Croda International Plc

Ladies and gentlemen, welcome to the CRODA full year results. My name is Gemma and I'll be the call operator for today. If you'd like to ask a question during the presentation, please press star followed by one in your telephone keypad. I will now hand you over to your host, Steve Foote, the Chief Executive Officer.

Good morning, everyone. Many thanks for joining us. Hopefully, the time is fast approaching when we will be able to meet face-to-face again. But in the meantime, I'm joined with Jez and David as usual. Once we've run through the slide pack, very happy to take any of the questions as always. In terms of the agenda, nothing unusual. I will run through some of the highlights before Jez goes through the financials, after which I'll wrap up with an update on various aspects of the strategy before we come to Q&A. It has, of course, been a very challenging year for everyone, CRODA included. Despite that, we've navigated a tough environment incredibly well, testament to our strong business model, clear strategy, and, of course, all the people that work for CRODA around the world. As a result, the impact of COVID-19 on CRODA was relatively limited, with the core business only seeing a small dip in profits, but with robust cash generation. The global lockdowns inevitably impacted consumer spending, and industrial markets. We felt that at the premium end of our personal care business, as well as across parts of the performance technologies business. Encouragingly, we've seen a steady improvement since the trough in quarter two. We were backing growth in half two, with growth accelerating in the final quarter, giving us confidence as we look to the year ahead. That confidence is reflected in a further increase to our dividend, our 29th successive year of consecutive dividend growth. This truly resilient financial performance has given us the opportunity to make strong strategic progress during the year. We announced our ambitious 2030 sustainability targets, being climate, land and people positive, living up to our purpose. We accelerated organic investment to support growth in key areas such as drug delivery. And we also acquired two businesses, Avanti and Iberchem. Today, over 85% of Crud's profit is coming from life science and consumer markets. I've spoken before about the importance that we have placed on treating all stakeholders fairly and equally. Throughout the pandemic, we haven't furloughed any employees, nor have we drawn on any government funding. We prioritise the health and safety of our people, as well as the customers, suppliers and communities that we work so closely with. And equally, we've continued to fulfill our commitments to shareholders by paying dividends. And as I mentioned a moment ago, at a point when the market environment has been at its most challenging, we've taken the opportunity to invest in our future and make investments in sustainability, expanding life sciences, strengthening personal care, and building our knowledge brain in China. I've lived through six recessions in my 30 years with CRODA, And we make incredible progress in a recessionary year. We booked the trend and invested around £1 billion in those four key areas. So in terms of the financial highlights, core business saw sales grow by 2.3% with an encouraging second half recovery and the contribution from the acquisitions that we made during the year. Our margin was relatively stable but was inevitably impacted by weakness at the top end of personal care as well as in performance technologies due to COVID. Profits declined 4% due to the mixed effect. Cash flow remained reversed, helping us to support increased investment in the business. Turning quickly to the sectors then, Life Sciences had an outstanding year, growing sales, profits and margin to record levels. This was primarily due to healthcare and seed treatment, but we also saw good performance from our crop protection business too. The highlight and the highlight of the year has been delivering components to the Pfizer-BioNTech vaccine and the critical role that we're playing to aid its continued rollout around the world. This is a big step forward for CRODA and an even bigger step forward for our intentions in healthcare. As mentioned, personal care was impacted as a result of the lockdowns across all key geographies, with sales in our beauty actors business lower as a result of consumers spending far less on prestige and luxury items than they would normally. This had an adverse impact on margins. This is simply a business mix issue. Gross margins at the product level remain rock solid. Encouragingly, we've seen a steady improvement since May, with underlying sales in quarter four returning to prior year levels. I will come back to Ivocam later, but needless to say, we see this as a very exciting acquisition, which will add a new growth dimension to our consumer care offer. It finished the year strongly and has started 2021 strongly as well. Performance technology sales were resilient, largely due to good demand in our home care and packaging businesses. Whilst we saw an overall return to growth in quarter four, adverse mix and operating leverage had a material impact on our profitability. Our strategy to refine to grow performance technologies remains unchanged, and we have continued to deploy capital into renewable technologies and further expansion in Asia. With that introduction, let me now hand over to Jez.

Thanks, Steve, and good morning, everybody. As Steve has said, 2020 saw a resilient financial performance. Sales were up 0.9% in reported currency at 1,390,000,000 sterling and increased by 1.1% in constant currency. Adjusted operating profits reduced by 4% in constant currency to 320,000,000 pounds. This reflected an adverse impact with lower margin businesses in personal care and performance technologies less impacted by COVID than the higher margin businesses, as Steve has described. It also reflected an increased loss on the eco plants in North America and a higher share based payment charge, reflecting the strong share price performance. Net interest increased to £19 million, reflecting higher net debt following the Avanti and IBKM acquisitions. Adjusted profit before tax came in at £301 million, almost 5% behind the prior year period in constant currency. With a weaker mix effect, return on sales declined 1.7 percentage points to 23%. With a slightly lower tax rate of 24% and more shares in issue following the IBKM equity placement, adjusted earnings per share were 175.5 pence, 5% down on 2019. Having held the interim dividend flat in July, the final dividend is being increased, making the full-year proposed dividend 91 pence per share, an increase of 1 pence over 2019. Finally, the free cash flow remained robust at 177 million pounds, despite funding significant organic capital investment. Adjusting profit items charged in the year totaled 31 million pounds. This was driven by the impact of acquisitions, with advisory costs of 11.7 million pounds, and amortization of acquired intangibles of 13.6 million pounds. In addition, an exceptional charge of 5.8 million pounds related to unwinding of the discount on a vanity deferred consideration and completion of the 2019 cost savings programme, which delivered nearly 20 million pounds of annual benefits, which we have reinvested in resource to grow the business. Profit before tax on an IFRS basis was just under 270 million pounds. This slide looks at the key bridging items for the change in sales. Core business sales increased by 2.3% in constant currency. This comprised a 3% reduction in price mix. With raw material prices broadly flat, this primarily reflected the weaker product and business mix due to lower sales of higher value-add products in personal care and performance technologies and better relative sales of low value-add products used by consumers during the crisis. Volume was up 1.2% in the year, helped by growth in life sciences. The acquisitions of Avanti and Iberchem added 4.1% to sales. Industrial chemicals contributed a 1.2% reduction in group sales, and currency translation was broadly flat. Sales in all regions were impacted in the second quarter by government steps to tackle the COVID pandemic. It was therefore encouraging to see all regions except Asia improve performance in the second half year. North America and Latin America returned to growth, with underlying sales up 7% and 8% respectively. Lockdowns were more extensive and impactful in Asia and Europe, but both regions saw flat underlying sales compared with 2019 in the second half year. Asia was mixed throughout the year. China rebounded following its first quarter lockdown, but the key manufacturing markets of Japan and Korea remain soft, driven by a reduction in foreign tourism. Overall, underlying sales in the core business, that is before the benefit of acquisitions, were down 6% in H1, but up 3% in H2. Turning now to look at the sector overview. Personal care was significantly affected by lockdowns. First-half sales were 9% lower, But from a near 20% year-on-year decline in May, underlying sales in personal care recovered month-on-month to leave the second half just 3% lower overall. The acquisition of Iberchem in November added 9% to second-half sales to give set-to-full-year constant currency sales just 2% lower than prior year. The standout performer in 2020 was Life Sciences. With no discernible negative impact from COVID-19, sales grew by 15%. Against the strong comparator in the first half, which saw sales 2% lower year on year, all three businesses in life sciences grew in H2, with underlying sales up 16%. The acquisition of Avanti in July added a further 17% to second-half sales. In performance technologies, sales were only 3% lower than the prior year. After a good start to 2020, sales progressively weakened through the second quarter, alongside temporary closures of automotive and industrial customer plants, to leave first-half sales 6% down. The second half saw a steady recovery, with sales just 1% lower than the prior year. So for the core business overall, underlying sales improved from a drop of 6% in H1 to plus 3% in H2, supplemented by a further 8% increase in sales due to acquisitions. This slide shows how these sector sales fed through to profitability. In personal care, government COVID-19 measures reduced consumer demand for products associated with going out, while also interrupting prestige sales channels. As a result, sales were better for our at-home use beauty formulation products, but with a greater reduction in sales of the higher margin beauty active and beauty effects products. The resulting adverse mix impact saw adjusted operating profit reduced by 15%, and return on sales just under 29%, which included a small dilution from the Ibogaine acquisition. With continued growth in higher value-add niches, return on sales in life sciences increased by 160 basis points to 32.2%, and adjusted operating profit was 25% higher, including the benefits of Avanzi. In performance technologies, although sales were only slightly lower than prior year, profitability reduced significantly. Adjusted operating profit reduced by over 20%. Return on sales was 13%. This reflected the sector's higher operating leverage, lower production at its European sites, and adverse profit index, with sales more resilient in lower margin parts of the business. Now let's look at each of the core business sectors in more detail. As previously noted, Q2 was the weakest quarter for personal care, with the near closure of the French cosmetic industry and luxury shopping channels. A steady recovery saw underlying sales back in line with prior year in the fourth quarter. The full-year constant currency sales reduction of 2% was driven by a decline in the sales price mix of 5%, reflecting the weaker business mix, while volume was just 1% lower and the IBM acquisition added 4%. The adverse mix effect was driven by a double-digit percentage sales decline in each of beauty actives and beauty effects, the higher margin segments of personal care. Beauty effects was impacted through its exposure to social and travel categories, such as sun protection and colour cosmetics, while beauty actives was impacted by the disruption to sales of prestige products. This performance was consistent with published consumer sales data for personal care and beauty, which reported declines of 3% in the US and 8% in Europe across 2020. It's also consistent with what our customers have been reporting, as shown here in this extract from L'Oreal. Regionally, Europe and Asia were hardest hit, outside of China, where sales rebounded quickly. By contrast, sales in North America remained robust throughout the year, and Latin America improved in the second half. We've not seen any signs of change in the longer-term drivers to growth We expect personal care profitability to improve when lockdowns lift, luxury channels reopen, and with the significant cross-selling opportunities provided by Iberchem. This is underpinned by our Strengthen to Grow strategy, which Steve will take you through in more detail shortly. 2020 saw continued growth in all three life science businesses. Crop protection, increased sales, net of planned product withdrawals. Seed enhancement delivered double-digit revenue growth, delivering its anticipated recovery from a weaker 2019. Underlying healthcare sales rose 11%, with continued growth in our established speciality excipients and vaccine adjuvant businesses. This was complemented by the acquisition of Avanti, which saw over 50% sales growth year-on-year, including the pre-acquisition period. 2020 also marked the first sales from supply of Pfizer and BioNTech, with components for their COVID-19 vaccine. Overall, sector sales growth of 15% in constant currency was driven by volume growth of 7%, unchanged price mix, and 8% from Avanti. Steve will set out more detail on our expand to grow strategy shortly. Sales and performance technologies were resilient in what were challenging industrial markets. Encouragingly, fourth quarter sales were 5% up on prior year. there was a marked variation in the performance of the different businesses, which adversely impacted profit margin. Smart Materials was resilient, with sales actually slightly up on prior year, driven by strong demand in packaging and hygiene markets. Similarly, within home fabric and water, hygiene and household care applications saw strong demand, reflecting both COVID-19 and the increased sales from our eco-sustainable solutions. By contrast, the energy technologies business saw sales down over 15%, impacted by sharply lower lubricant demand in automotive and reduced flow control additive sales for oil and gas production. By Q4, demand was returning, with energy technology sales back to 2019 levels and smart materials remaining in growth. But the last two years have shown that the sector remains exposed to the industrial cycle. The refine-to-grow strategy will see capital redeployed selectively within the sector, reducing exposure to older cyclical technologies and focusing more on technology-rich markets. We're also developing the sector's geographic footprint beyond its traditional European and US markets, in Asia and particularly in China. Performance technologies also have strong sustainability credentials, which we can leverage to meet customers' product needs and help them deliver their green targets. Now, from 2021, the group will report under four sectors, consumer care, life sciences, performance technologies, and industrial chemicals. The new consumer care sector offers the opportunity to selectively deploy more capital with stronger and more consistent organic growth, geographic expansion, and bolstering acquisition. It will comprise our market-leading personal care business, recently acquired Ibukim fragrance and flavors business, and the high growth potential of our home care business. In 2021, the 2020 results will be restated for these changes, and this table sets out, first of all, how the results were reported in 2020, and then how they will look under the new structure when we restate. In addition, I've shown what the 2020 outcome would have been had iBecame and Avanti been owned for the full year. This is the pro forma results. The Group's capital allocation policy remains to invest for growth through organic capital expenditure, to provide regular returns to shareholders through an increase in dividend, to acquire disruptive technologies with a focus on consumer and life science markets, and to maintain an appropriate balance sheet, typically within a one to two times leveraged target, returning excess capital when we move beneath this. In 2020, at a time when other companies were cutting back on investment, CRODA has continued to execute this policy. We invested £870 million in acquisitions through Avanti and Iberchem, funded 70% through the UK's largest M&A equity placing of 2020, and 30% from cash and debt raised. We invested over £120 million in organic capital expenditure. This comprised our regular capital programme, together with an extra £30 million to accelerate capture of opportunities in healthcare, scaling drug delivery, doubling our US speciality excipient capacity, and reprioritising £10 million to deliver COVID-19 solutions for our customers. We expect our ongoing annual capital programme to continue at around £90 million, or 6% of sales, but with 2021 seeing an extra £40 million deployed to accelerate delivery of the exciting life sciences pipeline. With our prudent leverage and dividend distribution policy, the Board was able to pay final 2019 ordinary dividend and maintains 2020 interim and is recommending an increase to the 2020 final dividend. The dividend cash cost increases by over 10% following the recent equity placement. I'll now hand you back to Steve to update you on our strategic priorities.