Chemicals company Elementis (ELM) was the biggest faller in the FTSE 350 this morning after it warned on profits and stalled on progress towards paying off its debts.
Shares in the FTSE 250 firm plunged almost 15% to 140p after it said in an update that trading in the final quarter of 2019 was ‘somewhat subdued’ thanks to weakness in its chromium and energy divisions in particular.
While its coatings and talc divisions performed strongly, driven by new business wins and cost savings, a weak demand environment and lower market prices particularly outside of North America hit its chromium division.
Energy performance was also weaker than expected thanks to a further slowdown in North American drilling activity, with the Q4 rig count down approximately 25% on the prior year period.
As a result, Elementis has reduced its full year adjusted operating profit guidance to between $122m and $124m, compared to the $131m the market had been expecting.
DEBT PROGRESS DELAYED
Numis analyst Kevin Fogarty pointed out that the lower profit guidance appears to have delayed Elementis’ plans to deleverage its balance sheet.
The company has a medium-term aim to get to a net debt to adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) ratio of 1.5x.
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In its half-year report back in July, Elementis said it expected the full year ratio to be 2.4x.
But now net debt for the year is anticipated to be $465m, representing around 2.8x net debt to EBITDA.
DELEVERAGING REMAINS 'KEY FOCUS'
Despite this, the company insists financial deleveraging ‘remains a key focus’. It said, ‘The execution of our medium term innovation, growth and efficiency priorities combined with strong cash generation will drive a clear deleveraging profile.’
In its 2019 Capital Markets Day in November, Elementis outlined three clear medium-term performance objectives – financial leverage of under 1.5x net debt/EBITDA, adjusted operating profit margin of 17% and operating cash conversion of at least 90% per annum, a target it has already hit.
Fogarty said, ‘Management's financial targets are key to the investment case for Elementis, and these remain unchanged at this point, while 2020 will benefit from recent self-help initiatives.’