Croda International Plc

I'll now hand over to your host, Steve Foote, the CEO, to begin. Steve, please go ahead.

Good morning. Many thanks for joining the call today, and I hope you're all safe and well. We're sorry not to be with you in person, but the presentation, as usual, will follow the normal format for CRODA. Some comments then to Jez for the financials, and then I'll come back to talk about some key aspects of our strategy. We'll take questions over the telephone and via the webcast at the end of the presentation, too. So overall, our strong business model has delivered a resilient performance, and we've managed through a very challenging period. It goes without saying. I use the word resilient for a number of reasons. On the supply side, all of our 19 principal manufacturing sites have remained in operation, and nearly all of our workforce has continued to function as normal. So limited impact operationally around the world, and that's great credit to our teams and great credit to the local government support that we're getting as well. On the demand side, we've seen a modest reduction in sales, and the group margin has also held up well. As a capital-like business, we've continued to generate strong cash. This has allowed us to continue investment in future growth, agree on exciting technology-rich healthcare acquisition, and pay a dividend to shareholders, demonstrating our confidence in the future. The 28th successive year of increased dividend payments. In response to COVID, we have three priorities from the outset. And as you'd expect, our major priority has been the health and safety of all of our people. We needed to look them in the eye at the end of the crisis, and we're not there yet, knowing we've done everything possible to safeguard their well-being. And we have a more engaged workforce as a consequence of that, more loyal, and it generates a lot more goodwill. We're looking after our people, which is absolutely right. And next, we focused on keeping the show on the road, maintaining the performance of the business by closely controlling costs and working capital as you'd expect us to. And we've been talking to customers in a lot more frequent basis along the way. And finally, but just as important, we have continued to plan for the future to ensure that Kuroda is taking full advantage of the emerging opportunities from the pandemic, which I will come on to later. The key principle has been treating all our stakeholders fairly. We didn't furlough anybody. We protected employee salaries. We helped a number of our smaller customers and suppliers with flexible payment terms. We helped communities around the Crota world with our act of kindness initiative. And we paid a final dividend to our shareholders. We've treated everybody fairly and we're doing the right things. And all of this plays well to our purpose. Turning to the numbers, they are what they are, but you can see the resilience borne out in them. Innovation and commercializing clever people's knowledge is what our business model is all about. And a modest reduction in sales, a resilient performance in margin, and the output of which is strong profit and cash generation. And this is allowing us to further invest in the business. Turning to the sector performance, in personal care, we continue to see positive trends from quarter four into quarter one. Quarter 2 was significantly impacted by a downturn in consumer demand, luxury, travel, department stores. This was particularly evident in Europe, where a lot of our customers either closed or repurposed their facilities into making hand sanitizer gels. And in Latin America, where there is a greater reliance on door-to-door selling. During the quarter, we've accelerated our customer interactions massively, much more engagement than we normally would see. And we're excited about what our customers are telling us. There's lots of innovation in the pipeline. And we've also seen a very good recovery in China, with personal care sales in China up 9% in quarter two. And we remain confident of a good recovery once lockdown measures have eased further. Turning to life sciences, that's less impacted by COVID. Strong underlying healthcare business. Crop will be more second-half weighted due to phasing issues. And margin progress is in line with our expectations. The Avanti acquisition I'll come back to later in the pack. In performance technologies, industrial end markets are clearly challenging, but this is partly offset by strong food packaging and home care sales for the group. So let me stop there, and I'll hand over to Jez for the financials.

Thanks, Steve, and good morning, everybody. As Steve has said, the first half year saw a resilient performance. Sales were 5.8% down in reported currency at 673 million pounds. This reduction of 7% in constant currency sales terms translated to a 9% reduction in adjusted operating profit in constant currency to 161.6 million pounds. Operating costs reduced with the benefit of cost savings delivered at the end of 2019 and lower discretionary spend during the first half of 2020. These cost savings were partly offset by the start-up of the North America bio-suffactants plant in the early part of 2020. Net interest was broadly unchanged at £9.1 million, with higher net debt from the 2019 special dividend payment mostly offset by lower interest rates following our refinancing. Adjusted profit before tax came at 152.5 million pounds, 10% behind the prior year period. With lower volume and a weaker product mix, return on sales declined by 1.1 percentage points to 24%, a resilient performance reflecting the strength of Crota's operating model. With the tax rate broadly flat at 25%, adjusted earnings per share were 88.8 pence, just under 10% lower than 2019. Having paid the increased 2019 final dividend in May, the interim dividend has been held at 39.5 pence per share. Finally, the free cash flow remained healthy at over £80 million in the half. Adjusting profit items charged in the first half totaled £7.6 million. This covered a further £1.7 million exceptional charge for delivering the cost savings announced at the end of 2019, which is delivering up to £20 million of annual benefits to reinvest in the business. Acquisition costs relating to Avanti totaled £1 million, and amortisation of intangible assets relating to previous acquisitions was £4.9 million. Profit before tax on an IR4S basis was £144.9 million. So now let's look at the key bridging items for the change in sales. Core business sales declined by 6%. This comprised a 2% reduction in volume due to the impact of COVID-19 and a 4% reduction in price mix. Whilst raw material prices were generally stable, this price mix primarily reflected a weaker product mix due to lower sales of higher value-add products and personal care and performance technologies, and relatively better sales of lower value-add products used by consumers during the crisis. There was no impact from acquisitions during the period. Industrial chemicals contributed to a 1% reduction in group sales, and currency translation was favourable by 1%. Now looking at the key movements by core sector. Consumer product markets responded more rapidly to lockdown than industrial end markets, as Steve has described. As a result, personal care sales were hardest hit, 9% lower. This, together with a weaker product mix, saw operating profits 17% lower. Margin was resilient, though, staying at 15%. We expect this to recover back to the low 30s once volumes return. Lifespan sales were 2% lower. As we highlighted at the full year results in February, this reflected a strong comparison period from 2019, particularly in product sales. Continued growth in target market healthcare saw operating profit rise by 7% and return on sales increased to 32.5%. Although sales and performance technologies were 6% lower due to slower industrial demand, the impact of COVID-19 was seen later here than in personal care, with customers initially moving to protect their supply chains. However, profit was harder hit, down nearly 20%, and return on sales is just above 15%, still a strong performance compared with its peer group. Let's look at each of the core sectors in more detail. Following a solid first quarter, which saw continued recovery in the North America market, the personal care and beauty industry was significantly affected by the COVID lockdowns. China was impacted in the early part of the year, but rebounded quickly. As the bottom chart shows, Crota sales were down 4% in the first quarter before recovering to be up 9% in the second. The second quarter has seen European consumer demand heavily affected. As Steve said, most of the French cosmetics industry has shut down for several weeks, and consumer retail data showed a 14% reduction in sales in the quarter. By contrast, North America consumer demand has been less impacted, with lockdown intensity varying state by state. Latin America has been hardest hit, particularly in Brazil, where 50% of consumer sales are typically made on the doorstep. Whilst there are signs of lockdown conditions easing in Europe, Latin America is likely to remain difficult. Overall, this resulted in a 6% reduction in personal care volume and a 3% weaker price mix. as the more at-home-use staple products of the beauty formulation business proved more resilient than the higher-value going-out products. Also, beauty-actives demand is typically resilient in these circumstances, but disruption to the prestige distribution channels of duty-free department and luxury stores had an impact on consumer buying patterns. We've not seen any signs that the long-term drivers to growth in personal care have changed. Our strategy to strengthen the growing personal care through organic and inorganic investment remains unchanged. Pleasingly, our digital investment has begun to pay off, allowing us to maintain our customer intimacy through virtual contact and support. Life Sciences has seen limited adverse impact from COVID-19. Healthcare demand has been modestly affected, with fewer prescriptions issued and delays for some elective surgery. There has been no discernible impact on crop. Volumes grew by 2% overall in the half, while price mix declined due to crop sales moving from the first half to the second half year. Growth continued in the key high-value niches of healthcare. Our excipient delivery systems business grew by 11% as pharma customers looked to high-quality solutions from well-invested, stable and innovative partners like CRODA. The biosector vaccine adjuvant business had a much stronger period, growing sales by 25%. Consumer health product sales were broadly flat year on year. Crop protection sales were lower against a strong comparison period, coupled with delayed plantings in Latin America due to adverse weather. We also withdrew voluntarily from products with a negative environmental footprint, as announced at the last year end. The outlook for crop looks strong, with North America recovering from last year's US-China trade dispute and a strong innovation pipeline with our global customers. Seed enhancement also recovered some lost sales from 2019 during this season-acquired first half period. Our Expand to Grow strategy for life sciences is working well. Return on sales for the overall sector has reached 32.5%, an increase of over 4 percentage points since the acquisition of Incotech at the end of 2015. Our speciality excipients and vaccine adjuvants are being trialled in a number of COVID-19 related projects, and we're investing for the future, both organically in plant expansion and inorganically through M&A. After a week 2019, Performance technologies experienced a steady recovery in demand during the first quarter. However, with significant closures of automotive and industrial plants, sales weakened progressively through the second quarter. Partially offsetting this, sales have been strong in both the home care and packaging markets due to COVID-related demand and new innovation. This is shown in the top graph. Home and fabric sales grew by 11% in the first half, whilst energy technologies saw sales decline by 18%, reflecting its focus on automotive and industrial lubricants and on flow control in oil production. Smart materials was more resilient, down just 2%, with polymer additives being used in many COVID-related applications, including PPE, medical devices, and packaging. Overall volume was down 2% in performance technologies. Profitability was impacted by a combination of operating leverage, and production constraints in our European and Indian plants. The refine-to-grow strategy will reduce the sector's exposure to more cyclical markets, with growth in high-tech, higher-growth markets. Innovation will be important, and we are seeing strong interest and growing sales for coal-type radiants, which we presented to you at the full year results, which doubles the life of fabrics. We are building towards an expected 20 million sterling annual sales pipeline for this product by 2023. We're also investing in Asia with our new Shanghai R&D facility opening in the second half of this year, which will give greater access to many new Chinese customers. With the successful commissioning of our North American biosurfactants plant earlier in the year, we've secured our first two contracts for eco products in performance technologies, together with a first contract in personal care. The eco pipeline is now worth almost $20 million in annual sales, with sustainably positioned customer products launching from the end of 2020. While we are excited by the development of new sales opportunities, COVID has provided something of a perfect storm for the plant, with food-grade bioethanol, which we use as a feedstock, in short supply due to hand sanitizer demand, resulting in a high raw material cost at a time when petro-derived ethylene is at record lows. We expect to be able to move the plant to a lower-cost feedstock later this year, but in the meantime anticipate that this will cost us about $10 million in added costs in 2020. Crota continues to generate a healthy cash flow despite lower demand. Free cash flow in the first half year was £80 million, a reduction of £15 million on 2019, driven entirely by the reduced EBITDA. The change in working capital was £14 million better than 2019, and it's pleasing to note that we have seen no material deterioration in the timeliness of customers' receivables during the COVID crisis. Capital investment increased by £9 million to £50 million in the first half year, despite some delays to projects during lockdown. I would expect investment in the full year to be just over £100 million, allowing us to complete key investments, including the doubling of speciality existing capacity in the US, creation of a new customer and R&D facility in Princeton in the USA, and consolidation of our UK distribution facility. We're also expanding in healthcare in Japan and Denmark, investing in greater digital and innovation capability in China, and expanding some of our European plants. At a time when many companies are slashing investments, we believe that maintaining investments at this time will enable us to grow more rapidly in the coming years. Finally, Crota has a strong balance sheet, having completed its debt refinancing in 2019. As the top graph shows, we have excellent liquidity with almost £450 million in undrawn committed facilities at 30 June. Furthermore, there are no material maturities before 2023, as the bottom graph shows, with funding out to 2030. And on top of this, we have in July added a $200 million acquisition funding facility to allow us to complete on Avanti, therefore preserving our ample liquidity. Net debt at the half year, which is pre-acquisition, was £577 million. This is a leverage ratio of 1.5 times EBITDA. Our downside modelling shows significant leverage in liquidity headroom, even in more extreme crisis scenarios. I'll now hand you back to Steve, who will update you on our strategic priorities.