, 280 degrees Celsius, and hectorite is stable at those temperatures. We refocused the team. We have a smaller portfolio. Actually looking at last year, we've had a lot of success indeed in difficult conditions for drilling, such as deep water. We talked about the geothermal energy opportunity. That's what we're doing here.
Smaller business, relatively small team, close the plant down so to cost out and focus on the areas that make Elementis unique, and we'll continue to do that actually. The third question was around personal care and hectorite. Yes, we have grown. Obviously last year with the markets being a little bit soft, also the personal care growth was, you know, low single digit also in hectorite. But if I look at personal care, again I'm turning the clock back 14, 15 years ago when I joined, this was a $30 million business. We actually reported it at a certain point under oil and gas. You wouldn't believe that. That was a purely hectorite business, and we understood where else we could sell hectorite in personal care in adjacent areas.
Looking at the last five, 10, 14 years, hectorite in personal care has grown really, really nicely. Last year was relatively lower growth, but still growth. Looking at the opportunities ahead, in personal care as well, replacing synthetics which continues to be very, very exciting opportunity, entering skincare, which is a, you know, $20 million or so business for us now. We can scale that. Lots of exciting opportunities. Yeah.
I think with respect to the question on share buybacks. As we said this morning, following the sale of the pharma manufacturing business, upon closing, we expect to distribute those funds to shareholders. We also have the target of net debt to EBITDA of about 1 times. You know, we expect to be there by the end of 2026. That will give you a signal of what we're expecting in this year. As we look forward, we'll consider, you know, continue to take into consideration where we are on leverage and expectations.
Thank you. Sorry, I've got to pretend to be Anil now. Anil Shenoy from Barclays has sent two questions as well. We didn't see any guidance on 2026. Are you happy with where the consensus is at for adjusted EBIT? If so, could you help to bridge the gap between 2025 EBIT to 2026 consensus EBIT? What are you assuming in terms of growth, and what are you assuming in terms of savings? Thank you.
Shall I do the first part and you the second?
Okay.
All right. Thank you, Anil, for those questions. Look, we had a solid start of the year, like we just mentioned, so we're quite happy with that and therefore comfortable with the consensus. In terms of the bridge, EBIT 2025, 2026, I mean, Kath, you wanna.
Yes.
...comment on that? Yeah.
As I mentioned, we expect the incremental $4 million in savings come through. We do expect volume growth, so we'll get some natural leverage, and some margin accretion continue to drop through, and that's how we're, you know, moving from 2025 to 2026. You know, sort of steady as she goes with the additional cost savings.
Just some last questions from Chetan Udeshi from JPMorgan. Are you expecting Q1 sales to be up compared to last year? Secondly, we didn't see volume growth this year. What are your expectations for volume growth for 2026?
Thank you, Chetan, for those questions. I think for Q1, as I said, we made a solid start. I think the most important is that if you look at where the exit rate of Q4 last year was relatively soft. We're happy to see good progression after that. For the full year, again, back to the previous questions from Anil, we're comfortable with where consensus is. We are looking at a typical balance between H1, H2, which I think also can help Chetan in terms of his modeling. Anything to add, Kath?
I mean, I'd hate to be the Dow CFO, but I would just note the geopolitical situation since the weekend.
Yeah.
You know, we have an expectation, but, and we hope we'll deliver that, but some things are out of our hands.
Good.
We will maintain our focus on our strategic targets.
Yeah. Yeah. We're two months in, it's early days. Yeah. Good point.
Just on that, how much does gas pricing and energy prices affect you?
Not so much anymore, actually. When we owned Talc, I had the Dutch TTF Gas on my phone here. I was tracking it every half an hour. I didn't get a lot of sleep. Luckily, we don't have that business anymore, and we are in specialty chemicals. If you look at how, you know, we generate our margins, it's about adding value to our customers' formulations rather than trying to squeeze out a cent on our costs. Very much, a different situation than where we were a year ago. Good question. Thank you. We'll continue to monitor. I mean, I think perhaps one of the things to add, we continue to monitor the situation. The situation Kath mentioned, obviously, that the recent occurrence in the Middle East.
If our input costs go up, we typically look to price to compensate for that input cost increase. Definitely. Yeah. Thank you. Good question. Yeah. No more questions?
Sorry, can I ask one?
Hi, Vanessa. Yes.
Sorry, just to clarify what you said.
Sorry. Can we just get the mic to you, please?
Oh, yeah.
Sorry. Just to clarify what you just said, that you're happy with consensus sales and EBIT, but you've got the loss of pharma business, which was $35 million sales and $3.5 million EBIT, right?
That's on a pre-adjustment for pharma, but we suggest that people wait until it actually closes before adjusting numbers.
Okay, cool. Thank You so much.
Thank you, Vanessa.
Okay, thank you. There's been no questions on the conference line. With that, thank you very much.
Thank you, everybody.
Thank you.